Balancing act benefitting Dunkin’

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Among top sellers at Dunkin' Donuts are the indulgent Big N' Toasted and the better-for-you Turkey Sausage Breakfast Sandwich.

 

CANTON, MASS. — The bestselling breakfast sandwiches at Dunkin’ Donuts suggest its customers want both indulgent items and better-for-you options. Parent company Dunkin’ Brands said both platforms perform well at the donut and coffee chain.

“We’re really implementing what we call a choice strategy and what some people call a barbell strategy, which is offering both indulgent products and DD Smart products,” said John Costello, president of global marketing and innovation at Dunkin’ Brands, during a July 24 call with financial analysts to discuss second-quarter earnings. “And what we’re seeing is growth in both of those products. So for example, two of our most successful products are the Big N’ Toasted, which is a big, hearty, fill-you-up breakfast sandwich, and our Turkey Sausage Breakfast Sandwich, which is a DD Smart, lower-calorie offering.”

Items on the DD Smart menu contain 410 calories or fewer and include such items as egg white flatbreads, a reduced-fat blueberry muffin and a multigrain bagel.

“We also give people a choice in carriers,” Mr. Costello said. “So again, you can have products on bagel for a breakfast sandwich, but you can also get them on our Wake-Up Wraps, which again offer smaller portions and lower (calories). So interestingly enough, we continue to see growth in both sides.”

Same goes for iced coffee, he added, which has become a strong business for the brand.

“Our regular plain iced coffee, if you will, has no calories; growing very rapidly,” Mr. Costello said. “But we also offered (Baskin-Robbins ice cream-inspired) flavored iced coffees, which are a little bit more indulgent and are also very successful.”

During the quarter, Dunkin’ Donuts introduced for a limited time an apple chicken sausage breakfast sandwich as lighter alternative to pork sausage, and the product was well received, Mr. Costello said.

“Our strategy is to offer choice on both DD Smart and indulgent, and I think it’s telling that our top two selling breakfast sandwiches are the Big N’ Toasted on one side and the Turkey Sausage on the other,” he said. “And you’ll continue to see growth in both big, hearty products as well as growth in DD Smart products.”

While product innovation has propelled Dunkin’ Brands in past quarters, increasing competition during the breakfast day part contributed to recent weakness.

“There’s no doubt that breakfast is the most competitive out-of-home eating day part and everyone wants to be in the beverage business,” said Nigel Travis, chief executive officer of Dunkin’ Brands and president of Dunkin’ Donuts, U.S. “While new entrants into the space don’t necessarily have a direct impact on us, they increase the overall competitive intensity from existing players. As a result, deep discounting is pervasive in the beverage space from Q.S.R. players to gas and convenience stores. Given the macroeconomic environment and the competitive intensity, we now expect full-year comp growth of 2% to 3%, versus the 3% to 4% that we initially guided earlier this year.”

Dunkin’ Brands lowered its full-year forecast as second-quarter sales growth fell below expectations. Executives attributed continued macroeconomic challenges and bad weather for weak performance at Dunkin’ Donuts U.S., which had comparable sales growth of 1.8% during the quarter.

“Coming out of the first quarter we were hopeful that as the weather improved sales growth would bounce back and that we’d be able to get back to the 3% to 4% range for the full year,” Mr. Travis said. “Unfortunately, sales momentum didn’t accelerate as fast or to the degree that we anticipated. Our conclusion is that it was a very tough quarter for both the Q.S.R. industry and the retail sector, which the numbers being reported by other companies are supporting that the consumer, particularly at the lower end, is in a tough spot.”

Driving higher traffic and increased average ticket were iced coffee and frozen beverages, breakfast sandwiches, add-ons such as hash browns, and donuts, including a limited-time blueberry cobbler variety.

“While we’re disappointed in the overall comp growth in the quarter, we did see some encouraging signs and we outperformed the industry,” Mr. Travis said. “And importantly, we remain highly confident in our ability to drive long-term growth for Dunkin’ Donuts in the U.S.A.”

In addition to the domestic headwinds, Dunkin’ reported weak performance in two of its largest international markets, Baskin-Robbins in Japan and Dunkin’ Donuts in Korea.

“We still think Japan is a great market for ice cream,” Mr. Travis said. “Again, we’re disappointed what happened in Q2, and we’re doing everything to get it going in the right direction.”

For the second quarter ended June 28, net income attributable to Dunkin’ Brands increased 13% to $46,191,000, equal to 44c per share on the common stock, which compared with $40,812,000, or 38c per share, in the prior-year period. Contributing to the earnings growth were an increase in operating income and decrease in interest expense, offset by an increase in income tax expense.

Revenue for the quarter totaled $190,908,000, up 4.6% from $182,488,000.

Comparable sales climbed 4.2% at Baskin-Robbins U.S., driven by sales of cups and cones, cakes and beverages as a result of promotional activity and holidays, with on-line cake ordering gaining strength.

The company added 151 net new units during the quarter, including 75 Dunkin’ Donuts in the United States.
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