TAIPEI, Taiwan (TheStreet) -- A massive expansion in China by Dunkin' Donuts (DNKN) will put new pressure on major fast-food multinationals to hold onto their secret formulas for winning over Chinese consumers.
The American coffee and pastry giant said last week it would open 1,400 new stores over 20 years through a joint venture with Philippine fried chicken icon Jollibee Worldwide and Chinese financial investor Jasmine Asset Holding. The Massachusetts-based donut chain with 11,000 outlets total but just 16 in China calls the deal its largest development agreement ever.
Dunkin' may launch a whole new market of doughnut eaters. It could also erode the market share of Starbucks (SBUX) , Yum! Brands' (YUM) KFC and Pizza Hut and McDonald's (MCD) , which would be wise to review their locations and store ambiance.
Urban Chinese, particularly youth and busy commuters with little time to eat, know those American brands as they've been widespread in China for more than a decade. But the Chinese also like to experiment with whatever's new and hot. They also represent no small market.
Dunkin' Donuts will sell coffees, espresso drinks and teas along with bagels, muffins, croissants and sandwiches and, or course, donuts. The company, with 2,200 outlets in the Asia Pacific region, already says it will pick convenient locations and mind its prices -- incidentally in keeping with its blue-collar image in the United States.
The chief competitor from a menu standpoint is Starbucks, which has 1,500 stores in China now, according to its Web site. Its 16-year-old China business rests largely on offering quiet, well-decorated places to hang out and discuss, for example, job offers or real estate deals. That's how Starbucks now stays ahead of offshore coffee shop rivals such as Lavazza LAVA.
Starbucks would need a new strategy if Dunkin' provides upbeat, comfortable chatting venues at lower coffee and pastry prices. Dunkin' is already expected to be going for a more upscale image this time after a less successful China joint venture in 2013.
"A coffee shop in China is not necessarily a pace to drink coffee, but a place to meet someone," says Matthieu David-Experton, founder of market research firm Daxue Consulting in Beijing and Shanghai. "If you provide donuts, if you provide sandwiches, it doesn't mean that much. It's about do you look good in that place? Do you get social status?" It's also about high-traffic locations, he adds.
Executing well in seating and siting would pit Dunkin' against the American burger and fried chicken chains as well because Chinese look to those for cleanliness, bright lighting and the freedom to occupy a table until closing time. That formula appeals to high school students with homework and mobile self-employed people with no real office.
But each fast food brand must eventually do more to lock in a dedicated Chinese following. There's no obvious formula.
"Distinct from the US, the future of each brand will be determined by its ability to create a visceral connection with Chinese cultural values, aspirations and tastes," says James Berkeley, managing director of the London-based management advisory service Ellice Consulting. "That is a huge difference and why success is not a 'given' even for the most powerful brands."
TheStreet Ratings team rates DUNKIN' BRANDS GROUP INC as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:
"We rate DUNKIN' BRANDS GROUP INC (DNKN) a BUY. This is driven by a few notable strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, impressive record of earnings per share growth, compelling growth in net income, expanding profit margins and good cash flow from operations. We feel these strengths outweigh the fact that the company has had generally high debt management risk by most measures that we evaluated."
You can view the full analysis from the report here: DNKN Ratings Report