Dunkin’ batters up against unlikely rivals

by Monica Watrous
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CANTON, MASS. — Dunkin’ Brands’ defensive strategy in what the company described as an increasingly “intense” competitive environment resembles halftime huddle talk.

“We sometimes decide that certain competitors have weakness that we want to take advantage of, and using my favorite sports analogy, we identify those weaknesses and go after them,” said Nigel Travis, chief executive officer of Dunkin’ Brands and president of Dunkin' Donuts U.S., during an Oct. 24 earnings call with analysts.

Unlikely rivals, including burger chains and convenience stores, have added pressure in a “choppy macroeconomic environment.”

“Clearly, you’ve got a group of burger competitors, which sometimes people forget, but are major competitors of ours, being put under some pressure by the results,” Mr. Travis said. “You also have — I think, in our segments — some very sophisticated competitors who are doing some very good things for their business. So, I think that is two squeezes. And then, I think people see coffee as a growth segment. People believe breakfast is a growth segment. You’ve obviously had Wendy’s move out of breakfast. You’ve got Taco Bell coming in.”

Meanwhile, the convenience store channel has emerged as a food service foe.

“We do see convenience chains thinking about food and beverage — that’s something we’re very aware of,” Mr. Travis said. “Most of these competitors are very good. They’ve invested new concepts — you’ve seen that from everyone from Race Trac, Wawa, 7-Eleven. We’re aware of all these. Our franchisees are highly aware of them. And we talk about competitors like these all the time with our franchisees.”

Dunkin’s franchisees have become more strategically responsive to competition, even as economic pressures continue for consumers, he said.

“Think about sequestration; think about what happened with the debt ceiling debacle,” he said. “It’s all been difficult for the consumer. Income tax is effectively up, so everyone is under some pressure. You then have the industry not performing as well as some people would like. So that increases the competitive pressure on us, but I think our response has been very positive, very strategic. And the next good thing is our results are spectacular.”

Net income for the third quarter ended Sept. 28 increased 36% to $40,200,000, equal to 38c per share on the common stock, from $29,500,000, or 26c per share, during the same period of the previous year as a result of an $11,900,000 increase in operating income as well as a loss on debt extinguishment and refinancing transactions incurred in the third quarter of 2012, offset by increases in income tax and interest expenses.

Revenues rose 8.5% to $186,300,000 from $171,700,000 last year, due to an increase in system-wide sales, increased franchise fees due to favorable development mix and incremental franchise renewals and increased sales of ice cream products.

Dunkin’ Donuts U.S. comparable store sales growth climbed 4.2%, driven by higher average ticket and increased traffic. Strong beverage growth, led by cold beverages and hot and iced espresso drinks, as well as pumpkin and caramel flavors across the beverage portfolio, and increased sandwich momentum drove sales, as well as growth in donut sales on the strength of lemonade, key lime and pumpkin pie flavors, and afternoon products, including the limited-time Pretzel Roll Roast Beef Sandwich and incremental gains in chicken and tuna salad wraps and chicken sandwiches.

Comparable store sales for Baskin-Robbins U.S. grew 3.2%, led by sales of cups, cones and beverages and increased sales of cakes and take-home ice cream quarts.

During the quarter, the company added 222 net new units globally, with 81 new Dunkin’ Donuts U.S. stores.

Expanding and differentiating underpin Dunkin’s growth strategy amid mounting competitive activity, the company said.

“There’s no doubt that Q.S.R. and breakfast has been, and will continue to be, very, very competitive,” said John Costello, president of global marketing and innovations. “As Nigel mentioned, while we study competition, we deeply believe in that the best defense is a strong offense. We really think the combination of the operational excellence that Nigel talked about, continued differentiated products, and innovative marketing is a strong offense. And we'll continue to stay on the offense in the face of the strong, competitive environment.”
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