Dunkin’ Brands Offers Massive Growth Potential

Dunkin’ Brands recently announced its bold plans for California. If consumers take to Dunkin’ Donuts like they have in other parts of the country, then growth potential is significant, even though California is Starbucks territory.

Jan 22, 2014 at 6:30PM

It's not easy to find many companies offering significant growth potential in today's economic environment. Despite the stock market performing well and numerous reports about an economic recovery, today's consumer is still cautious. However, you can still find winners.

In most cases, the winners in the consumer goods space will be companies that cater to either the high-end, value-conscious, or health-conscious consumer. In the case of Dunkin' Brands Group (NASDAQ:DNKN), it doesn't cater to any one of these consumers specifically. Yes, Dunkin' Donuts is adding healthy items to its food menu, primarily in the form of sandwiches. And, yes, Dunkin' Donuts coffee is more affordable than Starbucks (NASDAQ:SBUX) coffee, but Dunkin' Donuts still isn't known as a quick-service restaurant that primarily caters to the health-conscious or value-conscious consumer.

The growth potential for Dunkin' Brands stems from its future geographic expansion. Back in 2005, Carlyle Group teamed up with other private equity firms Bain Capital Partners and Thomas H. Lee Partners to purchase Dunkin' Brands. At that time, the company only had 5,000 locations. Carlyle Group and friends announced that they had the intention of expanding Dunkin' Brands to 15,000 U.S. locations by 2020. At the end of 2012, there were 7,306 Dunkin' Donuts locations in the United States. It seems as though this lofty goal mioht be attainable, and even if it's not reached, Dunkin' Donuts, and ultimately Dunkin' Brands, has the potential to enjoy significant and sustainable top-line growth over the next several years.

Northern California
If you follow Dunkin' Donuts, then you already know about the brand's expansion into California, but that pertained to Southern California. It wasn't until last week that Dunkin' Donuts announced its plans to expand into Northern California.

Dunkin' Donuts plans to eventually have a total of 1,000 locations in all of California. This is a sign that Dunkin' Donuts thinks it can thrive in a state with 2,010 Starbucks locations. Most of these Starbucks locations offer 24-hour service, drive-thrus, mobile payment, and of course, free Wi-Fi. Therefore, it will be difficult for Dunkin' Donuts to pry customers away from its "arch-rival." However, that's likely not the plan.

While Dunkin' Donuts and Starbucks do compete for coffee drinkers, they target different types of consumers. Starbucks caters to middle- to high-end consumers who are willing to pay a premium for their coffee. Starbucks also attracts consumers who are looking to spend hours in a comfortable location so they can complete work, study, or socialize (physically or via social media).

Dunkin' Donuts has attempted to attract more consumers looking to spend this kind of time in their restaurants to work, study, or socialize, but it hasn't caught on as much. On the other hand, Dunkin' Donuts caters to a broader audience, as in those not willing or able to pay premium prices for their daily caffeine kick.

The point here is that while Dunkin' Donuts has potential to steal customers from Starbucks, the impact would likely be minimal, especially since most Dunkin' Donuts stores are located in middle-income areas, as opposed to high-end areas. Dunkin' Donuts should still attract many customers, especially since consumers usually love the novelty of a new popular brand in their neighborhood. The key is whether or not Dunkin' Donuts will be able to retain these customers. 

Growth potential on two fronts
Dunkin' Donuts has seen strong, ongoing demand in the United States. Therefore, expansion makes sense. Baskin-Robbins has been growing internationally for several years, but the brand only recently saw net development growth in the United States, indicating a potential turnaround. Looking at the big picture, Dunkin' Brands expects to open 685-800 net new locations for both Dunkin' Donuts and Baskin-Robbins in 2014.

It should also be noted that Dunkin' Donuts expanded into the United Kingdom and Vietnam last year, and it plans on opening 100 locations in China this year. 

The bottom line
Dunkin' Brands has seen top-line growth of nearly 20% since January 2011. That's strong given today's consumer environment. Selling a mildly addictive product, as in caffeinated coffee, plays a big role. The strong brand name combined with affordability also helps a great deal. By franchising the majority of its locations, Dunkin' Brands has the ability to keep costs low while enjoying top-line growth. If you're a growth investor, then Dunkin' Brands should at least be on your watchlist, but as always, please conduct your own research prior to investing. 

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Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends Starbucks. The Motley Fool owns shares of Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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