On Wednesday, Goldman Sachs analyst Karen Holthouse cut her rating to sell from neutral and price target to $47 from $48.
Dunkin' has suffered because it's concentrated in the Northeast, where 55% of its stores are located compared to some other companies, which have a 20% concentration in the region. Two large winter storms in the Northeast in the first quarter dampened Dunkin's sales, added Holthouse. In contrast, in the same quarter last year, mild weather resulted in 0.9% bump.
More worryingly, McDonald's and other competitors are undercutting Dunkin' on coffee prices, she wrote. In January, McDonald's revamped its McCafe coffee concept and decreased prices, selling any size coffee for $1 and specialty drinks like lattes for $2. The price of a small coffee at Dunkin' starts at around $1.59.
"This is a substantial discount to Dunkin's pricing, and search trends show an ongoing benefit to consumer interest in McDonald's for coffee," she wrote. "This could suggest traffic share gains in the quarter." Search trends have accurately predicted the effects of other promotions, she wrote, including the 4 for $4 deal at Wendy's (WEN) , the $1 menu at Yum! Brands' (YUM) Taco Bell and Jack in the Box's (JACK) "brunchfast" menu.
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Convenience stores are also making inroads, she said, with 7-11 late last month offering a free coffee of any size with a sandwich purchase.
"This not only represents an additional competitive threat, but it could have initially been rolled out as 7-11's response to the McDonald's promo (7-11's small coffee prices start around $1.30)," Holthouse wrote. "More generally, we believe a lack of 'freshness cues' (e.g., freshly cracked eggs, flat-top cooking) put Dunkin' more at risk of share losses to convenience stores than other fast food chains."
In the medium and long term, Dunkin' is focusing on "re-establishing its coffee culture/quality/consistency as key to managing through the competitive environment" and on accelerating its digital efforts.
This week, driving app Waze unveiled an order ahead feature, which lets drivers order food from Dunkin' from their cars. The promotion, available to members of Dunkin's Perks Rewards Program, connects Dunkin's mobile ordering to the Waze app. Dunkin' and Waze have collaborated since 2012. Starbucks (SBUX) will soon have a similar function for Ford (FORD) drivers in conjunction with Amazon's (AMZN) Alexa.
Editor's Pick: Originally published March 29.