Understanding smashing success of Dunkin’ public offering

by Josh Sosland
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Longtime readers of this newsletter and our company’s related publications know that for decades, we have been inclined toward a grain-based-centric view of the world. Hence, during the 1970s, the “fast food revolution” was dubbed the “bun revolution” by Milling & Baking News. Even if the moniker was not broadly adopted by the public, it was not entirely a tongue-in-cheek exercise.

A commonality in the explosion in the quick-service restaurant business in the late 20th century was grain-based foods, whether as buns, pasta, pizza or bagels. Against this backdrop, it is tempting to celebrate the power of grain-based foods yet again last week with the stunning success of the initial public offering of Dunkin’ Brands, Inc.

Investor response, with shares up more than 50% in the first day of trading, seemed to be the kind more closely associated with the initial offerings of companies like Apple Computer or Genentech, as opposed to a mature retail donut and ice cream business. While no definitive explanation for the extraordinary jump in the share price has emerged, it appears that the strength may not be, sad to say, about Dunkin’s powerful presence in grain-based foods.

In the I.P.O. prospectus, coffee, rather than donuts, received top billing, with Dunkin’ celebrating the company’s leading share (57% of quick-service coffee market in New England) and high scores for customer loyalty. The share price surge after the offering led some observers to compare Dunkin’ to Starbucks Corp.

Based on the July 28 close, Dunkin’ shares traded at 18 times 2010 operating income, not far behind the multiple of 21 for Starbucks. The view of Dunkin’ Donuts as a coffee rather than a donut/bagel company does not leave grain-based foods with reason for any sort of inferiority complex. In fact, both companies should aspire to a stronger position with grain-based foods, which already have a major presence in their retail stores. After all, multiples of neither company begin to compare with that of Panera Bread Co., trading recently at 57 times 2010 operating profits.

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