How Dunkin' plans to perk up its sales

by Monica Watrous
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The first piece of Dunkin’ Donuts’ growth plan is coffee innovation, with a focus on introducing more premium offerings.

CANTON, MASS. — Plans are under way to reignite growth at Dunkin’ Donuts in the United States, where same-store sales fell 0.8% in the latest quarter.

Nigel Travis, Dunkin' Brands
Nigel Travis, chairman and c.e.o. of Dunkin’ Brands

“To address our disappointing comp performance, and with the goal of getting back to positive transactions, we’re executing against a new five-part strategic growth plan that is supported by our franchisees,” said Nigel Travis, chairman and chief executive officer of parent company Dunkin’ Brands Group, Inc., during a Feb. 4 earnings call with financial analysts.

The first piece of Dunkin’ Donuts’ growth plan is coffee innovation, with a focus on introducing more premium offerings.

“Espresso-based beverages were one of our fastest-growing categories in 2015, which said to us that in addition to loving our drip coffee products, there is a huge opportunity for us with premium coffee offerings,” Mr. Travis said.

Second, the company is focused on menu innovation, with plans to enhance the quality of core menu items and accelerate the process of new product development.

“We’re using both our internal and external resources to help us deliver the best possible food and beverage offerings that meet the needs of today’s consumer,” Mr. Travis said. “Sweet black pepper bacon breakfast sandwich, filled croissant donuts, and the macchiato are three examples of the types of products that have recently come out of our innovation pipeline, and there will be more of these going forward.”

Dunkin' Donuts recently introduced the fudge croissant donut.

Third, the company said it will implement targeted value offerings and strategic promotions designed to boost attachment sales.

“An example of a value offering is our current promotion in certain markets where we’re selling two egg and cheese sandwiches for $3, but which results in total average ticket of more than $7,” Mr. Nigel said.

The fourth strategy expected to drive growth is the use of digital technology, including mobile ordering, delivery and a loyalty program.

Finally, Dunkin’ Donuts aims to improve order accuracy and customer service in its restaurants.

“We’ll also continue to play up to our competitive advantages, in other words, the things that make Dunkin’ unique, including the fact that all of our beverages and sandwiches can be customized, our unparalleled speed of service, our all-day menu offerings and the fact that our drip coffee is made fresh every 18 minutes,” Mr. Travis said. “The elements of plan I’ve outlined are critical to the long-term health and relevancy of the brand. However, we know that some of these tactics will take longer than others to have an impact on the business, and we know we will continue to face some headwinds this year.”

For the fiscal year ended Dec. 26, 2015, net income attributable to Dunkin’ Brands was $105,227,000, equal to $1.10 per share on the common stock, which was down from $176,357,000, or $1.67 per share, for the year before. Revenues totaled $810,933,000, up 8.3% from year-ago revenues of $748,709,000.

For the fourth quarter, Dunkin’ Brands posted a net loss of $8,938,000, which compared with net income of $52,513,000, or 50c per share, for the prior-year period. Performance was negatively affected by a $46.2 million decrease in operating income as a result of the impairment of the company’s Japan joint venture, and a $7.8 million increase in tax expense, as well as additional interest expense of $8.1 million, the company said. Excluding special items, adjusted net income rose 1.5% over the year-ago quarter.

Fourth-quarter revenues rose 5.5% to $203,797,000 from $193,213,000, boosted by an increase in royalty income, licensing fees earned from the sale of Dunkin’ K-Cup pods, and higher franchise fees. Since launching Dunkin’ K-Cup packs in the grocery channel last May, more than 150 million have been sold.

Segment profit at Dunkin’ Donuts U.S. for the fourth quarter increased more than 8% to $115,603,000, over year-ago profit of $106,536,000, driven by growth in royalty income, franchise fees and other revenues. Revenues for the quarter rose 6.2% to $153,057,000 from $144,077,000. Dunkin’ Donuts U.S. comparable store fell 0.8% in the fourth quarter as a result of lower traffic.

Segment profit at Baskin-Robbins U.S. for the quarter fell nearly 17% to $3,733,000 from prior-year profit of $4,485,000. The shortfall was due to higher general and administrative expenses. Revenues increased 3% to $8,726,000 from $8,469,000, as an increase in licensing income and higher franchise fees and royalty income offset lower sales of ice cream and other products due to a shift in certain franchisees purchasing ice cream from a third-party manufacturer. Baskin-Robbins U.S. comparable store sales grew 4.4% for the quarter, reflecting increased sales of cups and cones, beverages, desserts and sundaes, and strong year-over-year growth of on-line cake ordering.

In the company’s other units, segment operating profit for Dunkin’ Donuts International decreased nearly 18% to $3,577,000 from $4,346,000 as a result of decreases in revenues and a decrease in net income from the company’s South Korea joint venture, plus higher general and administrative expenses. Revenues fell 5.1% to $6,348,000 from $6,689,000, driven by lower franchise fees and royalty income and a decline in franchise renewal income. Segment profit at Baskin-Robbins International during the quarter dropped 3.6% to $8,753,000 from $9,084,000, reflecting a reduction in income from the company’s South Korean joint venture and decreases in royalty income, net margin on ice cream and franchise fees, in addition to a net loss from the company’s Japan joint venture. Revenues fell almost 6% to $28,140,000 from $29,911,000, as a result of lower ice cream sales in the Middle East and decreases in royalty income and franchise fees.

For the year ahead, the company expects comparable store sales growth of flat to 2% at Dunkin’ Donuts U.S. and 1% to 3% at Baskin-Robbins U.S. The company is targeting revenue growth between 4% and 6% and adjusted operating income growth in a range of 8% to 10% for the full year.
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