Dunkin' Brands (NASDAQ:DNKN) made a change to its Dunkin' Donuts menu earlier this year that effectively raised some prices without causing a major uproar among its customers.
That's partly because while the chain decided to drop combination meals, it did not force its franchisees (who own nearly all of its domestic stores) to drop them. Instead, shop owners could elect to keep them, phase them out, or simply offer them by request, but not promote them on the new menu boards that were rolled out at the time the decision to drop the money-saving deals was made.
What did Dunkin' Donuts do?
To put the changes in a positive light, Dunkin' Donuts decided to put the focus back on its core products -- coffee and breakfast items most notably. It was an answer to falling sales likely due to McDonald's (NYSE:MCD) pushing its all-day breakfast offering. Dunkin' CEO Nigel Travis has cited "revitalized burger players" as hurting the chain, according to a February 2016 Bloomberg article.
The new menu seeks to remind people that Dunkin' offers all-day breakfast and push attention to coffee drinks that offer higher margins than food sales. Dunkin' Donuts Senior Public Relations Manager Lindsay Cronin confirmed the change in an email exchange with The Motley Fool, which is shared here in its entirety:
In February of this year, we rolled out new menu boards designed to more dramatically showcase our wide array of products and to make it easier for customers to navigate these choices. The new menu boards also featured new fonts and colors, as well as more imagery and video content, to create an overall warmer, more modern design.
In the new design we eliminated combos to give our guests choice, while showcasing our menu in a contemporary look and feel, and also making it easier for guests to navigate our broad menu of coffees, sandwiches and baked goods. Franchisees can still offer combo meals if they choose. They just will not be highlighted on the menu boards.
Essentially, Dunkin' upgraded its menu boards and took combination meals off of them, but some, perhaps many, franchisees have chosen to let people keep ordering them (because how often do regulars even look at a menu?). It's a subtle move, perhaps one not even made with the intention of raising prices, but for at least some customers, that will be the effect if they order the same items unbundled. Dunkin' started testing the shift away from combo meals late last year.
How is this a price increase?
Combo meals, a tactic long used by McDonald's and other fast-food chains, give consumers multiple items for less than the price of buying each individually. The savings can vary greatly by restaurant, and even by specific deal at each eatery, but in a broad sense combinations are designed to make it attractive for a person who may just have gotten one thing to order more.
In the case of Dunkin' Donuts, combos bundled doughnuts, muffins, breakfast sandwiches, or even lunch sandwiches, with coffee or another drink (and sometimes hash browns at a deal price). People who regularly order combos will pay more under the new structure if their Dunkin' no longer offers the deal.
At the time the change was made, Scott Hudler, the company's vice president of global consumer engagement, told Bloomberg that before the change, about 60% of the menu board was dedicated to combo meals, but that they accounted for a small percentage of sales.
What does this mean for Dunkin' Donuts?
It's important to note that the company does not see this move as a price increase, even though some customers will pay more for the same order. Cronin responded to a follow-up question from The Motley Fool, saying that "Our franchisees set their own pricing and they still have the ability to offer combo meals if they so choose." She also shared details of how the company views what it offers diners.
"Our overarching strategy is to focus on offering customers a great value every day, as well as strategically targeted value promotions AND, simultaneously, to offer more premium products. In addition, our DD Perks program rewards customers for their loyalty," she wrote.
And, while at least some stores have not offered combo meals for several months, there has not been a massive push-back from customers. In fact, while the company saw comparable-store sales drop by 0.8% in the United States in Q4 2015 -- the first decline since it went public -- it has seen positive changes since that quarter. That key U.S. metric rebounded to 2% in Q1 2016 -- the quarter when the menu change began being implemented -- followed by a 0.5% gain in Q2 and another 2% improvement in Q3.
That's likely at least in part because the new menu board has been successful in driving transactions and partly because customers who used to get combos now have to spend more. It's also likely that many franchisees know their markets and their customers. That means that some are likely promoting combos off of the menu boards and others are still honoring the deal pricing for those who know to ask for it, and those who did not realize they should stop ordering that way.
Daniel Kline has no position in any stocks mentioned. He likes his Dunkin' coffee iced. The Motley Fool has no position in any of the stocks mentioned. 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.