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Dunkin Donuts May Win Health Care Battle

Stocks in this article: DNKN

NEW YORK ( TheStreet -- Debra Borchardt:

Dunkin' Donuts (DNKN) is expanding into California, 330 to 360 new stores for 2013. How are you able to manage that fast growth?

Nigel Travis: Well, I'm delighted to say I've got a great team. We've got great franchisees. We've got great unit economics. I think the real answer to your question is, I came in right in the middle of the recession. I learned a lot about how tough life could be. We applied the lessons from the recession to our store development, improved our systems, really focused on unit economics, we improved our marketing, we have national marketing now for the last three years. So, that helps. That gives us the cover.

But I think the trick is to be really organized. Our real estate team put together our numbers. We pro forma every store. We have a very high hit rate in terms of the success of the new stores against their pro forma. So, I think it's by being organized, by being absolutely fanatical. It is in many ways a loss if any store doesn't make it. We've had very few of those in recent times. I think it's the combination of all those facts. We are very focused on the unit economics of our franchisees.

Debra Borchardt: Dunkin' Donuts is known for its good coffee, but it seems a lot of your competitors in the market are now touting their coffees. Everyone is getting into the coffee business all of a sudden. So, how are you able to keep the focus on your coffee and away from your competitors?

Nigel Travis: Well, several things. Firstly, our coffee is obviously brewed fresh, it's changed at a very regular rate, and it's obviously got a profile that's attractive to a lot of people. I'm amazed, even when I go to England the number of people that ask me to take over Dunkin' coffee. These are people that haven't had a lot of time to get used to it. So, there is something about the flavor profile, I can't claim any personal part in that success. It's been there a long time. I think that's important.

I think also, we've managed to do a great job of putting breakfast sandwiches alongside the coffee, particularly in the morning. We provide food very quickly. So, fast great service. We've improved the quality of our stores I think dramatically in the last few years.

So, I think it's that combination of breakfast sandwiches, which by, the way are nearly as high a margin for our franchisees as beverages. So, that combination has worked very well. I'd say that, it's probably not the best way of phrasing it, but the breakfast sandwiches are the glue that pulls in the coffee.

Debra Borchardt: Let's talk about health initiatives. Every one is talking about eating healthy and I want to be healthy...but you've got donuts. How is it that donuts are still doing well when everyone is proclaiming that they want to be so healthy?

Nigel Travis: Well most people, and I'm one of them, go into a casual dining restaurant, I'm going to order a salad and at the last minute, I change my mind. I think we all have that kind of resistance to actually doing what's right. We try to give our customers choices. Several years ago we introduced DD Smart. It's been relatively successful. It's not a huge part of the menu, but it gives people choices. If they are feeling today in early January, after the holiday season that they want something that's not so heavy, we've got wraps.

We've just come out with a product and I think we're going to look back and say that was one of the best things we ever did. It's right on the fringe of DD Smart. It's under 400 calories, but it's a healthy sandwich and that's our turkey sausage sandwich. It's got fried egg in it as well. It's got plenty of protein. It's doing very well already. I think that's going to be the wave of the future. The products that really are attractive to look at, really make you crave, but at the same time are relatively healthy. Not the ultimate, but very low calories.

Debra Borchardt: There has been a lot of talk about the new healthcare mandate and how it's affecting quick service restaurants. Are you going to be affected by the changes in insurance requirements for your employees?

Nigel Travis: We're going to be affected like everyone. We're working very hard on franchise economics, as I mentioned earlier and we think we can mitigate most of the costs. We're involved with the national restaurant association in lobbying to have some of the provisions improved. It's not going to go away, however some of them could be improved. We're also working with our franchisees to find ways to mitigate the costs, reduce the costs of some of their items, new programs to increase their revenue. We are now franchisees together on this. The relationship that we have is very strong. The open discussions we've had about healthcare, the impact on the P&L, have been very productive. I'm confident that it's not going to be a big barrier.

In fact it could be just the other way. Some other chains may be forced to raise their prices; it may make Dunkin' Donuts even more of a value play than it is already.

Debra Borchardt: Your outlook for 2013? Are you positive? Are you concerned? Choppy? What do you expect?

Nigel Travis: I'm relatively positive. I think the first quarter, a few people are going to get concerned about the fact that the payroll tax holiday has gone away. In the office two weeks ago, everyone was holding their paychecks saying, "What happened to that?" I think that will hang around for a month or two. We need to sort out healthcare and where it's going. We need to sort out the remaining cliffs. After that I'm confident. I think the American economy is picking up. Housing is picking up. Europe has seems to have solved some of its problems, not all but its better. China is looking good. So, I'm beginning to think that this could be a relatively good year.

Debra Borchardt: When you go into Dunkin' Donuts, what do you order? What's your favorite?

Nigel Travis:

I always have a regular medium coffee with cream. I love our sandwiches. I would probably have a big and toasty, if I had free choice, but this turkey sausage sandwich, I've had about four of them in the past week. I tend to have that. Occasionally when I really want something sweet, I have a straight forward glazed donut.

--Written by Debra Borchardt in New York.

>To contact the writer of this article, click here: Debra Borchardt.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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