Can Dunkin’ Brands’ “Value Strategy” Give It A Competitive Edge?

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

Dunkin’ Brands (NASDAQ:DNKN) is in a tricky position trying to compete with two giants — Starbucks and McDonald’s — both catering to different customer subsets.  While Starbucks is working on its “premium” image competing on the “gourmet” coffee and iced coffee front, McDonald’s increased focus on McCafe can threaten Dunkin’ Brands’ value customers. However, it appears that the company is gearing up for this strong competition via value promotions.  Dunkin’ Brands exceeded revenue estimates in its Q3 2017 results and the key driver of revenue was its morning sales driven by promotions around value wake up wraps and its breakfast sandwiches. The company stated in its Q3 2017 earnings call that 60% of its sales happen in the mornings before 11 am and it is focusing on building a competitive edge in the mornings.  Dunkin’ Brands’ “value strategy” has shown positive results and the company plans to build further on this plan. Its $2 egg and cheese wake up wrap was the key driver for breakfast sales in Q3 2017 and this food offer combined with beverages pushed the average ticket size to $7 (for the offer) compared to the regular average ticket size of $5. This shows the impact of the promotional offer in driving sales for the company, which is struggling to grow guest count. In Q3 2017, Dunkin’ Brands faced a decline in guest count, but higher ticket price drove comparable sales and revenues.

Click here to analyze how average revenue per outlet impacts Dunkin’ Brands’ valuation and price estimate.

Focusing on value meals has helped McDonald’s grow its sales via its “All Day Breakfast” initiative. The company is now following a dual strategy of value and “healthy –gourmet” meals to meet the requirements of different customer sub-sets. As it struggles to increase guest count, a value-based strategy which is impacting the ticket size positively is likely to work well for Dunkin’ Brands. Just as McDonald’s is increasing focus on McCafes, Dunkin’ Brands is looking to stress more on beverages and not identify itself as a “donut” company. Restaurants are looking to cash into the trend of the coffee culture in the U.S., especially as consumers move away from carbonated soft drinks.  It appears that a “beverage and value meal” combo is working well for restaurant companies, increasing the average spend by the customer at its stores and Dunkin’ is preparing to take advantage of this strategy.

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Dunkin’ Brands is going through a challenging phase with competition increasing as several players look to ride the coffee trend in the U.S.  The company is also focusing on the use of data to make its customer experience easier, faster and more personalized. McDonald’s has already shown benefits of analysis of customer data and Dunkin’ Brands is looking to use digitally captured customer data for effective one-on-one marketing. We believe a value-based strategy focusing on a beverage food combo can drive sales for Dunkin’ Brands in the coming years.

Click here to see our complete analysis for Dunkin’ Brands.

Our price estimate for the company is $55, which might be revised as we are currently in the process of updating our model for Dunkin’ Brands post the Q3 2017 results.

 

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