New Owner Has Global Plans for Dunkin’ Donuts
By George Anderson
It is now official. Pernod Richard has sold its Dunkin’ Brands business (Dunkin’ Donuts, Baskin-Robbins ice cream shops and Togo’s sandwich stores) to an investment group including Bain Capital, Carlyle Group and Thomas H. Lee Partners for $2.43 billion in cash.
The new owners plan to focus on expanding the Dunkin’ Donuts franchise in the U.S. and abroad. While the brand is especially strong in the Northeast, the ownership group is looking to have it compete with Starbucks for market share. The chain currently operates 6,100 shops in 30 countries.
Anthony DiNovi, co-president of Thomas H. Lee, told Reuters, “The growth profile of this business is fantastic: You’ve got a business that’s extremely strong in New England, 10-plus years of positive store growth and two brands with tremendous potential ahead of them.”
The deal is expected to close in the first quarter of 2006. The new owners intend to keep current management in place.
Moderator’s Comment: What should the new owners of Dunkin’ Brands do with its Dunkin’ Donuts unit? What do you expect to see the ownership group do with
Baskin-Robbins and Togo’s? –
George Anderson – Moderator
Just a quick follow up to Stephan. Is it not a labor choice? The reason I ask, is that in my area, Starbucks has grown x4 in the last two years. All this without a single ‘Help Wanted’ sign that I have seen. And, yes due to my ability to seek out coffee all over town, I’ve visited them all at least once. Not once in a Starbucks have I ever seen what I would consider poor quality help. What I have seen is bright, enthusiastic, friendly and well trained staff. Isn’t it the same pool that they draw from? Therefore, is it not a labor choice?
Dunkin’ Donuts franchisees make almost all their profit by selling the coffee. The company is reluctant to sell individual location licenses any more. If you want a license these days, the company usually demands that you pay for multiple licenses, with the additional locations to be built in the future. The great USA potential lies in the “fill-in” location strategy. The key for the franchisor is to create as many franchise locations as possible per 100,000 people in a given area, since they’re selling convenience. The recent test of putting Dunkin’ locations within Pathmark supermarkets, if successful, should be rolled out to as many chain retailers as possible. Any foods added to the menu, and any food-emphasis strategy should be designed to reinforce the coffee business, since food margins are almost always less than coffee. For Dunkin’ it’s much safer to sustain profitability by keeping margins high and expanding the number of locations.
Certainly, Starbucks is an experience more than the coffee. Well, at least for me it is. Their regular coffee (as I am not a three sentence coffee order guy) simply is average, if not bitter. But, it is a treat and an experience to stop in to their shop. Explain it? I can’t. Go figure. I am willing to spend more for a not so great cup of coffee for the experience of getting it? Yes, that’s about it. For a few moments, you know you are special and you are treating yourself. Its sort of like the same special feeling you got as a kid when the “Ice Cream Man” came down the street — but in an adult sort of way. There’s a certain excitement when you see their location up ahead.
So what does this all mean for Dunkin’ Donuts? It means that they simply don’t strike that type of a chord with the consumer. Sure they have a better than average cup of coffee at a lesser price than Starbucks, but it simply doesn’t conjure up those same feelings as the sight and experience of Starbucks.
Now, I am not saying that a clone of Starbucks would be successful either even though many local spots and other chains are doing so. What I am saying is that Dunkin’ Donuts lacks that spark with the consumer. They lack consistency in their locations. Their cleanliness in some cases is below that of McDonalds. The consumer just doesn’t know what to expect. And, at a minimum, they don’t have an experience expectation.
So, if you had to describe them, how would you do so? A place for an average cup of coffee? A place for a less than average doughnut? A place that you’re simply not sure about? As Yogi would say, “When you find a fork in the road, take it.” Dunkin’ Donuts simply hasn’t found the fork. I hope they do.
If in fact, they take the tact of going after a share of the Starbucks’ pie, they have some work to do. They could start with a better cup!
And finally, as I write this, I realize how much of a coffee junkie I really am in the first place. I also have a bit of a craving for a Dunkin’ Donuts coffee. Unfortunately, the local Dunkin’ Donuts closed due to competition from a local coffee shop and two Starbucks near by. The customers found the fork and took it.
Is there anything healthy to eat at a Dunkin’ Donuts? I like ’em as much as the next person, but with all the legal issues surrounding everything that is “unhealthy,” long-term they are going to have to wake up and smell the coffee before they are accused of contributing to the global obesity problem. As they go global, they will be a target, so I’d say this is the number one issue they should be proactive about.
There are some people who are loyal Starbucks coffee drinkers. Others are loyal Dunkin’ Donuts coffee drinkers. With the coffee emphasis, Dunkin’ Donuts is prosperous. Hopefully, the new owners will not change what makes it prosperous and drive those customers away in an effort to recreate the image. Knowing when to keep something that is successful is important. Expanding sales means expanding locations, maybe even trying some innovative locations and/or partnerships. It may require adding something to the menu, as Dunkin’ Donuts has done in the past. They responded to customer’s interests in cold blended coffee drinks. They could expand and offer some healthy choices of food possibly, but, again, I don’t think they should change the current doughnuts. Keep what works and keep on moving.
Over the last few years I’ve seen a major decline in the quality of their products, service and facilities. A new Starbucks just opened near a local hockey rink. At each game, all you would see is DD coffee, now I’d say it’s 50/50 with Starbucks. If that little slice of real life is any indicator, I’d say they have a huge uphill battle.
The key question for Dunkin’s is simple to state – do they want their core locations to encourage people to dwell or do they want to be a pit stop?
Little known but deep in the DNA of Dunkin Donuts is that for many years they engineered the store front and counter operation to be downright unfriendly. The famous Dunkin’ Donuts pink was selected after extensive research to be jarring to the eyes and jangly to the nerves of late night hangers-on coming down from alcoholic over-indulgence.
In more recent years they toned down the pink, added tables, which are inherently more inviting than a counter, added menu items and tried to become a sort of modified coffee-bar and restaurant.
Since they have these multiple formats, they probably will develop a lot more “three in one” sorts of locations, where you can get coffee, ice cream, and sandwiches from all three banners, and leverage these different competencies on the same real estate.
But even if they want a simple in-and-out coffee-and-donut shop, I agree with the comment above — some of them are in poor locations, have a seedy look and a reputation of a magnet for troubling and troubled people. They need to protect their brand, or it won’t ever compete with Starbucks.
This new combination of retail businesses will complement each other.
You get the new House(s) in order, test concepts and expand accordingly! Why would you try to buy another business with ice cream & cakes, sandwiches and soups, breakfast treats and coffee. You have the day parts covered and seasonality as well! Quality of product offered is excellent to superior. It’s the labor pool that presents a problem.
Do you know how many competitors of the above ‘NEW HOUSE’ would love to be in this situation? Hmmmmmmm
As I’ve mentioned in these spaces previously, donuts make coffee taste better. I learned that by frequenting Mr. Donut as a kid, and later working at Dunkin’ Donuts during college. It’s the yeast in the donuts that makes coffee taste better, and folks in my town swore that Mr. Donut coffee was the best they’d ever had. Mr. Donut then began selling ground coffee for home use and, no surprise, it didn’t taste anything like the coffee in the shops. No donuts at home.
To hitchhike on the comments by those who’ve mentioned that donut shops make money on the coffee — not the donuts (like restaurants profiting on the booze rather than the food), why not provide a few free donut “holes” with each cup of coffee purchased?
What do I expect to see the new owners of Dunkin’ Donuts, Baskin-Robbins and Togo’s do? Market their offerings as being “improved” and then raise prices. Why would they spend $2.6 billion to dunk their donuts against McDonald’s only?
I’m sorry to have to admit that I have a long (and happy) relationship with Dunkin’ Donuts, beginning in my teen years! (Thank goodness my waistline doesn’t give that away!) My own feelings are unlikely to be representative of the market as a whole; still, here are my thoughts:
My own feelings are that Dunkin’ Donuts shops have come to have a down-and-out feel to them, mainly due to their decor and layout (but also due to their reputation and the clientele that reputation attracts). They aren’t a hip place, in my mind, they are a dowdy place. On top of that, the donuts are based on outmoded recipes, and are poorly cooked (low oil temperatures, over-reuse of oil, poor caramelization) and poorly finished (over-sweet coatings, too acidic fillings, etc.). It is my uneducated speculation that Krispy Kreme has stumbled partly because of some of the same issues — cooking, recipes, and finish.
Changing these things is quite easy. But changing the image (if it is as poor in the general market as it is with me) will be difficult. Potential for growth? If Dunkin’ could place itself in the Starbucks space (not a hangout for the homeless — we need much more useful solutions to that problem than Dunkin’ Donuts!), I would speculate: HUGE.