The orange and pink Dunkin’ Donuts logo is ubiquitous on the New England landscape. The coffee chain has a regional brand awareness that’s on par with the Boston Red Sox. Operated by Dunkin’ Brands Group (DNKN), Dunkin’ Donuts isn’t just content to stay in its home region. The restaurant chain is embarked on an ambitious expansion strategy that will prove sweet for DNKN stock investors.
Based in Canton, Mass., Dunkin’ Brands operates more than 10,700 Dunkin’ Donuts restaurants and 7,000 Baskin-Robbins restaurants in 60 countries. The company is now launching its flagship Dunkin’ Donuts brand from coast-to-coast in the U.S. and has plans to boost the number of doughnut shops in the country to more than 15,000 over the next 20 years.
On December 15, Dunkin’ Donuts announced that it had opened six new stores in South Florida, an area where the chain is underrepresented. It’s also expanding in California. It plans to open 45 new restaurants in California next year, a vast opportunity for growth where its presence is surprisingly scant.
Already Dunkin’ Donuts is the world’s largest operator of doughnut shops, but it’s number two in the broader coffee and snack shop market. Its biggest competitor, Starbucks (SBUX), is number one with more than 23,000 stores worldwide.
According to a recent report from the market research firm Packaged Facts, fast food sales are growing despite Americans’ professed concerns about eating right. “Limited-service” (i.e., fast food) restaurant sales in the U.S. reached $188.1 billion in 2013, up 4.9% compared to 2012. A similar rate of growth is expected for 2014.
Fast food is increasingly popular around the globe. A rising consumer class in developing nations is embracing more aspects of the Western lifestyle, including a desire for sugar, salt, fat and grease. Still, the U.S. accounts for the majority of the fast food market with 40% of global revenue. More than a quarter of Americans eat fast food daily.
At the same time, fast food chains in the U.S. are losing market share to a new style of eatery that’s all the rage: the “fast casual” dining experience. Restaurants such as Chipotle Mexican Grill, Inc. (CMG) and Panera Bread Co (PNRA) occupy a niche between the hamburger “drive-through” and a fancy sit-down joint with cutlery and waitresses.
Most of Dunkin’ Donuts’ customers drive in for a quick cup of coffee and baked good during their morning commute, but the chain is adding new gourmet items and redecorating its shops to attract the business lunch crowd and encourage longer visits and more expensive sit-down meals. Croissant creations with fancy names are increasingly occupying a spot next to jelly donuts. The goal: reach beyond the Homer Simpson crowd and get the folks in suits to linger a while.
Earnings on the Rise
Dunkin’ Brands Group reported third-quarter earnings of $54.7 million, or adjusted earnings per share (EPS) of 49 cents. That represented a year-over-year increase of 19.5% and came in ahead of Wall Street’s expectations for EPS of 47 cents.
In the quarter, the company added 197 new restaurants worldwide including 120 new Dunkin’ Donuts in the U.S. Revenue increased 3.4% year-over-year to $192.6 million.
Straddling both fast food and “fast casual” markets, Dunkin’ Donuts has tapped into the desire of budget-conscious consumers to eat slightly more upscale fare that’s also inexpensive and fast. As this well-known chain expands beyond its familiar New England environs, revenue from new stores should accumulate faster than a Bostonian drops his Rs.
As of this writing, John Persinos did not hold a position in any of the aforementioned securities.