Here’s Why Dunkin’ Brands Is Shrinking Its Donut Menu

Recent reports suggest that as a part of its menu simplification exercise, Dunkin’ Brands (NASDAQ:DNKN) is reducing its donut varieties from 30 to 18 in nearly 1,000 locations of its Dunkin’ Donuts stores. This is a part of the company’s experiment of a limited menu so that it can focus on quality and ensure consistency of products across outlets. In its Q2 2017 earnings call, Dunkin’ Brands stated that it will continue its menu simplification efforts to ensure that new innovative menu items can become a part of its offerings. With a limited selection of donuts, the company can focus on one or two “new and bold” flavors which can be introduced regularly and attract the attention of customers, leading to higher customer traffic. A large menu selection leads to lack of consistency and limits the ability to introduce new flavors, since the existing menu is already huge.  Further, it appears that Dunkin’ Brands is repositioning itself as a “coffee house” and focusing more on beverages, thus a limited donut offering makes strategic sense.

According to our estimates, Dunkin’ Donuts – U.S. is the most valuable segment for Dunkin’ Brands and the average revenue per outlet from a Dunkin’ Donuts store will increase steadily over our forecast period. We expect this revenue to increase from around $0.97 million in 2017 to nearly $1.04 million by the end of our forecast period.  However, through menu innovations, if this revenue increases at a faster pace, there can be an upside to our price estimate.

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Menu innovation is likely to be the key growth driver for restaurant companies in the future. Players such as McDonald’s are experimenting with bold flavors, “vegan” burgers, and an increasing focus on coffee (McCafe) to attract customers. Dunkin’ Brands is also experimenting with frozen coffee to attract the younger generation which does not prefer hot bitter coffee. The company is directly competing with Starbucks which is also innovating in the iced coffee segment. With millennials demanding more convenience, new flavors and gourmet coffee, restaurant companies have to aggressively focus on a) creating an interesting menu and  b) technology initiatives to provide efficient service. We believe Dunkin’ Brands’ menu simplification strategy will help the company to deliver consistent products and focus on innovation which should drive long term growth.

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