Ready To Drink Coffee : The Next Growth Driver For Dunkin’ Brands?

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

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Recently, Dunkin’ Brands (NASDAQ:DNKN) announced that its flagship brand Dunkin’ Donuts will launch ready-to-drink (RTD) coffee beverages in the U.S. by early 2017. For this launch the company will partner with Coca Cola, which will manufacture, distribute and sell the product. The ready-to-drink coffee market is pegged at $1.5 billion and dominated by the Starbucks-Pepsi partnership, which holds 80% share in this market by volume. Dunkin’ Brands closely competes with Starbucks and believes that this new product will increase the consumption of its coffee and its brand relevance with existing and new customers. We believe that, as the company makes the bottled iced coffee available widely at grocery, convenience stores, mass merchandisers and Dunkin’ Donuts restaurants, it will improve brand visibility for the company and drive incremental visits to its restaurants.  It will also attract new consumers to its restaurants.

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Higher Brand Visibility Can Drive Revenues

According to our estimates, Dunkin’ Donuts U.S. is the most valuable segment for Dunkin’ Brands, accounting for more than 85% of its valuation. We expect Average Revenue per Outlet for this segment to increase from around $940,000 in 2016 to nearly $1 million by the end of our forecast period.

Menu expansion is one of the factors which will drive this growth, according to our estimates.  In this regard,  ready-to-drink coffee products can enhance the choices available for consumers at Dunkin Donuts’ restaurants. Furthermore, we believe this strategy can also attract new consumers to its restaurants who might pick up its RTD coffee at a grocery store. As an increasing number of consumers sample this coffee at more convenient locations, they should be attracted to Dunkin’ Donuts restaurants if they develop a liking for its RTD beverages. The company’s CEO claims that there is lot of evidence that consumers who buy bottled coffee will also buy the original product in the store.  Hence, this strategy can drive revenues for the brand.

While the bottled coffee market is dominated by Starbucks, we believe Dunkin’ Brands can potentially carve out a share for itself in this space. However, the key benefit from launching this product will come from increased store visits and acquisition of new consumers especially in areas where the company is opening new stores. We believe Dunkin’ Brands strategy to expand into ready -to-drink coffee can drive revenues for the company in the long term through more loyal customers and an increase in the consumption of its products.

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