What c-stores can learn from the coffee-and-doughnut king as DD continues to grow and expand.
A Hit with Hess
Ask DD’s largest franchisee why it chose to offer Dunkin’ products in its convenience retail operations and you’ll get a simple answer: brand power.
“We sold Mountaintop brand coffee for 13 years, and it performed really well for us, but it was still only getting us typical c-store type numbers per day,” says Rick Lawlor, vice president of retail marketing for Hess Corp., Woodbridge, N.J. “After reviewing sales, we explored the idea of creating a proprietary (coffee) brand. We felt like we needed to jump-start our program, and the only way to do that quickly was to develop with a brand that had instant credibility—a brand committed to operational excellence that was innovating itself every day.”
Hess, owner o f 1, 357 Hess Express and WilcoHess c-stores in 16 states across the East Coast, began adding DD to select locations five years ago. Today, Hess operates 657 DD-equipped c-stores, 532 of which it also owns (the remaining 125 Hess stores lease out space to outside DD franchisee owners). Originally, Hess tested two distinct pay points: one for DD, one for c-store sales, which seemed to aggravate customers and create unwanted in-store congestion. Today, there’s one checkout point for all customers.
The DD portion of each store operates in a self-serve format, offering approximately 75% of the full Dunkin’ menu—meaning sandwiches, Coolattas and other niche items are off the list. That’s because most Hess c-stores also house Quiznos Subs and Godfather’s Pizza entities that offer competing food products.“Godfather’s is known more as a Midwestern brand, and Quiznos is a great sandwich brand not as well known to all of our customers, but Dunkin’ is a national brand known for launching innovative new products. They also do a great job of brand advertising, so they really do a lot as a package to drive people to our stores,” says Lawlor, who declined to divulge financial data but says coffee sales have substantially increased in its stores since adding DD.
Lawlor says Hess also picked Dunkin’ over its competitors because DD hit a “sweet spot.”“Starbucks is a great company with a great product, but they tend to be viewed as more high-end,” says Lawlor. “Dunkin’ offers a more natural fit with our c-store customer: the middle America coffee and doughnut consumer. [Providing DD] has broadened our customer base.”
Before Joining Forces
Prior to partnering with any franchisee or owning/operating your own in-store QSR, it’s important to choose the right player that can best benefit your operations. For many convenience retailers, DD is an ideal partner not only because it fills a menu niche and brings heady name recognition, but also because it may offer a greater return on investment.
For example, Ralph Semb, owner of Weatherheads, an independent, standalone c-store in Erving, Mass., ultimately opted to rent space to a Dunkin’ franchisee at his location in large part because DD offered the most utilitarian value to a town with only 1,200 residents and no stoplights.
“Dunkin’ seems to be a good fit. There’s nowhere else along this road where people can stop and get a snack or a cup of coffee. I’ve seen a continual increase in my sales since [DD] opened last August,” says Semb, who also admires how compact DD fits within his c-store’s approximately 4,000 square feet, taking up about a third of that space.
Doucette of C.N. Brown is equally impressed with how efficient DD is in creating a quality product within a limited footprint in his Big Apple Food Stores.
“[DD has] a limited space to prepare all the things they offer, but they really have their act together. The footprint we provide to [DD franchisees] within our stores is typically much smaller than other franchisees we’ve looked at. So the investment on our part to bring in a Dunkin’ partner is pretty reasonable.”
Whether a c-store wants to be the landlord or the franchisee itself, Semb recommends keeping it simple at the start.
“It may be a better deal if you have one instead of two franchisees inside the same store. It gives you more space for your own [retailing operations], and it’s less stressful,” says Semb. “I don’t think we would have done as well if we had opted for two. We probably would have gotten less of a percentage from Dunkin’. ”
The road forward isn’t paved with endless coffee pots of gold and chocolate-frosted diamond rings for as far as the eye can see. Riggs says all QSRs will be challenged in the coming years as the battle for market share across day-parts intensifies.“Right now, [doughnut-category QSRs] are heavily dependent on the morning meal, but the morning meal is the growth area. Specialty drinks, smoothies, slushies and iced coffees are very appealing to consumers, and they happen to be in markets that are growing,” says Riggs.
But anytime there’s a growth area, “everybody else wants a piece of the action, so their competition becomes greater and they have to be more innovative and creative and market more,” she adds. “They will always have to stay on top of new product activity.”
Challenges for Dunkin’ will come from every direction, including QSRs moving into their breakfast and specialty coffee space, Powell says: “Dunkin’ is also still a largely East Coast brand, and saturation is a real possibility.”
Doucette agrees on the latter point. “They run the risk of putting too many locations too close together. You can get to a saturation point here in the Northeast, for example, where, if you have a Dunkin’ on virtually every corner, things can go south pretty quickly,” he says. “Due to the drive-thrus they have, they may find a bit of a backlash within towns issuing permits without incurring a lot of expense in redoing roads to avoid traffic backup.”
Despite these issues, Riggs is confident that doughnut-category QSRs are in an enviable position now and in the near future.
“It has been one of the few categories that have done fairly well during a difficult time for the (QSR) industry,” says Riggs. “That has a lot to do with the fact that the focus isn’t just on doughnuts, but on specialty beverages in addition to traditional coffee.”
DD, Powell says, “knows where they belong in the reasonably priced, standard quality space, and they have built a good niche there.
Dunkin' Donuts at a Glance
History: Founded in 1950 in Waltham, Mass.
Store Count: More than 7,300 stores across 38 states; about 500 of these stores include Baskin-Robbins operations.
Strategy: Known for operating primarily in Northeast and Midwest markets, DD in 2012launched a nationwide outreach that continues today, including new locations in Denver, Houston, Dallas and, more recently, Southern California.