Why Dunkin' Is Taking On Starbucks And Betting On Coffee

Dunkin' is making a big bet on

coffee

. When you walk into a Dunkin' today, you'll notice many more

coffee

options and many fewer donuts than you did a few years ago. And there's no longer just filtered coffee on the menu. There's everything from Pumpkin Sugar Cinnamon Lattes to Coolatta's and premium espresso. At the chain's newer stores you'll even find Nitro Cold Brew on tap. It's all part of Duncan's $100 million investment to revamp the brand and become a major player in coffee. CEO David Hoffmann believes espresso is key to driving the company's long-term growth. The aggressive push toward beverages comes at a time when the coffee wars are heating up.

Competitors like McDonald's are cutting prices through deals. While coffee giant Starbucks is

betting

on more expensive drinks, a renewed loyalty program and delivery. But Duncan's rebranding 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 began implementing new store designs. It got a new CEO and made some leadership changes at the top. Dunkin' needs this strategy to work. Store traffic has slowed and annual comparable-store sales at Dunkin' fell one percent in 2017. While slow traffic and lagging same-store sales are not unique to Dunkin', they are increasing the pressure on the chain.

So will that $100 million investment be enough to fuel Dunkin's move into the big leagues with McDonald's and Starbucks? Or will the impact on profits cost the company in the end? Dunkin' started here in Quincy, Massachusetts. When Bill Rosenberg left school in eighth grade, he dabbled in restaurants, but soon realized that 40 percent of his income came from two simple products: coffee and pastries. In 1948, Rosenberg opened a restaurant that sold donuts for five cents and cups of coffee for ten cents. Two years later, Rosenberg changed the restaurant's name to "Dunkin' Donuts." The restaurant was a success. In 1955, the first Dunkin' Donuts franchise opened.

That same year, the first McDonald's franchise also opened. In 1963, Dunkin' Donuts opened its 100th location. "This is one of the original 100 percent publicly traded franchise businesses. I mean, it's a true asset-light model. By comparison, McDonald's is trending toward its 92 or 93 percent franchise globally, moving towards 95, Wendy's has 95 percent, but they weren't there five years ago Whereas Dunkin, when it went public, I think in 2011, was already 100 percent. franchisee and really generated appreciation for that type of business in the industry. That growth model worked well for Dunkin'. Franchises meant fewer real assets and higher profits. Dunkin' began expanding internationally in 1970 when it opened its first overseas location, in Japan.

As of the second quarter of 2019, there are more than 12,800 Dunkin' locations in more than 40 countries. Dunkin' Brands went public in 2011, selling about $423 million in stock. For comparison, Chipotle raised $193 million when it went public in 2006, adjusted to 2011 dollars. At the time, CEO Nigel Travis told CNBC that the company would use the proceeds from its IPO to expand in West and internationally and pay their debts. Analysts said the stock was overvalued because its price hinged on hopes that Dunkin' would recreate its success in the Northeast and 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 presence on the West Coast with 102 locations in California and 12 in Hawaii as of 2019. But even as Dunkin' has pushed to increase its presence west of the Mississippi and internationally, it hasn't forgotten the northeast. Dunkin' is the largest chain in New York City for the tenth year in a row, with 624 locations as of December 2018. In 2018, after 70 years of Dunkin Donuts, the restaurant abandoned donuts and became simply Dunkin'. "We think less about dropping donuts than leaning toward Dunkin'. Dunkin' is what we've been known for almost 20 years. We've been in America with Dunkin'." Beverage sales account for nearly 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 normally offers. While Dunkin' has simplified its food offerings, it continues to expand its coffee menu. For approximately 45 years, Dunkin's coffee offerings extended only to its original brewed coffee blend. But in 1997, Dunkin' decided to take a big step into the beverage market. That was the year he launched the Coffee Colada slushie. In 2000, Dunkin' began selling the blended Dunkaccino. And in 2003 it began offering espresso. Dunkin' relaunched its espresso line in 2018 with new machines, new recipes and new employee training.

It's a move that some say has a lot to do with Dunkin' trying to become a leading brand on par with Starbucks. "I think the initiative to modernize would absolutely come from their biggest competitor, which is Starbucks, which has really reinvented what coffee means to consumers on a daily basis. So, yeah, it's always nice to have kind of, you know, a archenemy, so to speak, a bad guy, whatever you want to call it, because they force you to stay on your toes." It seems to be working. Dunkin' espresso sales are on the rise. In its annual report for fiscal year 2018, Dunkin' U.S. said it sells about 1.7 billion servings of hot and iced coffee each year, with espresso making up about 10 percent of Duncan's total sales mix.

The company reported that sales of espresso-based drinks increased 40 percent in the second quarter of 2019 compared to the previous year. "That move into espresso drinks, this is a space that their key competitor really owned and had an advantage over them. Think about the length of order someone might give to a barista at a Starbucks, for example, versus, you know, just a cup of coffee at Dunkin'." But Dunkin' can't simply imitate Starbucks to succeed. You need to stay true to your brand. Dunkin' is all about fast, affordable menu and making trends accessible to everyone. This is not necessarily a natural pairing with espresso.

That's why analysts warn that Dunkin' should be careful with its move into espresso. Customers are often suspicious when a brand tries to do something that doesn't seem authentic. But if sales of Dunkin's espresso drinks so far are any indicator, this product could unlock big potential for the chain. However, coffee remains a saturated market and Dunkin' is fighting for market share against formidable opponents. Starbucks with its large presence, McDonald's with breakfast all day and the regional but beloved Tim Hortons and Krispy Kreme. As of September 2019, Dunkin' has a market capitalization of $6.8 billion and its shares are up about 8 percent over the past 12 months.

But it still has a long way to go to compete with giants like McDonald's and Starbucks, which have a market capitalization of about $167 billion and $115 billion, respectively, as of September 2019. In fiscal 2018, Dunkin' U.S. sales They were also eclipsed. for the competition. Dunkin' reported revenue of $606.8 million. McDonald's sales were more than 12 times higher. And Starbucks raised $16.7 billion in the Americas, which includes the United States, Canada and Latin America. Espresso is a premium product and typically costs more than other beverages. That means the average price of checks increases, which in turn offsets slowing traffic because people spend more when they walk through the door.

In 2018, the average party check at Dunkin' was eight dollars and five cents. That's more than its Canadian competitor, Tim Hortons, but less than Starbucks. The most recent check averages do not include data from 2019, so it may be too early to gauge Duncan's revamped espresso line, which began rolling out in late 2018. Dunkin' has long struggled with how to increase Pedestrian traffic in the afternoon. It has expanded its cold beverage offerings and offered deals ranging from two bagels for $4 to $2 lattes. "Morning drinks are their core. And that's where franchisees make money. But when it comes to the afternoon business, the "Dunkin' Run" and the "Go2s," a lot of times those promotions, if they're drinking drinks, they're usually after two in the afternoon.

So, you know, the afternoon 'Run' seems to be stabilizing the afternoon business." Dunkin' Brands has also tried, and possibly failed, to use ice cream to boost afternoon sales. Baskin Robbins and Dunkin' operate under Dunkin' Brands, but Baskin has not performed as well as Dunkin'. Its sales growth has been mediocre. From 2007 until it changed course in 2011, the chain posted negative annual comparable sales at its stores. Baskin Robbins again posted negative same-store sales for fiscal 2018. Analysts say Baskin may not be adding many sales to the brand, but it's not dead weight either. A dual store with a Baskin and a Dunkin' is attractive to some franchisees to boost sales outside of the morning coffee rush.

Opening a dual store costs just ten thousand dollars more than a stand-alone Dunkin' and requires no additional workers or machinery. Dunkin' is also trying to keep up with changes in the fast food industry by testing plant-based meat and a partnership with GrubHub in some locations. "The online ordering system is now much more robust. And our guests can get products anytime, anywhere. And, you know, we now live in a culture where everything is on demand. Now you can get your coffee "according to the demand." Dunkin' began offering Beyond Meats sausages in Manhattan and, according to the company, it is selling well and attracting 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 get pizza or tacos at a familiar place. But for us, consistency is really important." But there are challenges unique in coffee delivery. Experts say Dunkin' and other coffee shops may not be the natural choice for delivery, because coffee has to maintain its temperature to be attractive. Think about a watery iced coffee or a room temperature latte. It is also strongly committed to the store format.

Part of that $100 million cash injection went toward launching an entirely new type of Dunkin' store. It's a so-called "Next Generation" store design, and Dunkin' hopes it will modernize the brand's image and keep it relevant for the next generation of customers. Dunkin' plans to add between 200 and 250 net new restaurants a year for three years starting in 2019. "It completely changes the way the customer interacts with our team. There is nothing between the team and the customers, so customers "Now they can interact with our teams and ask questions and learn about the product." Dunkin' says the new store is a little more expensive than previous remodels because there is more technology in this design.

The company did not disclose the cost of the new design to CNBC. "The returns are actually very exciting and better than previous iterations. So working very closely with our franchisees, we have reached a point where we feel very good, both parties about the investment they will make for this next generation." transformation." Next-generation stores are also a big part of Dunkin's push toward digital ordering. Mobile ordering is another area where Starbucks surpasses Dunkin'. About 4 percent of orders at Dunkin' are placed via mobile phones. At Starbucks, the figure is closer to 16 percent. Experts are optimistic that the next-generation store will improve that metric.

The designs have a larger space for people picking up online orders. "And the next-gen store has an even larger area dedicated to this and we're seeing probably double the average percentage of on-the-go orders through the next-gen stores, which is tremendous in some of the new stores." They also have a dedicated moving lane at the drive thru. That should help avoid bottleneck issues like those seen at some Starbucks when the company added ordering.mobiles in 2017. Next generation stores also have an 8 tap system for cold drinks, just like donut cases, it's all about presenting the products to customers. increase how much they spend.

With drinks on tap, crew members function more like bartenders than baristas. "The bartenders are fast, they know your name, they know how to taste drinks. But most importantly, they are excellent at customer service." As of 2019, customers rated the barista experience at Dunkin' a 90 out of 100. Starbucks scored 94 out of 100. While McDonalds scored a lower 78. In its next-generation stores, Dunkin' expect that number to increase. Dunkin' has been a trusted brand throughout its existence, growing at a slow and steady pace. He hasn't had any major scandals like some of his competitors and his relationship with the franchise is solid.

So how has Dunkin' maintained strong, stable growth? According to one expert, it all comes down to loyalty. Dunkin' ranks fairly 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 metrics are where Dunkin' shines. For 13 years through 2019, Dunkin' was ranked number one in consumer loyalty in the out-of-home coffee provider category. In the packaged coffee category it has been number one for eight years. It is not an easy task in a field as competitive as coffee. Robert Pascal, whose company measures consumer loyalty, says having highly loyal customers ensures they will return again and again. "When we look at all the metrics against old rivals, against all expectations there is an increase of about 95 percent.

That's pretty good. If you look at someone like Starbucks, they're a little bit lower." And loyalty is valuable to a brand for more than just its bottom line. Loyal customers are more likely to purchase 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, shiny espresso machines and modern partnerships will be enough to help it grow.