Dunkin' Brands Missing the Mark

By Nate Matherson of Circa Alpha

NEW YORK (TheStreet) -- Dunkin' Brands Group (DNKN), the parent company of Dunkin' Donuts and Baskin-Robins, has performed very well since its public offering in late 2011. Shares have returned 118% over this period and currently sit at around $41 per share. This year alone, shares have risen more than 25%.

Dunkin has plenty of positives, but it is missing an entire revenue stream by not offering a frozen food line in supermarkets; it's the same fare you buy at its "restaurants". The stock closed Tuesday up 7 cents, or 0.17%, at $40.57.

Over the last few years, Dunkin' has done a spectacular job in shaping its brand into an all-day quick-service restaurant. If you listen in to the conference calls, you may have noticed the company executives always refer to the company as being in the "restaurant" business.

Executives realized a differentiation has occurred between their company and rival Starbucks (SBUX), which labels itself as a "coffee shop". This differentiation is key, as both companies are actively targeting the same areas for American expansions. Dunkin' serves a different consumer than Starbucks.


According to Civic Science, these consumers tend to have more children, be older, less health conscious and more conservative. Whereas Starbucks tends to pull the younger, health conscious and liberal crowd.

Fitting with this demographic, Dunkin' has focused its innovation on its distinct menu offerings. Stan Frankenthaler, executive chef and vice president of Innovation, along with his team of talented chefs, have created a deep portfolio of consumer favorites such as the Big N' Toasted, Angus Steak & Egg "Wake Up" wrap and a delicious personal favorite: The new Glazed Donut breakfast sandwich.

The company released more than 70 new products to market last year and is currently testing more than 40 new breakfast offerings here in the U.S. Stan and his team announced at the investor day earlier this month that they have more than 100 products in the pipeline that are set to be rolled out over the next two years. Many of these new products fall into the quick-serve breakfast and lunch category.

The new menu offerings that have hit the market have been received very well so far and over the last few quarters have contributed to rising margins and higher ticket sales. The company has worked hard to pair its coffee products with the offerings to push consumers to explore the menu. The company see's great margins of more than 75% on these products, second behind its coffee category. I expect the company to maintain these margins, even with rising input costs, as the company is making progress logistically.

The company's frozen-food technological advances have been beneficial. Dunkin' can leverage this new technology for profit by shipping frozen products to new markets without forgoing freshness. This cost-saving method has allowed the company to expand offerings in franchises that previously could not afford to take the products. However, I believe Dunkin' could leverage this technology further.

Dunkin' should continue down its path of sandwich innovation, but should consider expanding its products into supermarket aisles. The company could utilize its frozen food technology to offer consumers the same great sandwiches they love in the convenience of their own home. Have you ever watched the in-store preparation of your Dunkin' items. I have, its exceptionally simple and quick in an effort to maintain consistency. If the sandwiches are already being frozen for transport into the franchises, there should be hardly any taste difference between in-store and at-home products.

Here's where the strategic partnership could come into play. Dunkin' could partner with a company like Hillshire Brands (HSH) for the expansion. Hillshire is the owner and mind behind the successful line of Jimmy Dean breakfast sandwiches families love.

Hillshire's Brands, through its Sara Lee, Ball Park, Jimmy Dean and other brands, targets the exact same demographic as Dunkin'. Both companies seek to profit from families on the go. The menu offerings could be licensed to Hillshire, which has the experience necessary to take the products to supermarket nationwide. Dunkin' would be creating a successful revenue stream, while strengthening its brand name nationally.

Competitor Starbucks has recently placed great importance on the expansion of its "ready to drink" market segment as the company realized these offerings strengthen customer loyalty without decreasing in-store revenues.

In the years ahead, Dunkin' has bold plans to expand to all corners of the country. Primarily an east coast player, the company has outlined a plan to increase its presence to the mid-west and western markets, particularly California. Agreements have already been signed for near-term launches in Texas and Colorado. In combination with its current national advertising campaign, an in-store supermarket presence would help the company prepare consumers for the new locations in the years ahead. The company would be building its brand recognition through what would be effectively free advertising.

The Wrap

Dunkin' Brands seems to be hitting the taste buds of consumers with the array of new menu offerings launched or tested almost every day. Dunkin' executives should consider expanding the company's offerings into the national supermarket arena through an established partner. Hillshire looks like it fits well, as both companies concentrate on the same demographic and Hillshire has proven itself through its Jimmy Dean breakfast brand. By implementing this strategy, the company would grow its top line revenue, while priming the pastures for eventual franchise owners in new markets.

At the time of publication, Matherson was long SBUX.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Nate Matherson is currently a student at the University of Delaware, where he is pursing degrees in Finance and Economics. Nate manages his own investment portfolios in addition to writing investment analysis articles for a variety of news outlets. In the future, Nate would love to work in either the portfolio management or investment banking industry.

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