Slam Dunkin'

What c-stores can learn from the coffee-and-doughnut king as DD continues to grow and expand.

By  Erik J. Martin, CSP Correspondent

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Riddle: What’s loaded with dough, glazed with a sweet sheen of success, shaped like a well-rounded investment despite having a big hole in the middle, and baked from a proven 63-yearold recipe?

Answer: The company that convenience retailers should be eyeing closely as either a serious competitor to learn from or a worthy partner to grow with.

America runs on Dunkin’, we’re told, and the proof is in the numbers. Founded in 1950, Dunkin’ Donuts (DD) has more than 7,300 stores within 38 states; approximately 500 of these stores include Baskin-Robbins operations.

Known for operating primarily in Northeast and Midwest markets, DD branched out in a big way in 2012, opened 291 net new locations across the country, signed multi-store agreements in 32 U.S. markets—including Milwaukee, Denver, Houston and Dallas—and recently announced expansion into Southern California. In 2013, the company plans to debut up to 360 net new U.S. restaurants in new and existing markets, constituting an increase of 4.5% to 5%.

Put simply, Dunkin’ Donuts is the fastest-growing franchised business in America.

“Our strategic plan calls for extensive growth as we grow the business from over 7,000 Dunkin’ Donuts U.S. shops today to approximately 15,000 restaurants in the next 20 years,” says Michelle King, director of global public relations for Dunkin Brands Group Inc., the Canton, Mass.-based, publicly traded parent company of DD.

DD’s corporate parent reported systemwide sales of $8.77 billion in 2012—up 5.2% from 2011. That’s little surprise, considering DD restaurants serve the most hot regular, decaf, flavored and iced coffee in the United States, selling 1.7 billion cups of hot and iced coffee annually, based on NPD Group/CREST data provided by DD.

The brand ranks within the top three U.S. vendors as far as number of cups sold and is the largest bakery vendor among QSRs (selling about 2.1 billion doughnuts and Munchkins per year), as well as the largest bagel vendor in the country, according to Study Logic LLC, a Cedarhurst, N.Y.-based market research and business intelligence fi rm. Additionally, DD ranked tops in customer loyalty in the coffee category for the sixth consecutive year by the 2012 Brand Keys Customer Loyalty Engagement Index.

Dunkin’s largest competitors are Starbucks Coffee, McDonald’s, Krispy Kreme and Tim Hortons, as well as mom-andpop/independent doughnut shops.

“Dunkin’ Donuts is a leader in hot regular, fl avored and decaf coffee, iced coffee, doughnuts, breakfast sandwiches, bagels and muffins,” King says. “We have some strong competitors, but we have a distinctive positioning and have proven that we can grow in a competitive environment.”

On a Sweet Roll

According to Samuel Nahmias, chief operations officer for StudyLogic, the average DD store enjoys about $990,000 in annual sales, a fi gure that has grown nearly 7% a year over the past two years. And DD has an estimated 45 million unique customers who each visit an average of 5.8 times a month, which is about twice the visitation rate of a typical QSR.

While Starbucks appeals more to white-collar workers and those with higher incomes, DD “has a high penetration of blue-collar customers with more average incomes,” Nahmias says. The average DD customer is 36 years old and fairly evenly split among males and females.

“Dunkin’ is a very well-run organization,” says Nahmias. “What makes them unique are three key things. First, they offer a great coffee product, as well as a great food pairing with their coffee product, including bakery and breakfast items. Second, they have a nice seasonal shift in their performance. There’s no other real QSR out there that has this business model with the kind of seasonality combination that Dunkin’ offers when its stores partner up with Baskin-Robbins. When it’s warmer, it can sell more ice cream than coffee, and when it’s colder, vice versa.”

Third, he says, DD has one of the lowest average checks per customer in the QSR market: about $2.75 to $3.50, which is half that of Starbucks and still less than McDonald’s ($5 per check on average), and which makes its financial performance all the more remarkable. As expected, DD’s top seller is coffee, followed by pastries and breakfast sandwiches.

“Over 50% of customers walk out of a DD store with a coffee cup, bakery item and/or breakfast sandwich,” Nahmias says.

Ever-Expanding Menu

In addition to traditional hot java, signature treats such as Munchkins and more than 70 varieties of doughnuts, DD’s all-day menu boasts iced coffee; fl avored coffees; lattes; Coolatta frozen beverages; bagels and bagel twists; breakfast sandwiches; oven-toasted bakery sandwiches such as Texas toast grilled cheese, chicken salad and tuna salad; hash browns; cookies; and a DDSMART menu offering healthier food choices with fewer than 300 calories, such as Wake-up Wraps and egg-white fl atbread sandwiches.

“We continue to develop offerings to appeal to the changing preferences of our guests,” King says. “As people fi nd themselves busier than ever and are snacking more frequently throughout the day, [DD] is meeting guests’ changing eating habits and expectations for fast, satisfying menu items that can be enjoyed any time of day.”

Dunkin’s model fits nicely not only as a freestanding business but also as a c-store tie-in. South Paris, Maine-based C.N. Brown Co. leases out space to DD franchisees within 10 of its 79 Big Apple Food Stores-branded c-stores in the Northeast. Mike Doucette, C.N. Brown’s director of purchasing and merchandising, praises Dunkin’ for keeping its menu fresh and refreshed.

“They’ve diversified so much and gone after other day-part meals so successfully,” says Doucette. “They have an ability to grab an idea, sell it to people and get them to flock to it. Just look at their cold iced-coffee program, which is absolutely second to none.”

You can go to DD, buy something and never get bored because there’s always something different to pick on the menu, Nahmias says. “But one of the biggest things that make them so

successful is offering a great product that’s consistent,” he says. “After all, they wouldn’t sell as many breakfast sandwiches as they do if customers didn’t like them.”

Perhaps surprising to some, DD is currently the no. 2 seller of breakfast sandwiches in America, behind the Golden Arches.

“They’ve rolled out a number of different breakfast sandwiches, as well as recently rolled out bakery sandwiches meant for lunch, to try to capture both the breakfast and lunch occasions,” says Tim Powell, principal and c-store foodservice practice leader for Technomic Inc., Chicago. “They have a very simple strategy of offering reasonably priced sandwiches and specialty coffee beverages that tend to be combined with [limited-time offers] and ongoing promotions. Dunkin’ also comes out with one to two new products a month and is always keeping products innovative and customers interested.”

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