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Positive Signs for Dunkin’ Brands ... and Investors

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Dunkin' Brands Group (NASDAQ: DNKN  ) sees its competition as Starbucks (NASDAQ: SBUX  ) , McDonald's (NYSE: MCD  ) , Burger King Worldwide, Panera Bread, and Krispy Kreme Doughnuts. That's quite a list, and it might give potential Dunkin' Brands investors pause.

However, despite the stiff competition Dunkin' Brands faces from these exceptional competitors, there are several reasons to believe that Dunkin' Brands will continue to grow in spite of tough competition from a large number of world-class brands. 

Global expansion
Dunkin' Brands fourth-quarter results have yet to be released, but the company has mentioned that it met guidance for the year and that it feels good about what transpired in 2013. Looking ahead to 2014, Dunkin' Brands' Dunkin' Donuts plans on opening approximately 800 locations across the world, about 400 of which will open in the United States. Additionally, Dunkin' Donuts will see its loyalty program go nationwide on Jan. 27. Global expansion will increase brand recognition and sales, and loyalty programs are the norm for retailers and restaurants in today's consumer environment. Consumers want bargains if they remain loyal to a specific brand, and bargains they shall receive.  

Franchisee demand 
Contrary to popular belief, it's not Dunkin' Brands the company that maps out Dunkin' Donuts' growth. Rather, it's franchisee demand. The reason franchisee demand has increased so much recently is because Dunkin' Donuts has advertised aggressively over the past three years. This has increased brand awareness. Recent franchisee demand is evidenced by 371 net new Dunkin' Donuts restaurants opening in the U.S. in 2013, as well as  In 138 net new Dunkin' Donuts restaurants opening outside the U.S. (Almost all Dunkin' Donuts are franchised). 

That's not the only important point about franchisees. In the past, a Dunkin' Donuts franchisee would need cash. That's it, done deal. Today, it's a much different story. A franchisee won't just need cash but operational background and expertise. This has made a significant difference for Dunkin' Donuts, as its franchise locations have much stronger potential to succeed than in the past.

Dunkin' Donuts is also focused on being more disciplined with its real estate locations and supply chain costs than in the past, and it treats every franchise location as though it's company owned. If a franchise location were to fail, and be forced to close, it would look bad for the brand. Therefore, Dunkin' Donuts wants to make sure the odds of success are high. 

For an example of how much franchisee demand there is for Dunkin' Donuts, which indicates the brand's growth potential, the current pace of signings is one-to-two years in advance.

First impressions  
Aside from a military base in Oceanside, Calif., the first California Dunkin' Donuts opened in Barstow, Calif. on Nov. 4, 2013, in Barstow, Calif. This is an ideal stopping point for those traveling between Los Angeles and Las Vegas, which leads to a lot of traffic. The Dunkin' Donuts in Barstow, Calif. has only received 14 reviews on Yelp to date, but this information is better than nothing.

Dunkin' Donuts in Barstow, Calif. currently holds a Yelp rating of 3 of 5. However, this rating has mostly been driven down by very early guests and one customer who had to wait too long for his order. Otherwise, customers agree that the staff here is very friendly and that the overall experience was positive. 

The Dunkin' Donuts in Barstow, Calif. is located at Barstow Station, a pit stop for long-distance travelers and truckers with a train theme. There is a McDonald's location right next to Dunkin' Donuts. This McDonald's location has a pedestrian score of 2.5 of 5 on Yelp. The most common complaints are long wait times and the customer base the location attracts. McDonald's can't help the latter, but customers are consistently put off by the large and unruly crowds this McDonald's attracts (many of which are returning from Las Vegas).

Some of these disappointed potential-McDonald's customers might give Dunkin' Donuts a try. And for many of these people, it would be their first Dunkin' Donuts experience, since the brand doesn't have much of a presence on the West Coast.

There is also a Starbucks in Barstow, Calif. While this location sports an average 3 of 5 score on Yelp, seven of the last eight reviewers have scored it 1 or 2 stars. This Starbucks location is consistently described as dirty (no soap in bathroom, trash on floor) and slow. Many customers have also complained about incorrect orders. Overall, several recent customers have described it as the worst Starbucks location they had ever visited. Advantage: Dunkin' Donuts. 

This is only one geographic area for Dunkin' Donuts to square off against some of its peers, but it's a high-traffic area. And based on preliminary results, Dunkin' Donuts appears to be capable of stealing some market share from its peers. Ultimately, Dunkin' Donuts will really be competing against privately owned coffee and doughnut shops throughout California, but any market-share gains (or losses) versus its aforementioned peers still makes a difference.

The bottom line
Dunkin' Brands is expanding globally thanks to increased brand awareness and heightened franchisee demand. These are the most important catalysts. That said, early reception in California appears to be good. This should also help fuel positive word of mouth. These are just some reasons why Dunkin' Brands looks to be a quality long-term investment. Please conduct your own research prior to making any investment decisions.

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Dan Moskowitz

Dan Moskowitz spends the majority of his time researching stocks. He believes that fundamentals, and logic pertaining to industry trends, win out over the long haul.

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Related Tickers

8/28/2015 3:59 PM
DNKN $51.69 Up +0.16 +0.31%
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McDonald's CAPS Rating: ***
SBUX $55.63 Down -0.32 -0.57%
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