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An industry advantage: Dunkin’ Brands’ operating costs are dieting

Matthew Krikorian

Business overview: An investor's guide to Dunkin' Brands Group (Part 5 of 10)

(Continued from Part 4)

Low capital requirement

Dunkin’ Brands has a very low capital requirement relative to the rest of the coffee retail industry. This is due to its business model, centered around establishing franchises across the world. The company is allowed to grow distribution points and brand recognition with very little capital investment, as a large portion of operating costs and overhead are shifted onto franchise owners. So company margins are very high relative to the rest of the industry

 

Advertising

Franchises in the U.S. pay advertising fees to brand-specific funds administered by the company. Typically, 5% of gross sales are collected weekly for the advertising fund. Franchises can freely choose to increase fund contribution to bolster targeted initiatives. This is an interesting take on advertising expense allocation, as many large industry players with franchised business models (such as McDonald’s) fund advertising out of the corporation’s pocket. The unique take on advertising is likely due to Dunkin’s need to compensate for its small relative size and its inability to compete with the larger players in terms of each ad’s penetration. The fund is used to cover all expenses relating to marketing, research and development, innovation, advertising, public relations, and sales promotions. Advertising is placed on print, radio, television, billboards, sponsorships, online, and other media streams—all of which are tasks assigned to various agencies. Circumstances allow franchises to conduct local advertising with prior approval of the content and promotional plans. The most recent corporate advertising campaign is one commonly known as “America runs on Dunkin’.” As of January 2014, the company signed a multi-year partnership with British soccer team Liverpool FC to strengthen its expansion into the UK and the rest of Europe.

Quick service

Quick-service restaurants boast certain qualities that improve the flow of customers throughout the day. For example, QSRs usually have little to no in-house dining space. This is also the case in many Dunkin’ Donuts franchised kiosks, where the location consists of a counter and a handful of instruments to heat or cool food and beverage. This not only encourages customers to leave the store in a timely manner, but also allows employees to focus on kitchen cleanliness as opposed to storefront upkeep.

Continue to Part 6

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