Dunkin’ Brands (NASDAQ:DNKN) is a franchisor of quick service restaurants and operates globally through Dunkin’ Donuts and Baskin-Robbins brand names. Dunkin’ Donuts offers varied products including coffee, donuts, muffins, bagels, and breakfast sandwiches, among others, whereas Baskin-Robbins is a global chain of ice cream parlors. At present, Dunkin’ Donuts U.S. segment contributes the most to Dunkin’s revenues, with approximately 70% share of gross revenues. Going forward, we believe its contribution would decline slightly and Baskin-Robbins International would emerge as the key driver for growth. Dunkin’ Brands competes with McDonald’s (NYSE:MCD), Starbucks (NASDAQ:SBUX), Krispy Kreme, Dairy Queen and Cold Stone Creamery, among others.
We recently launched our analysis of Dunkin’ Brands stock with a $29 Trefis price estimate, which is around 10% ahead of the market price.
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Dunkin’s Business Model – 100% Franchise based
Dunkin Brands operates mainly on a full-fledged franchise model, unlike its competitors such as Starbucks and McDonald’s that follow a mix of the company-operated and franchise business model.
Margins are higher in the franchise model compared to the company-operated model due to lower capital investment required. New store development and substantially all of the store advertising costs are funded by franchisees and thus explain the high margins in this business model.
Trends Affecting Dunkin’ Brands
Increase in health consciousness among customers
The awareness about healthy food intake is increasing globally. Customers are cautious of health disorders resulting from junk food. Consequently, fast food companies have started offering healthier food offerings in order to catch up with this fast emerging trend. We believe this trend would emerge as a key factor that would govern Dunkin’s product offerings in the future.
Dwindling consumer discretionary spending
Volatile economic conditions are directly affecting the fast food industry. The impending Euro crisis, sluggish U.S. economic recovery and high unemployment rates are affecting disposable incomes worldwide.
Higher cost pressures troubling food and beverage sector
Rising inflation has significantly increased costs for food and beverage companies. Many of the firms have increased the prices of their offerings to fight inflation. However, continued inflationary pressures could significantly affect growth prospects.
Shift in Ice Cream Consumption in U.S.
The ice cream industry in the U.S. is shrinking gradually. A trend towards home consumption is growing and sales at ice cream parlors are declining. Baskin-Robbins is gradually closing down its franchises in the U.S. and expects the trend to continue in coming years.