Why Dunkin’ Brands is a unique player in a maturing industry

Market Realist

Business overview: An investor's guide to Dunkin' Brands Group (Part 7 of 10)

(Continued from Part 6)

Competition

Dunkin’ Donuts’ main competitor on the coffee sales front is Starbucks, which sells coffee from its company-owned fleet of retail locations. Starbucks targets the market, seeking premium coffee products and gourmet pastries, courtesy of its partnership with California-based French-style bakery La Boulange. Dunkin’ Donuts appeals to the working-class American, offering value-oriented goods and an advertising scheme that suggests “America runs on Dunkin.”

Scope of influence

Despite its current size differences, Dunkin’ Donuts is the older of the two chains. Its origins trace back to the opposite coasts of the United States. Starbucks was founded during 1971 and was a single coffee shop in Seattle until the 1980s expansion efforts driven by Howard Schultz. Dunkin’ Donuts was founded in 1950 by Bill Rosenberg. It focused its franchising efforts in the northeastern United States, starting with its first franchise in Worcester, Massachusetts, in 1955. By 1963, 100 franchises were operational, with Dunkin’ Donuts University (the employee training center) educating large numbers of prospective franchisees by 1966. Shortly afterward, investing guru Peter Lynch made a ten-fold profit on the old Dunkin’ Donuts stock after noticing the growth potential it had close to what he called home.

In terms of domestic geographic positioning, Dunkin’ Donuts has historically concentrated its franchising efforts in the Northeast United states. The primary purpose of this tactic was to simplify kitchen operations via franchisee collaboration with centralized manufacturing locations. This strategy was also set in place for franchisees to more easily accommodate the mandatory ingredient purchasing guidelines that are imperative to ensuring continued product quality consistency. The result of this unique take on a franchise model was significantly stronger margins relative to the rest of the industry.

On the other hand, Starbucks assumed responsibility in supplying and managing the majority of its locations. The single largest benefit Starbucks leverages is economies of scale. Over ten thousand domestic locations from coast to coast are provided the necessary inputs by the company that wholly controls the supply chain, as opposed to Dunkin’, which outsources its purchasing. Starbucks also has footholds in more international markets, leveraging emerging market growth in countries such as India and China more efficiently than Dunkin’ Brands.

McDonald’s

Dunkin’ Brands’ main competitor on the QSR front is Mcdonald’s. McDonald’s has used the franchise model in a way that Dunkin’ looks to in the coming years as far as both domestic and international expansion efforts. McDonald’s largest threat to Dunkin’ Brands’ business is its line of breakfast offerings. The menu includes everything from egg sandwiches (the Egg McMuffin), to yogurt parfaits, in addition to hot cups of coffee in the morning. McDonald’s even carries a limited line of pastries.

Historically, McDonald’s and Dunkin’ Brands haven’t competed so fiercely in food sales through the day. Dunkin’ stuck to breakfast foods and McDonald’s to burgers. However, Dunkin’ Brands is looking to expand the variety of food items it carries on its menu, beginning with chicken salad in 2011. Likewise, McDonald’s is threatening Dunkin’s breakfast market share by offering its entire line of breakfast sandwiches and compliments all day. McDonald’s historically stopped serving breakfast after 10:30 AM.

Continue to Part 8

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