U.S. Markets open in 3 hrs 26 mins

Will Delivery Transform Dunkin' Brands' Business?

Asit Sharma, The Motley Fool

Dunkin' Brands (NASDAQ: DNKN) formally entered the food delivery space on June 17, beginning what will be a nationwide rollout in one of its most doughnut-saturated markets: New York City. Partner GrubHub (NYSE: GRUB) is now picking up customers' orders from more than 400 Dunkin' locations across the five boroughs, via its Seamless brand. The company says it will expand delivery service to other markets in the next few months, among them Chicago, Philadelphia, and Boston.

For Dunkin' Brands shareholders wondering how all this might impact the chain's bottom line, one of the marketing hooks of this campaign should be of interest to you. Those in the NYC metro area who order from Dunkin' through Seamless or Grubhub through June 23 using a designated code will have a chance to win an "exclusive, tricked out Dunkin' bicycle" designed in conjunction with the delivery launch.

A red bike in an unfurnished city apartment loft.

Image source: Dunkin' Brands. 

This bicycle is emblematic of the campaign, and the image encapsulates financial implications of the new partnership. Bikes are the delivery vehicles of choice in densely populated New York; automobile delivery is relegated to afterthought status due to the Big Apple's notorious traffic. And given the  number of locations the chain has blanketing the city, most people who would order from one will be in close enough proximity to a Dunkin' that delivery via foot, bicycle or motorbike are viable options.

Conditions in most of the markets where Dunkin' will initially offer delivery are similarly dense and urban. If you think about the economics of a typical big-city Dunkin' location, those choices make sense.

As I explained in a recent piece on investing in food delivery companies, restaurants must pay commissions for every completed delivery -- fees that drag on those restaurants' profit margins. Those that produce high annual sales and consistent profitability can treat their delivery revenue streams as incremental boosts to their bottom lines. This certainly describes Dunkin's NYC locations, on average. But in smaller markets, tacking on a delivery option might be less than ideal for the doughnut purveyor, as it may simply weigh on franchisees' profits and cash flow.

As often seems to be the case with Dunkin' Brands, its decision to climb on board with this trend follows the successful implementation of a similar plan by fast-food giant McDonald's  (NYSE: MCD). On McDonald's most recent earnings conference call, executives discussed the numerous benefits it had reaped from initiating delivery service in a number of global markets, as well as in the U.S. via its partnership with Uber's (NYSE: UBER) delivery arm, Uber Eats.

McDonald's views delivery as a sales accelerator, and it currently offers delivery in 20,000 locations across 75 countries. CEO Steve Easterbrook observed on the earnings call that delivery has grown into a $3 billion business for the company's owned and franchised locations -- amounting to roughly 3% of annual systemwide sales.

Will delivery prove to be a sales accelerator for Dunkin' as well? Without test data that only the company is privy to, it's impossible to guess how much consumer demand exists for its doughnuts, coffee beverages, and other wares in a delivery context. McDonald's' foray into the U.S. market yielded some surprising early discoveries, such as the propensity of college students to order burgers delivered to their dorm rooms late in the evening. We may see some similar unanticipated ordering patterns emerge as Dunkin' begins to share data with investors over the next few quarters.

Eventually, delivery could probably provide a systemwide sales boost to Dunkin' of the same magnitude that it has given to McDonald's -- 1% to 3%. The would be a meaningful improvement. And by offering this option, Dunkin' will avoid losing business among customers for whom ordering out is becoming second nature. But beyond the incremental profits to be garnered in major metropolitan areas, delivery is unlikely to have anything like a major impact on the company's bottom line -- at least, not for a very long while.

More From The Motley Fool

Asit Sharma has no position in any of the stocks mentioned. The Motley Fool recommends Dunkin' Brands Group, Grubhub, and Uber Technologies. The Motley Fool has a disclosure policy.