Dunkin’ Donuts Introduces Frozen Coffee: Can Menu Innovation Drive Sales?
Dunkin’ Brands (NASDAQ:DNKN) had a disappointing Q1 2017. The company reported lower than expected revenues and flat comparable sales for its Dunkin’ Donuts U.S. segment (which is the highest revenue generator for the company). In order to gain a competitive edge, Dunkin’ Brands is working on faster and improved product innovation to attract and retain customers in the long term. In an inflationary environment, the company believes that brand differentiation is critical to attract customers to spend more on its products. In order to meet this goal, Dunkin’ Brands is launching frozen coffee as a new menu item in its stores via a nationwide tasting event on May 19. This new product is the latest in its lineup of innovative products such as Dunkin’ Energy Punch – an energy drink aimed towards millennials. As the restaurant industry faces headwinds and gets increasingly competitive, we believe product innovation will be a key driver of sales for Dunkin’ Brands in the long term.
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Driving Increase In Average Revenue Per Outlet
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While Dunkin’ Donuts U.S. registered flat comp sales for Q1 2017, the company is confident that it can grow these comps in the future. A higher average ticket size on the back of menu innovations was offset by declining traffic, which caused the flat comps. Summer menu innovations such as frozen coffee should ensure that the company continues to drive average ticket sizes. Further, as these products help the company to create brand differentiation, they should attract customers, especially the younger generation, driving traffic to increase comp sales. This should, in turn, drive higher revenues per outlet for the company. We expect a moderate increase in the average revenue per outlet of the Dunkin’ Donuts U.S. segment of the company over our forecast period.
A faster pace of increase in these revenues can lead to a significant upside in our price estimate.
Dunkin’ Brands is working on a six part plan to differentiate itself from its competitors. This includes better utilization of technology, lower employee turnover, and simplified restaurant operations for an improved guest experience, along with menu innovation. We believe a better digital platform and improved guest experience, in addition to exciting menu items, will be critical for Dunkin’ Brands to drive growth. While frozen coffee can intrigue customers in the summer and attract them to Dunkin’s stores, an effective execution of its differentiation strategy will be the key factor for the company to drive sales in the long term.
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