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Why Dunkin' Is Taking On Starbucks And Betting On Coffee - YouTube
Channel: CNBC
[0]
Dunkin' is placing a
huge bet on coffee.
[4]
When you walk into a Dunkin'
today, you'll notice way more coffee
[7]
options and far fewer donuts than you
would have just a few years
[10]
ago. And it's not just drip
coffee on the menu anymore.
[14]
There's everything from Cinnamon Sugar
Pumpkin Lattes to Coolatta's
[19]
to premium espresso.
[21]
At the chain's newest stores you'll even
find Nitro Cold Brew on tap.
[26]
It's all part of Duncan's $100
million investment to refresh the
[30]
brand and become a
major player in coffee.
[33]
CEO David Hoffmann believes espresso is
key to fueling the company's
[38]
long term growth.
[40]
The aggressive push into beverages comes
at a time when the coffee
[44]
wars are heating up.
[45]
Competitors like McDonald's are
slashing prices through deals.
[49]
While coffee giant Starbucks is taking
bets on more expensive drinks,
[54]
a revamped loyalty
program and delivery.
[57]
But Duncan's rebrand strategy encompasses
more than just coffee.
[60]
The company also wants to aggressively
expand across the country and
[64]
revamp its restaurants
with new technology.
[67]
The chain changed its name, simplified
its menu and started rolling
[71]
out new store designs.
[72]
It got a new CEO and made
some changes to leadership at the top.
[76]
Dunkin' needs this
strategy to work.
[79]
Traffic in stores has slowed and
annual comparable store sales at
[83]
Dunkin took a one
percent dip in 2017.
[86]
While slow traffic and lagging same
store sales aren't unique to
[90]
Dunkin', they are dialing up
pressure on the chain.
[93]
So will that $100 million dollar
investment be enough to fuel
[96]
Dunkin's move into the big
leagues with McDonald's and Starbucks?
[100]
Or will the hit to profits just
cost the company in the end?
[106]
Dunkin' got its start
here in Quincy, Massachusetts.
[110]
When Bill Rosenberg left school in
the eighth grade, he dabbled in
[115]
catering but soon realized 40 percent
of his revenue came from two
[119]
simple products --
coffee and pastry.
[123]
In 1948, Rosenberg opened a restaurant
that sold five cent doughnuts
[127]
and 10 cent cups of coffee.
[129]
Two years later, Rosenberg renamed
the restaurant "Dunkin' Donuts".
[133]
The restaurant was a hit.
[135]
In 1955, the first
Dunkin' Donuts franchise opened.
[139]
That same year, the first
McDonald's franchise opened too.
[143]
By 1963, Dunkin' Donuts
opened its 100th location.
[148]
"This is one of the original
publicly traded 100 percent franchise
[151]
businesses. I mean, it's a
true asset light model.
[154]
Versus, you know, McDonald's is trending
towards its 92 or 93 percent
[159]
franchise globally, moving towards 95,
Wendy's is 95 percent, but
[163]
they weren't there five years ago.
[165]
Whereas Dunkin, when it went public, I
think in 2011, it was already
[168]
100 percent franchised.
[169]
And it really built the appreciation
for those types of businesses in
[173]
the industry."
[174]
That growth model worked
well for Dunkin'.
[176]
Franchising meant fewer actual
assets and higher profits.
[180]
Dunkin' started expanding internationally in
1970 when it opened its
[184]
first overseas location in Japan.
[187]
As of Q2 2019, there are over
12,800 Dunkin' locations, in more than
[193]
40 countries.
[195]
Dunkin' Brands went public in 2011,
selling around $423 million worth
[201]
of shares. For comparison, Chipotle raised
$193 million when it went
[206]
public in 2006 when
adjusted to 2011 dollars.
[210]
Then CEO Nigel Travis told CNBC,
the company would use profits from
[215]
its IPO to expand West and
internationally and pay down its debts.
[219]
Analysts said the stock was overvalued
because its price hinged on
[223]
the hope that Dunkin' would recreate
its success in the Northeast,
[226]
across the rest of the country.
[228]
At the time of the IPO, there was
only one Dunkin' Donuts on the West
[231]
Coast, in Portland, Oregon.
[233]
The company has since expanded its
West Coast presence with 102
[237]
locations in California and 12
in Hawaii as of 2019.
[241]
But even as Dunkin' has pushed to
grow its footprint west of the
[244]
Mississippi and internationally, it
hasn't forgotten about the
[248]
Northeast.
[249]
Dunkin' is the largest chain in
New York City for the tenth
[252]
consecutive year, with 624
locations as of December
[256]
2018.
[259]
In 2018, after 70 years of
Dunkin Donuts, the restaurant dropped the
[263]
doughnuts and became just Dunkin'.
[266]
"We think about it less about
dropping doughnuts then just leaning
[269]
into Dunkin'. Dunkin' is
what we're known as
[272]
for almost 20 years.
[273]
We've been America
runs on Dunkin'".
[275]
Beverage sales make up almost 60
percent of Duncan's revenue, so
[279]
growth in the category is essential
to the company's overall health.
[283]
In 2017, Dunkin' told Nation's
Restaurant News, that most stores
[288]
would offer fewer than
20 different donuts.
[291]
That was a big decrease from
the 30 varieties it typically offers.
[295]
While Dunkin' has simplified its food
offerings, it keeps adding to
[299]
its coffee menu. For about
45 years, Dunkin's coffee offerings
[303]
extended only to its
original blend drip coffee.
[306]
But in 1997, Dunkin' decided to make
a big push into the beverage
[310]
market. That was the year it
rolled out the Coffee Colada slush
[314]
drink. In 2000, Dunkin' started
selling the blended Dunkaccino.
[317]
And by 2003, it
began to offer espresso.
[322]
Dunkin' relaunched its espresso lineup in
2018 with new machines, new
[327]
recipes and new
training for employees.
[329]
It's a move some say has a whole
lot to do with Dunkin' angling to
[333]
become a premier brand
on par with Starbucks.
[337]
"I think that the initiative to
modernize would absolutely come from
[341]
their largest competitor, which is
Starbucks, which it has really
[344]
reinvented what coffee means to
consumers on a daily basis.
[349]
So, yeah, it's always good to kind
of have a, you know, an arch
[353]
enemy, if you will, out there, a
bad guy, whatever you want to call
[356]
them, because they force you
to stay on your toes."
[358]
It seems to be working.
[360]
Espresso sales for Dunkin'
are on a tear.
[362]
In its annual report
for fiscal year 2018,
[365]
Dunkin' U.S., said it
sells approximately 1.7
[368]
billion servings of hot and iced
coffee each year, and espresso
[373]
accounts for about 10 percent
of Duncan's overall sales mix.
[377]
The company reported sales of espresso
based beverages were up 40
[380]
percent in the second quarter of
2019 when compared to the year
[384]
prior. "That move into
the espresso beverages,
[387]
this is a space that their key
competitor really owned and had an
[391]
advantage over them.
[392]
Think about the length of the
order that somebody might give a
[396]
barista at a Starbucks, for example, versus,
you know, just a cup of
[401]
coffee at Dunkin'".
[402]
But Dunkin' can't just
mimic Starbucks to succeed.
[405]
It needs to stay true to its brand.
[407]
Dunkin' is all about a quick,
affordable menu and making trends
[410]
accessible to everyone.
[412]
That's not necessarily a
natural fit with espresso.
[416]
So analysts warn that Dunkin' has to
be careful about its move into
[419]
espresso. Customers are typically suspicious when
a brand tries to do
[423]
something that doesn't
feel authentic.
[426]
But if Dunkin's espresso based beverage
sales so far are any
[429]
indicator, this product could unlock
big potential for the chain.
[433]
However, coffee remains a crowded market,
and Dunkin' is fighting for
[437]
market share against
some formidable opponents.
[440]
Starbucks with its vast footprint,
McDonald's with all day breakfast
[445]
and the regional but beloved
Tim Hortons and Krispy Kreme.
[449]
As of September 2019,
Dunkin' has a $6.8
[452]
billion dollar market cap and its shares
are up about 8 percent over
[457]
the last 12 months.
[458]
But, it still has a ways to
go to compete with giants like McDonald's
[462]
and Starbucks, which have about a
$167 billion and $115 billion
[468]
market cap, respectively as
of September 2019.
[472]
In fiscal year 2018, Dunkin' U.S.'s
[475]
sales were also dwarfed
by the competition.
[478]
Dunkin' reported revenues of $606.8
[480]
million dollars.
[482]
McDonald's sales were more
than 12 times that.
[485]
And Starbucks brought in $16.7
[487]
billion in the Americas,
which includes the U.S.,
[490]
Canada and Latin America.
[493]
Espresso is a premium product and
typically costs more than other
[496]
beverages. That means it pushes the
average check price higher, which
[501]
in turn makes up for slowing
traffic because people are spending more
[504]
when they do walk through the door.
[506]
In 2018, a party's average check
at Dunkin' was eight dollars and
[509]
five cents. That's higher than
its Canadian competitor, Tim Hortons,
[513]
but lower than Starbucks.
[515]
The most recent check averages don't include
2019 data, so it may be
[519]
too soon to measure Duncan's
revamped espresso lineup, which started
[522]
to roll out at the end of 2018.
[525]
Dunkin' has long struggled with how
to drive up afternoon foot
[529]
traffic.
[529]
It has extended cold beverage
offerings and offered deals ranging
[533]
from two bagels for $4
dollars to $2 lattes.
[536]
"The beverages in the
morning, that's their core.
[539]
And that's where the
franchisees make their money.
[542]
But as far as the afternoon
business is concerned, the "Dunkin' Run"
[545]
and the "Go2s", a lot of times
those promotions, if they are on
[547]
beverages, they're usually after two
o'clock in the afternoon.
[551]
So, you know, the afternoon "Run"
seems to be stabilizing the
[554]
afternoon business."
[555]
Dunkin' Brands has also tried, and
arguably failed, at using ice
[558]
cream to drum up afternoon sales.
[561]
Baskin Robbins and Dunkin' are
both operated under Dunkin' Brands,
[564]
but Baskin hasn't performed
as well as Dunkin'.
[566]
Its sales growth
has been lackluster.
[569]
From 2007 up until it changed
course in 2011, the chain posted
[574]
negative annual comparable
store sales.
[577]
Baskin Robbins again posted negative same
store sales for the fiscal
[581]
year 2018.
[582]
Analysts say, Baskin might not be adding
much in sales to the brand,
[586]
but it's not
really deadweight either.
[588]
A dual store with both a Baskin
and a Dunkin' is attractive to some
[593]
franchisees to boost sales outside
the morning coffee rush.
[597]
A dual store costs as little as
ten thousand dollars more to open
[601]
than a standalone Dunkin' and
doesn't require extra workers or
[605]
machinery.
[607]
Dunkin' is also trying to keep up
with change in the fast food
[609]
industry by testing plant based meat
and a partnership with GrubHub
[613]
in some locations.
[614]
"The online ordering system now
is much more robust.
[618]
And our guests can get products
anytime they want, anywhere they
[621]
want. And, you know, we're living
in a culture now of everything
[624]
being on demand. Now you can
get your coffee on the demand."
[628]
Dunkin' started offering Beyond Meats
sausage in Manhattan, and the
[633]
company says, it's selling well
and drawing repeat customers to
[636]
Dunkin'. Dunkin' has been testing
delivery through partnerships with
[639]
GrubHub, DoorDash and
other local companies.
[642]
It plans to expand the partnership
with GrubHub to other major cities
[646]
in the U.S.
[647]
"Consistency of experience.
[649]
It's not a big deal when you're ordered
from a mom and pop pizza or
[652]
taco place. But for us,
the consistency is really important."
[655]
But there are unique
challenges in delivering coffee.
[658]
Experts say Dunkin' and other cafes might
not be a natural fit for
[662]
delivery, because coffee has to
maintain its temperature to be
[665]
appealing. Think, watery iced coffee
or a room temperature latte.
[670]
It's also betting big
on store format.
[673]
Part of that $100 million cash
injection went toward the rollout of
[677]
an entirely new kind
of Dunkin' shop.
[680]
It's a layout called the "Next
Generation" store and Dunkin' hopes it
[683]
will modernize the brand's image
and keep it relevant
[686]
for the next
generation of customers.
[688]
Dunkin' plans to add 200 to 250
net new restaurants a year for three
[693]
years starting in 2019.
[695]
"It completely changes the way the
customer interacts with our crews.
[700]
There's nothing between the crew from
the customers, so the customers
[703]
can now engage with our crews and
ask questions and learn about the
[707]
product."
[707]
Dunkin' says the new store is
slightly more expensive than previous
[711]
remodels because there's more
technology in this design.
[714]
The company didn't disclose the cost
of the new layout to CNBC.
[717]
"The returns are actually very exciting
and better than the previous
[721]
iterations. So working very closely
with our franchisees, we've
[725]
gotten to a place that we feel
very good, both sides on the
[727]
investment that they'll be making
for this next gen transformation."
[731]
Next gen stores are also a big
part of Dunkin's push to digital
[735]
ordering. Mobile ordering is another
area where Starbucks has Dunkin'
[739]
beat. About 4 percent of orders
at Dunkin' are made through mobile
[742]
phones. At Starbucks the number
is closer to 16 percent.
[747]
Experts are optimistic that the next
gen store will improve that
[750]
metric. The designs have a larger space
for people who are picking up
[753]
online orders.
[755]
"And the next gen store has an
even bigger area dedicated to this and
[759]
we're seeing probably twice the average
percentage of on the go
[763]
orders through the next gen
stores, which is tremendous."
[766]
Some of the new stores also have
a dedicated mobile lane in the drive
[769]
thru. That should help prevent bottleneck
issues like the ones seen
[772]
in some Starbucks when the company
added mobile ordering in 2017.
[776]
Next gen stores also have an 8
tap system for cold drinks, just like
[780]
the doughnut cases
[781]
it's all about getting products in
front of customers to increase how
[784]
much they spend. With drinks on
tap, crew members function more like
[788]
bartenders than baristas.
[790]
"Bartenders are quick
on their feet,
[791]
they know your name, they
know how to sample drinks.
[794]
But most importantly, they're great
at serving the customer."
[797]
As of 2019, customers rated the barista
expertise at Dunkin' at a 90
[802]
out of 100. Starbucks scored
at 94 out of 100.
[805]
While McDonalds was lower at 78.
[808]
In its next gen stores Dunkin'
hopes that number will go up.
[813]
Dunkin' has been a reliable
brand throughout its existence, growing
[817]
at a slow and steady rate.
[818]
It hasn't had any major scandals like
some of its competitors and its
[822]
franchisee relationship is strong.
[824]
So how has Dunkin' maintained
solid and steady growth?
[828]
One expert says, it all
comes down to loyalty.
[831]
Dunkin' ranks pretty high in
satisfaction, slightly below Starbucks,
[834]
but above McDonald's, according to
the American Consumer Satisfaction
[838]
Index. But if satisfaction is a
moment in time, loyalty tells the
[842]
future. And, it is in
metric where Dunkin' shines.
[846]
For 13 years through 2019, Dunkin'
has ranked number one in consumer
[851]
loyalty in the out-of-home
coffee provider category.
[855]
In the packaged coffee category, it's
been number one for eight
[858]
years. That's no easy task in
a field as competitive as coffee.
[863]
Robert Pascal, whose firm measures
consumer loyalty, says having
[867]
highly loyal customers ensures that they'll
come back again and again
[872]
and again.
[873]
"When we look at all the metrics
against old rivals, against all the
[878]
expectations is up at
about 95 percent.
[884]
That's pretty good.
[887]
You look at someone like Starbucks and
they are a little bit lower."
[891]
And loyalty is valuable to a brand
for more than just its bottom
[895]
line. Loyal customers are more likely
to buy products associated with
[898]
the brand. Recommend the brand to
others and invest in publicly
[902]
traded stocks. Despite low traffic
and intense coffee competition,
[906]
Dunkin' is betting that new
logos, sparkling espresso machines and
[910]
trendy partnerships will be enough
to help it grow up.
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