SLAM DUNKIN. What c-stores can learn from the coffee-and-doughnut king as DD continues to grow and expand. By Erik J. Martin

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1 SLAM DUNKIN What c-stores can learn from the coffee-and-doughnut king as DD continues to grow and expand By Erik J. Martin Riddle: What s loaded with dough, glazed with a sweet sheen of success, shaped like a well-rounded investment despite having a big hole in the middle, and baked from a proven 63-yearold recipe? Answer: The company that convenience retailers should be eyeing closely as either a serious competitor to learn from or a worthy partner to grow with. America runs on Dunkin, we re told, and the proof is in the numbers. Founded in 1950, Dunkin Donuts (DD) has more than 7,300 stores within 38 states; approximately 500 of these stores include Baskin-Robbins operations. Known for operating primarily in Northeast and Midwest markets, DD branched out in a big way in 2012, opened 291 net new locations across the country, signed multi-store agreements in 32 U.S. markets including Milwaukee, Denver, Houston and Dallas and recently announced expansion into Southern California. In 2013, the company plans to debut up to 360 net new U.S. restaurants in new and existing markets, constituting an increase of 4.5% to 5%. Put simply, Dunkin Donuts is the fastest-growing franchised business in America. Our strategic plan calls for extensive growth as we grow the business from over 7,000 Dunkin Donuts U.S. shops today to approximately 15,000 restaurants in the next 20 years, says Michelle King, director of global public relations for Dunkin Brands Group Inc., the Canton, Mass.- based, publicly traded parent company of DD. DD s corporate parent reported systemwide sales of $8.77 billion in 2012 up 5.2% from That s little surprise, considering DD restaurants serve the most hot regular, decaf, flavored and iced coffee in the United States, selling 1.7 billion cups of hot and iced coffee annually, based on NPD Group/CREST data provided by DD. The brand ranks within the top three U.S. vendors as far as number of cups sold and is the largest bakery vendor among QSRs (selling about 2.1 billion doughnuts and Munchkins per year), as well as the largest bagel vendor in the country, according to Study Logic LLC, a Cedarhurst, N.Y.-based market research and 18

2 business intelligence firm. Additionally, DD ranked tops in customer loyalty in the coffee category for the sixth consecutive year by the 2012 Brand Keys Customer Loyalty Engagement Index. Dunkin s largest competitors are Starbucks Coffee, McDonald s, Krispy Kreme and Tim Hortons, as well as mom-andpop/independent doughnut shops. Dunkin Donuts is a leader in hot regular, flavored and decaf coffee, iced coffee, doughnuts, breakfast sandwiches, bagels and muffins, King says. We have some strong competitors, but we have a distinctive positioning and have proven that we can grow in a competitive environment. On a Sweet Roll According to Samuel Nahmias, chief operations officer for StudyLogic, the average DD store enjoys about $990,000 in annual sales, a figure that has grown nearly 7% a year over the past two years. And DD has an estimated 45 million unique customers who each visit an average of 5.8 times a month, which is about twice the visitation rate of a typical QSR. While Starbucks appeals more to white-collar workers and those with higher incomes, DD has a high penetration of blue-collar customers with more average incomes, Nahmias says. The average DD customer is 36 years old and fairly evenly split among males and females. Dunkin is a very well-run organization, says Nahmias. What makes them unique are three key things. First, they offer a great coffee product, as well as a great food pairing with their coffee product, including bakery and breakfast items. Second, they have a nice seasonal shift in their performance. There s no other real QSR out there that has this business model with the kind of seasonality combination that Dunkin offers when its stores partner up with Baskin-Robbins. When it s warmer, it can sell more ice cream than coffee, and when it s colder, vice versa. Third, he says, DD has one of the lowest average checks per customer in the QSR market: about $2.75 to $3.50, which is half that of Starbucks and still less than McDonald s ($5 per check on average), and which makes its financial performance all the more remarkable. As expected, DD s top seller is coffee, followed by pastries and breakfast sandwiches. Over 50% of customers walk out of a DD store with a coffee cup, bakery item and/or breakfast sandwich, Nahmias says. Ever-Expanding Menu In addition to traditional hot java, signature treats such as Munchkins and more than 70 varieties of doughnuts, DD s Dunkin is a very well-run organization. They offer a great coffee product, as well as a great food pairing with their coffee product, including bakery and breakfast items. all-day menu boasts iced coffee; flavored coffees; lattes; Coolatta frozen beverages; bagels and bagel twists; breakfast sandwiches; oven-toasted bakery sandwiches such as Texas toast grilled cheese, chicken salad and tuna salad; hash browns; cookies; and a DDSMART menu offering healthier food choices with fewer than 300 calories, such as Wake-up Wraps and egg-white flatbread sandwiches. We continue to develop offerings to appeal to the changing preferences of our guests, King says. As people find themselves busier than ever and are snacking more frequently throughout the day, [DD] is meeting guests changing eating habits and expectations for fast, satisfying menu items that can be enjoyed any time of day. Dunkin s model fits nicely not only as a freestanding business but also as a c-store tie-in. South Paris, Maine-based C.N. Brown Co. leases out space to DD franchisees within 10 of its 79 Big Apple Food Stores-branded c-stores in the Northeast. Mike Doucette, C.N. Brown s director of purchasing and merchandising, praises Dunkin for keeping its menu fresh and refreshed. They ve diversified so much and gone after other day-part meals so successfully, says Doucette. They have an ability to grab an idea, sell it to people and get them to flock to it. Just look at their cold iced-coffee program, which is absolutely second to none. You can go to DD, buy something and never get bored because there s always something different to pick on the menu, Nahmias says. But one of the biggest things that make them so successful is offering a great product that s consistent, he says. After all, they wouldn t sell as many breakfast sandwiches as they do if customers didn t like them. Perhaps surprising to some, DD is currently the no. 2 seller of breakfast sandwiches in America, behind the Golden Arches. They ve rolled out a number of different breakfast sandwiches, as well as recently rolled out bakery sandwiches meant for lunch, to try to capture both the breakfast and lunch occasions, says Tim Powell, principal and c-store foodservice practice leader for Technomic Inc., Chicago. They have a very simple strategy of offering reasonably priced sandwiches and specialty coffee beverages that tend to be combined with [limited-time offers] and ongoing promotions. Dunkin also comes out with one to two new products 19

3 Coffee Talk: Dunkin Donuts is a popular franchise offered within Hess Express stores, including this one in Clearwater, Fla. a month and is always keeping products innovative and customers interested. Consumers Crave Quality While Dunkin s products and accomplishments are impressive, its recipe for market dominance shouldn t simply be admired from a distance it should be replicated across the convenience retailing industry, industry experts suggest. And that starts by appreciating two key concepts that have helped shape DD s success: quality and freshness. Today s c-store shoppers crave fresher ingredients, quality products and good-tasting foods at an attractive price point. You can t let that coffee sit on that burner too long, and you have to offer good coffee variety, says Bonnie Riggs, restaurant industry analyst for The NPD Group, Port Washington, N.Y. Riggs says The NPD Group has conducted several recent studies revealing that consumers desire more food choices and variety, but far and away, no matter the category, quality of product is No. 1 among customers. If it s a good product, reasonably priced and consistent in terms of how it s delivered, it s not going to go away. Just think of the Egg McMuffin it will be there forever. When it comes to promoting freshness, however, c-stores have a bad reputation to overcome and a long climb ahead. When you go into a c-store, you pour yourself a cup of coffee and worry if it s even fresh. And how often can you get a fresh doughnut or breakfast sandwich at a convenience store? asks Nahmias. One way to energize c-stores clientele and change a stale public perception is to expand a hot and cold beverage line with fresh offerings prepared by a dedicated server or team. [StudyLogic] has found that c-stores that have tested the concept of offering in-store barista service or at least someone dedicated to making fresh beverages on the premises have more than doubled their sales in that category, says Nahmias, who cites Sheetz and Wawa as two examples of this trend. When a customer is on his way to work, he s often got a lot of places to go before he gets there; he s got to get gas, coffee and breakfast. For c-stores to be better able to adapt and grow, they need to accommodate those needs by becoming a one-stop shop offering fresh food and more variety. Nahmias says convenience retailers can learn a great deal from the McCafe concept McDonald s rolled out in 2006, providing a wider array of specialty coffee and chilled beverages than the normal menu, resulting in $2 billion in average beverage sales growth annually. C-stores are in a unique position to capitalize on this concept, says Nahmias. If they can execute a strategy that allows customers to come inside, buy coffee and gas, save time and get a great product at a great price, they can succeed. Serendipitous Schedules The adage If you can t beat em, join em may apply when it comes to competing against DD. It may pay greater dividends 21

4 to bring Dunkin under a c-store s roof as an owned or leased franchisee than merely mimic its best practices. Consider that 34% of c-store traffic occurs at breakfast, reports The NPD Group, making the morning a vital daypart. Doughnut-category QSRs are equally dependent on mornings for big business. That s why a partnership between a convenience retailer and a coffee-and-doughnut leader such as DD can potentially be a winwin for both, says Riggs, especially if the c-store itself lacks a fresh breakfast and beverage destination. We may have a lot more one-stop shopping today because of high gasoline prices and consumers trying to be more conservative. They re likely to stop and get their gas and take advantage of what s there, especially if you offer a brand with high recognition and awareness that consumers know what to expect from, says Riggs. And therein lies a win-win proposition for operators in the right markets: the opportunity to cross-promote gas, snacks, tobacco and lottery with a beloved brand of hot joe and sweet dough. Expanding with c-stores has proven to be an effective way to continue Dunkin Donuts strategic expansion in both new and existing markets, while assisting complementary businesses to differentiate themselves from local competition and expand their presence with a powerful, well-recognized brand, says King of Dunkin Brands. Riggs says doughnut-category QSRs boast a customer demographic that is closely aligned with c-stores, because each appeal to blue-collar consumers. I wouldn t see a gourmet-coffee concept partnering easily with c-stores because of the demographic profile and because the gourmet-coffee places have a higher skew toward 18- to 49-year-old women, who are not the typical c-store customer, Riggs says. For c-stores, where the bulk of business is usually snacks, specialty beverages can also look particularly attractive, Riggs says. Offering such can lure more traffic into the store and potentially contribute to impulse buying of other items. [DD] is also perceived as a daily destination for coffee and baked goods, Powell Dunkin Donuts at a Glance History: Founded in 1950 in Waltham, Mass. Store Count: More than 7,300 stores across 38 states; about 500 of these stores include Baskin-Robbins operations. Strategy: Known for operating primarily in Northeast and Midwest markets, DD in 2012 launched a nationwide outreach that continues today, including new locations in Denver, Houston, Dallas and, more recently, Southern California. of Technomic says. These are two of the big barriers for c-stores, besides the perception that they are gas stations with food. The perks of partnering with Dunkin will depend on a c-store s corporate strategy, however. If you d like to build traffic and pay royalties, then Dunkin is the way to go. There is no ramp-up period, and Dunkin will provide the brand and distribution, Powell says. However, if you re a company like Sheetz or Wawa, you would prefer to build on your own foodservice brand, but execution becomes challenging. Dunkin is very good at executing systemwide across all its stores. A Hit with Hess Ask DD s largest franchisee why it chose to offer Dunkin products in its convenience retail operations and you ll get a simple answer: brand power. We sold Mountaintop brand coffee for 13 years, and it performed really well for us, but it was still only getting us typical c-store type numbers per day, says Rick Lawlor, vice president of retail marketing for Hess Corp., Woodbridge, N.J. After reviewing sales, we explored the idea of creating a proprietary (coffee) brand. We felt like we needed to jump-start our program, and the only way to do that quickly was to develop with a brand that had instant credibility a brand committed to operational excellence that was innovating itself every day. Hess, owner of 1,357 Hess Express and WilcoHess c-stores in 16 states across the East Coast, began adding DD to select locations five years ago. Today, Hess operates 657 DD-equipped c-stores, 532 of which it also owns (the remaining 125 Hess stores lease out space to outside DD franchisee owners). Originally, Hess tested two distinct pay points: one for DD, one for c-store sales, which seemed to aggravate customers and create unwanted in-store congestion. Today, there s one checkout point for all customers. The DD portion of each store operates in a self-serve format, offering approximately 75% of the full Dunkin menu meaning sandwiches, Coolattas and other niche items are off the list. That s because most Hess c-stores also house Quiznos Subs and Godfather s Pizza entities that offer competing food products. Godfather s is known more as a Mid- 22

5 western brand, and Quiznos is a great sandwich brand not as well known to all of our customers, but Dunkin is a national brand known for launching innovative new products. They also do a great job of brand advertising, so they really do a lot as a package to drive people to our stores, says Lawlor, who declined to divulge financial data but says coffee sales have substantially increased in its stores since adding DD. Lawlor says Hess also picked Dunkin over its competitors because DD hit a sweet spot. Starbucks is a great company with a great product, but they tend to be viewed as more high-end, says Lawlor. Dunkin offers a more natural fit with our c-store customer: the middle America coffee and doughnut consumer. [Providing DD] has broadened our customer base. Before Joining Forces Prior to partnering with any franchisee or owning/operating your own in-store QSR, it s important to choose the right player that can best benefit your operations. For many convenience retailers, DD is an ideal partner not only because it fills a menu niche and brings heady name recognition, but also because it may offer a greater return on investment. For example, Ralph Semb, owner of Weatherheads, an independent, standalone c-store in Erving, Mass., ultimately opted to rent space to a Dunkin franchisee at his location in large part because DD offered the most utilitarian value to a town with only 1,200 residents and no stoplights. Dunkin seems to be a good fit. There s nowhere else along this road where people can stop and get a snack or a cup of coffee. I ve seen a continual increase in my sales since [DD] opened last August, says Semb, who also admires how compact DD fits within his c-store s approximately 4,000 square feet, taking up about a third of that space. Doucette of C.N. Brown is equally impressed with how efficient DD is in creating a quality product within a limited footprint in his Big Apple Food Stores. [DD has] a limited space to prepare all the things they offer, but they really have their act together. The footprint we provide to [DD franchisees] within our stores is typically much smaller than other franchisees we ve looked at. So the investment on our part to bring in a Dunkin partner is pretty reasonable. Whether a c-store wants to be the landlord or the franchisee itself, Semb recommends keeping it simple at the start. One of the biggest things that make them so successful is offering a great product that s consistent. They wouldn t sell as many breakfast sandwiches as they do if customers didn t like them. It may be a better deal if you have one instead of two franchisees inside the same store. It gives you more space for your own [retailing operations], and it s less stressful, says Semb. I don t think we would have done as well if we had opted for two. We probably would have gotten less of a percentage from Dunkin. Challenges Ahead The road forward isn t paved with endless coffee pots of gold and chocolate-frosted diamond rings for as far as the eye can see. Riggs says all QSRs will be challenged in the coming years as the battle for market share across day-parts intensifies. Right now, [doughnut-category QSRs] are heavily dependent on the morning meal, but the morning meal is the growth area. Specialty drinks, smoothies, slushies and iced coffees are very appealing to consumers, and they happen to be in markets that are growing, says Riggs. But anytime there s a growth area, everybody else wants a piece of the action, so their competition becomes greater and they have to be more innovative and creative and market more, she adds. They will always have to stay on top of new product activity. Challenges for Dunkin will come from every direction, including QSRs moving into their breakfast and specialty coffee space, Powell says: Dunkin is also still a largely East Coast brand, and saturation is a real possibility. Doucette agrees on the latter point. They run the risk of putting too many locations too close together. You can get to a saturation point here in the Northeast, for example, where, if you have a Dunkin on virtually every corner, things can go south pretty quickly, he says. Due to the drive-thrus they have, they may find a bit of a backlash within towns issuing permits without incurring a lot of expense in redoing roads to avoid traffic backup. Despite these issues, Riggs is confident that doughnut-category QSRs are in an enviable position now and in the near future. It has been one of the few categories that have done fairly well during a difficult time for the (QSR) industry, says Riggs. That has a lot to do with the fact that the focus isn t just on doughnuts, but on specialty beverages in addition to traditional coffee. DD, Powell says, knows where they belong in the reasonably priced, standard quality space, and they have built a good niche there. n 24