Dunkin' is placing a
huge bet on coffee. When you walk into a Dunkin'
today, you'll notice way more coffee options and far fewer donuts than you
would have just a few years ago. And it's not just drip
coffee on the menu anymore. There's everything from Cinnamon Sugar
Pumpkin Lattes to Coolatta's to premium espresso. At the chain's newest stores you'll even
find Nitro Cold Brew on tap. It's all part of Duncan's $100
million investment to refresh the brand and become a
major player in coffee. CEO David Hoffmann believes espresso is
key to fueling the company's long term growth. The aggressive push into beverages comes
at a time when the coffee wars are heating up. Competitors like McDonald's are
slashing prices through deals. While coffee giant Starbucks is taking
bets on more expensive drinks, a revamped loyalty
program and delivery. But Duncan's rebrand strategy encompasses
more than just coffee. The company also wants to aggressively
expand across the country and revamp its restaurants
with new technology. The chain changed its name, simplified
its menu and started rolling out new store designs. It got a new CEO and made
some changes to leadership at the top. Dunkin' needs this
strategy to work. Traffic in stores has slowed and
annual comparable store sales at Dunkin took a one
percent dip in 2017. While slow traffic and lagging same
store sales aren't unique to Dunkin', they are dialing up
pressure on the chain. So will that $100 million dollar
investment be enough to fuel Dunkin's move into the big
leagues with McDonald's and Starbucks? Or will the hit to profits just
cost the company in the end? Dunkin' got its start
here in Quincy, Massachusetts. When Bill Rosenberg left school in
the eighth grade, he dabbled in catering but soon realized 40 percent
of his revenue came from two simple products --
coffee and pastry. In 1948, Rosenberg opened a restaurant
that sold five cent doughnuts and 10 cent cups of coffee. Two years later, Rosenberg renamed
the restaurant "Dunkin' Donuts". The restaurant was a hit. In 1955, the first
Dunkin' Donuts franchise opened. That same year, the first
McDonald's franchise opened too. By 1963, Dunkin' Donuts
opened its 100th location. "This is one of the original
publicly traded 100 percent franchise businesses. I mean, it's a
true asset light model. Versus, you know, McDonald's is trending
towards its 92 or 93 percent franchise globally, moving towards 95,
Wendy's is 95 percent, but they weren't there five years ago. Whereas Dunkin, when it went public, I
think in 2011, it was already 100 percent franchised. And it really built the appreciation
for those types of businesses in the industry." That growth model worked
well for Dunkin'. Franchising meant fewer actual
assets and higher profits. Dunkin' started expanding internationally in
1970 when it opened its first overseas location in Japan. As of Q2 2019, there are over
12,800 Dunkin' locations, in more than 40 countries. Dunkin' Brands went public in 2011,
selling around $423 million worth of shares. For comparison, Chipotle raised
$193 million when it went public in 2006 when
adjusted to 2011 dollars. Then CEO Nigel Travis told CNBC,
the company would use profits from its IPO to expand West and
internationally and pay down its debts. Analysts said the stock was overvalued
because its price hinged on the hope that Dunkin' would recreate
its success in the Northeast, across the rest of the country. At the time of the IPO, there was
only one Dunkin' Donuts on the West Coast, in Portland, Oregon. The company has since expanded its
West Coast presence with 102 locations in California and 12
in Hawaii as of 2019. But even as Dunkin' has pushed to
grow its footprint west of the Mississippi and internationally, it
hasn't forgotten about the Northeast. Dunkin' is the largest chain in
New York City for the tenth consecutive year, with 624
locations as of December 2018. In 2018, after 70 years of
Dunkin Donuts, the restaurant dropped the doughnuts and became just Dunkin'. "We think about it less about
dropping doughnuts then just leaning into Dunkin'. Dunkin' is
what we're known as for almost 20 years. We've been America
runs on Dunkin'". Beverage sales make up almost 60
percent of Duncan's revenue, so growth in the category is essential
to the company's overall health. In 2017, Dunkin' told Nation's
Restaurant News, that most stores would offer fewer than
20 different donuts. That was a big decrease from
the 30 varieties it typically offers. While Dunkin' has simplified its food
offerings, it keeps adding to its coffee menu. For about
45 years, Dunkin's coffee offerings extended only to its
original blend drip coffee. But in 1997, Dunkin' decided to make
a big push into the beverage market. That was the year it
rolled out the Coffee Colada slush drink. In 2000, Dunkin' started
selling the blended Dunkaccino. And by 2003, it
began to offer espresso. Dunkin' relaunched its espresso lineup in
2018 with new machines, new recipes and new
training for employees. It's a move some say has a whole
lot to do with Dunkin' angling to become a premier brand
on par with Starbucks. "I think that the initiative to
modernize would absolutely come from their largest competitor, which is
Starbucks, which it has really reinvented what coffee means to
consumers on a daily basis. So, yeah, it's always good to kind
of have a, you know, an arch enemy, if you will, out there, a
bad guy, whatever you want to call them, because they force you
to stay on your toes." It seems to be working. Espresso sales for Dunkin'
are on a tear. In its annual report
for fiscal year 2018, Dunkin' U.S., said it
sells approximately 1.7 billion servings of hot and iced
coffee each year, and espresso accounts for about 10 percent
of Duncan's overall sales mix. The company reported sales of espresso
based beverages were up 40 percent in the second quarter of
2019 when compared to the year prior. "That move into
the espresso beverages, this is a space that their key
competitor really owned and had an advantage over them. Think about the length of the
order that somebody might give a barista at a Starbucks, for example, versus,
you know, just a cup of coffee at Dunkin'". But Dunkin' can't just
mimic Starbucks to succeed. It needs to stay true to its brand. Dunkin' is all about a quick,
affordable menu and making trends accessible to everyone. That's not necessarily a
natural fit with espresso. So analysts warn that Dunkin' has to
be careful about its move into espresso. Customers are typically suspicious when
a brand tries to do something that doesn't
feel authentic. But if Dunkin's espresso based beverage
sales so far are any indicator, this product could unlock
big potential for the chain. However, coffee remains a crowded market,
and Dunkin' is fighting for market share against
some formidable opponents. Starbucks with its vast footprint,
McDonald's with all day breakfast and the regional but beloved
Tim Hortons and Krispy Kreme. As of September 2019,
Dunkin' has a $6.8 billion dollar market cap and its shares
are up about 8 percent over the last 12 months. But, it still has a ways to
go to compete with giants like McDonald's and Starbucks, which have about a
$167 billion and $115 billion market cap, respectively as
of September 2019. In fiscal year 2018, Dunkin' U.S.'s sales were also dwarfed
by the competition. Dunkin' reported revenues of $606.8 million dollars. McDonald's sales were more
than 12 times that. And Starbucks brought in $16.7 billion in the Americas,
which includes the U.S., Canada and Latin America. Espresso is a premium product and
typically costs more than other beverages. That means it pushes the
average check price higher, which in turn makes up for slowing
traffic because people are spending more when they do walk through the door. In 2018, a party's average check
at Dunkin' was eight dollars and five cents. That's higher than
its Canadian competitor, Tim Hortons, but lower than Starbucks. The most recent check averages don't include
2019 data, so it may be too soon to measure Duncan's
revamped espresso lineup, which started to roll out at the end of 2018. Dunkin' has long struggled with how
to drive up afternoon foot traffic. It has extended cold beverage
offerings and offered deals ranging from two bagels for $4
dollars to $2 lattes. "The beverages in the
morning, that's their core. And that's where the
franchisees make their money. But as far as the afternoon
business is concerned, the "Dunkin' Run" and the "Go2s", a lot of times
those promotions, if they are on beverages, they're usually after two
o'clock in the afternoon. So, you know, the afternoon "Run"
seems to be stabilizing the afternoon business." Dunkin' Brands has also tried, and
arguably failed, at using ice cream to drum up afternoon sales. Baskin Robbins and Dunkin' are
both operated under Dunkin' Brands, but Baskin hasn't performed
as well as Dunkin'. Its sales growth
has been lackluster. From 2007 up until it changed
course in 2011, the chain posted negative annual comparable
store sales. Baskin Robbins again posted negative same
store sales for the fiscal year 2018. Analysts say, Baskin might not be adding
much in sales to the brand, but it's not
really deadweight either. A dual store with both a Baskin
and a Dunkin' is attractive to some franchisees to boost sales outside
the morning coffee rush. A dual store costs as little as
ten thousand dollars more to open than a standalone Dunkin' and
doesn't require extra workers or machinery. Dunkin' is also trying to keep up
with change in the fast food industry by testing plant based meat
and a partnership with GrubHub in some locations. "The online ordering system now
is much more robust. And our guests can get products
anytime they want, anywhere they want. And, you know, we're living
in a culture now of everything being on demand. Now you can
get your coffee on the demand." Dunkin' started offering Beyond Meats
sausage in Manhattan, and the company says, it's selling well
and drawing repeat customers to Dunkin'. Dunkin' has been testing
delivery through partnerships with GrubHub, DoorDash and
other local companies. It plans to expand the partnership
with GrubHub to other major cities in the U.S. "Consistency of experience. It's not a big deal when you're ordered
from a mom and pop pizza or taco place. But for us,
the consistency is really important." But there are unique
challenges in delivering coffee. Experts say Dunkin' and other cafes might
not be a natural fit for delivery, because coffee has to
maintain its temperature to be appealing. Think, watery iced coffee
or a room temperature latte. It's also betting big
on store format. Part of that $100 million cash
injection went toward the rollout of an entirely new kind
of Dunkin' shop. It's a layout called the "Next
Generation" store and Dunkin' hopes it will modernize the brand's image
and keep it relevant for the next
generation of customers. Dunkin' plans to add 200 to 250
net new restaurants a year for three years starting in 2019. "It completely changes the way the
customer interacts with our crews. There's nothing between the crew from
the customers, so the customers can now engage with our crews and
ask questions and learn about the product." Dunkin' says the new store is
slightly more expensive than previous remodels because there's more
technology in this design. The company didn't disclose the cost
of the new layout to CNBC. "The returns are actually very exciting
and better than the previous iterations. So working very closely
with our franchisees, we've gotten to a place that we feel
very good, both sides on the investment that they'll be making
for this next gen transformation." Next gen stores are also a big
part of Dunkin's push to digital ordering. Mobile ordering is another
area where Starbucks has Dunkin' beat. About 4 percent of orders
at Dunkin' are made through mobile phones. At Starbucks the number
is closer to 16 percent. Experts are optimistic that the next
gen store will improve that metric. The designs have a larger space
for people who are picking up online orders. "And the next gen store has an
even bigger area dedicated to this and we're seeing probably twice the average
percentage of on the go orders through the next gen
stores, which is tremendous." Some of the new stores also have
a dedicated mobile lane in the drive thru. That should help prevent bottleneck
issues like the ones seen in some Starbucks when the company
added mobile ordering in 2017. Next gen stores also have an 8
tap system for cold drinks, just like the doughnut cases it's all about getting products in
front of customers to increase how much they spend. With drinks on
tap, crew members function more like bartenders than baristas. "Bartenders are quick
on their feet, they know your name, they
know how to sample drinks. But most importantly, they're great
at serving the customer." As of 2019, customers rated the barista
expertise at Dunkin' at a 90 out of 100. Starbucks scored
at 94 out of 100. While McDonalds was lower at 78. In its next gen stores Dunkin'
hopes that number will go up. Dunkin' has been a reliable
brand throughout its existence, growing at a slow and steady rate. It hasn't had any major scandals like
some of its competitors and its franchisee relationship is strong. So how has Dunkin' maintained
solid and steady growth? One expert says, it all
comes down to loyalty. Dunkin' ranks pretty high in
satisfaction, slightly below Starbucks, but above McDonald's, according to
the American Consumer Satisfaction Index. But if satisfaction is a
moment in time, loyalty tells the future. And, it is in
metric where Dunkin' shines. For 13 years through 2019, Dunkin'
has ranked number one in consumer loyalty in the out-of-home
coffee provider category. In the packaged coffee category, it's
been number one for eight years. That's no easy task in
a field as competitive as coffee. Robert Pascal, whose firm measures
consumer loyalty, says having highly loyal customers ensures that they'll
come back again and again and again. "When we look at all the metrics
against old rivals, against all the expectations is up at
about 95 percent. That's pretty good. You look at someone like Starbucks and
they are a little bit lower." And loyalty is valuable to a brand
for more than just its bottom line. Loyal customers are more likely
to buy products associated with the brand. Recommend the brand to
others and invest in publicly traded stocks. Despite low traffic
and intense coffee competition, Dunkin' is betting that new
logos, sparkling espresso machines and trendy partnerships will be enough
to help it grow up.
Never had dunkin coffee. Although I did have a donut and it wasn’t so good.