Here's What Dunkin' Donuts Is Doing to Solve One of Its Biggest Problems

Dunkin Brands' Group (DNKN) gave spreadsheet loving Wall Street analysts several new things to digest on Thursday.

The owner of Dunkin' Donuts and Baskin-Robbins said it will start to significantly reduce the number of items on its menu in a bid to improve wait times and more effectively manage labor. Executives didn't say specifically on a conference call what items would be slashed, except to point out that slower-selling products are the main focus.

"We have thousands of combinations of drinks and sandwiches on our menu, in some cases more than McDonald's (MCD) and other competitors -- we have perhaps gotten too complex," acknowledged Dunkin' Brands Chairman and CEO Nigel Travis in an interview with TheStreet. Travis believes simplifying the menu will help speed up lines both in stores and via drive-thrus.

To be sure, Starbucks (SBUX) may want to follow Dunkin's lead on menu simplification given its new challenges with uber long lines.

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As for the other fresh tidbit -- the historical growth juggernaut that is the Dunkin brand will open 383 new U.S. restaurants in 2017, a slower pace than the 397 opened in 2016.

Travis says Dunkin remains a "development machine", but that recent years of increased regulation and higher state minimum wages may have weighed a bit on how many locations franchisees would open this year.

Dunkin' sees full-year earnings in a range of $2.34 to $2.37 a share. Analysts were looking for $2.42.

Wall Street cheered the sharper menu focus as well as a U.S. business that ended last year on a good note from sales and profit perspectives. Dunkin' shares rose 4% on Thursday to $54.10.

Dunkin' fourth-quarter earnings came in at 64 cents a share, beating Wall Street forecasts for 61 cents. Net sales clocked in at $215.7 million, up 5.8% from the year earlier, and ahead of analysts' estimates of $215 million. Operating profit margins rose to 55.3% from 51% a year ago, excluding one-time items.

Among the company's two chains, it was Dunkin' Donuts that showed the most encouraging signs amid a new push toward higher-priced hot and cold beverages. Same-store sales at Dunkin's U.S. business rose 1.9%, relatively in line with Wall Street projections. The company saw strength in its higher ticket offerings such as the new Sweet Black Pepper Bacon breakfast sandwich and cold brew coffee.

TheStreet talked with Travis about the quarter and what he has planned for 2017. What follows is a condensed and edited version of our conversation.

Dunkin' wants to make its lines even faster

Dunkin Brands Chairman & CEO, Nigel Travis

TheStreet: You guys really got analysts in a huff on the earnings call with this new menu streamlining initiative. Why are you doing this?

Travis: When you do a big piece of consumer research like we did last year, you learn a lot. We learned that one of the biggest strengths we have is speed, which confirmed that we are a to-go brand. What we also learned is that we have a menu that has thousands of combinations of sandwiches, thousands of combinations of drinks and that we have more stock keeping units (SKUs) than some of our competitors like Starbucks and McDonald's. So that told us we may not always get the credit for this complexity.

So, we want to streamline our menu. We have done small tests on this already. We will do this across a variety of markets. It's important. We are determined to build quicker throughput and improve service. 

Our biggest problem is finding labor, and some of the things we have learned is that our system is pretty complicated to learn. If we can simplify it, it will be better for our employees. They will like working at Dunkin' more than they already do and we can retain people in a very tough labor market. So, we have a lot of stuff on the menu and we probably don't need it all. 

TheStreet: Is doing this one way to reduce labor in the store?

Travis: I wouldn't look at it that way. We have encouraged our franchisees not to look at it that way. This initiative is not about labor cutting. This is about using labor more efficiently. A couple earnings calls ago we talked about that 30% of our labor comes from taking the order. So, if we can do that in a better, less stressed manner that's better for the customer and better for the employee. Also, remember that 70% of our sales go through the drive-thru in stores that have them. There is a short period of time to get that order done. Anything we can do to speed up our transactions is good.

The thing that actually slows down the drive-thru is when people ask for donuts and want them put into a box. If we can speed all of this up, it will be a huge benefit. 

TheStreet: You also seemed to surprise some analysts on slowing down the pace of development a bit in the U.S. Is this a reflection of the build-up in regulations and higher minimum wages in recent years finally taking a toll on franchisees?

Travis: I think this reflects a lot of things. The actions taken in New York and California to raise the minimum wage to $15 an hour probably weighed on it. Franchisees are concerned about finding labor and the money they have to pay. Clearly, franchisees haven't seen the same-store sales increases. Their profit margins are still good. Last year was the second highest year ever for franchisee margins, but they are a bit cautious. So, there may be a couple years of build up here.

But I will say there is a good chance we could beat 385 new openings this year. I'm optimistic. Clearly, if we can get some help with corporate tax reform, and labor and less regulations it would be welcome. 

TheStreet: Starbucks clearly is having issues with long lines and possibly, upset customers. Are you doing anything to target these potentially disenchanted customers? It seems like a good opportunity to take some business.

Travis: I think targeting is an overstatement. Look, we are doing everything we can to speed up our transactions. I have gone into competitor stores and waited a long time. I never really wait anytime I walk into Dunkin' no matter how complicated the menu is. We can make our experience better by streamlining our menu. But, the fact that we have so many drive-thrus and we are working to make them more efficient is a real asset. Mobile ordering helps, too. 

So I don't think we have to go out and target Starbucks customers or anyone else's. But, I did find their news interesting. It told me that we are moving in the right direction.

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