Is A Change Of Strategy Required At Dunkin’?

-1.84%
Downside
106
Market
105
Trefis
DNKN: Dunkin' Brands Group logo
DNKN
Dunkin' Brands Group

For a number of quarters now, Dunkin’ Donuts has seen lukewarm growth in its comps and revenues. Although most of the decline is attributable to the general weakness in the restaurant industry, the stiff competition it faces from Starbucks, McDonald’s, and Burger King is also accountable for the fall in comps. Further, Dunkin’s refranchising activity, which has led to an almost 100% franchise model, has resulted in a considerable loss in revenues across all segments.

As of 2015, more than 80% of Dunkin’s revenue came from the U.S. It’s presence, internationally, is meager, at 18%. Given this, it could be argued that the company may be facing stagnation due to high saturation levels in the American market, alongside competition from its biggest rival, Starbucks. In the face of increasing challenges, it is important for the company to reaffirm its foothold in the fast casual space.

1. Become a coffee-centric brand

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In order to take away crucial market share from its nearest rival in the space, it is imperative for Dunkin’ to make coffee a bigger part of its business. Americans are consuming roughly 400 million cups of coffee per day, with a growing number of those beverages being specialty drinks such as espressos and Frappuccinos. Given the forecast of growth in coffee consumption in the U.S. and internationally, an increased focus on the coffee fad could prove to be beneficial for the company.

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In the third quarter, the company introduced cold brews to its menu. This, coupled with espresso-based beverages, resulted in record beverage sales at the company in the quarter. To keep up the momentum, Dunkin’ entered a partnership with Coco-Cola to launch its ready-to-drink bottled iced coffee throughout the United States. If the company can manage to promote the brand as more than just donuts, coffee could give it a second life-line.

2. International Diversification

As we mentioned before, only 18% of the total revenues made by Dunkin’ and Baskin’ come from international markets. This is despite its huge presence in Asia, Middle East, and Europe. To understand this anomaly, we need to consider the strength of the dollar opposed to the currencies of most developing nations and the eating habits in these nations. In such a scenario, a slowdown in the restaurant industry in the U.S. affects Dunkin’ more acutely than its competitors, as it is dependent on the U.S. for a majority of its sales. To follow Starbucks example in China, where it tried to adapt to consumers’ tastes by innovating and bringing beverages such as green tea flavored coffee, Dunkin’, too, should attempt to launch products which are more in line with consumers eating habits.

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Challenges Ahead

There has been a lot of talk about hiking the minimum wage for laborers. With the restaurant industry already under pressure and suffering from a lack of demand, this could be a further dampener for Dunkin’. Voters in Arizona, Colorado, and Maine have already approved boosting the minimum wage in their states to $12 per hour. The minimum wage in Washington is also being hiked to $13.50 by 2020. Consequently, we can expect Dunkin’s labor costs to go up and erode the company’s margins.

Furthermore, San Francisco, Oakland, and Albany have levied a tax on sodas and other sugary drinks. The move is an effort towards curbing the growing incidence of obesity and diabetes in America. A similar vote is also in motion in Colorado. If other states also adopt the tax on soda, given the health fad, and this incidence turns out to be more widespread, we can expect a further deterioration in the company’s margins. In such a case, if the tax is passed on to the consumers, it may even discourage sales.

However, we can look at the wage hike in another way. An increase in the minimum wage, will likely result in an improvement in the financial conditions of workers, thus, giving a boost to the economic activity in the nation. A stronger consumer retail spending, in turn, would lead to the elevation in demand and thus, sales, alleviating the risks related to a restaurant recession. Although the bottom-line may suffer, it might promote increased efficiency and a reduction in superfluous costs.

Have more questions on Dunkin’ Brands (DNKN)? See the links below.

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Dunkin’ Brands

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