Why Is Dunkin’ Donuts Aggressively Promoting Its Rewards Program?

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DNKN: Dunkin' Brands Group logo
DNKN
Dunkin' Brands Group

Recently, the Dunkin’ Donuts division of Dunkin’ Brands (NASDAQ:DNKN) announced a special promotion for new enrollments in its DD Perks loyalty program, which provides extra points redeemable towards beverages for people who enroll in April. The dates of this promotion coincide with the launch of a new Starbucks Rewards program, which has attracted criticism from a number of users. Starbucks recently announced changes to its rewards program, where users will earn rewards based on every dollar spent on the store, as opposed to each visit. While the company believes that this will impact a small section of Starbucks’ customers negatively, Dunkin’ Donuts appears to be aggressively looking to capture any market share which Starbucks might lose due to this change.  The DD Perks rewards program announced by Dunkin’ Donuts is also based on dollars spent, however the free beverage offer on enrollment makes it attractive for new users.  The company is also launching a new version of its mobile app along with the special promotion. We believe this marketing strategy could induce an uptick in enrollments for DD Perks, as  well as a subsequent increase in the mobile app downloads.  The company’s ability to retain these new users through other initiatives will be key for it to gain higher market share on a sustainable basis.

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Attracting Disgruntled Starbucks Customers

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Starbucks estimates that a very small minority of its customers will earn rewards at a slower pace under its new rewards program, while a vast majority will earn rewards at the same of better rate. (Read  Starbucks Changes Its Reward Program : Will This Increase Spend Per Customer?). However, a survey by YouGov BrandIndex revealed that the percentage of customers who said that they would purchase their next cup of coffee from Starbucks fell to 71% in March, when the new rewards program was announced, compared to the 80% figure in February. There could be perception issues about the new rewards program at play here, as Starbucks works on resolving teething issues for implementation of the new program.That said, Dunkin’ Donuts is looking to attract customers impacted negatively by this change. Its special promotion for new enrollments appears to be aimed towards customers disappointed with Starbucks.

Dunkin’ Donuts U.S. is the most important segment for Dunkin’ Brands accounting for more than 85% of its valuation as per our estimates.  We expect the average revenue per outlet of this segment to increase gradually from around $ 0.94 million in 2016 to more than $ 1 million by the end of our forecast period.

There can be a 10% upside in our price estimate if these revenues increase at a faster pace to reach $ 1.1 million by the end of our forecast period.

We believe Dunkin’ Donuts is looking to capitalize on an opportunity to attract more customers to its stores, increase enrolments to its rewards programs and attract users to its updated mobile app. However the company’s ability to retain these new customers through other initiatives such as attractive menu options and better service quality will be key to drive revenues in future.

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