Even the best businesses have risks, and it's important to study the threats that could derail your investments. That way you won't be blindsided by them, and you can identify the key trends that bear watching.
In this regard, here are the major threats to Dunkin' Brands Group's (NASDAQ:DNKN) business.
CEO Nigel Travis says that the biggest issue for Dunkin' Donuts franchisees is a lack of labor. In fact, franchisees in some locations have been able to find only about 60% to 70% of the employees they need to run their businesses effectively.
To combat this problem, Dunkin' is streamlining its menu to make its stores less complicated to operate. The company says this will make it easier to train people to work in its stores and help to reduce labor turnover. In turn, happier and better-trained employees should also lead to greater customer satisfaction. Still, as long as the unemployment rate remains low, finding enough good workers to man its stores will likely remain an ongoing challenge.
Declining retail traffic
Another major challenge is the steady migration of retail sales to online channels and away from the many malls and strip malls in which Dunkin' Donuts restaurants are located. This is weighing on Dunkin's own traffic figures, which have declined for six straight quarters.
Unfortunately, overall retail sales trends are outside of Dunkin' Brands' control, but the company is doing its best to adapt to the situation. Dunkin' is attempting to position itself as an "on-the-go brand." Drive-through efficiency is being prioritized. The company is testing mobile order pickup areas with encouraging early results; 70% of first-time users use the app again. Better still, mobile orders accounted for 3% of total transactions in the third quarter, and many of Dunkin's urban and high-volume stores are seeing nearly 20% of their transactions processed with mobile ordering.
This will be a key area to watch, as Dunkin' believes that mobile technology will be "the future of how many of our guests will interact with our brand."
As the risks of high sugar consumption become more well known, it may become more challenging for Dunkin' to sell its famous doughnuts and Munchkins. While I'll admit that these treats are delicious, it's hard to argue that they're healthy.
To be fair, this has been a challenge for the doughnut purveyor for quite some time; low-carb diets like Atkins have been around for more than a decade. Yet it remains a persistent threat nonetheless. And if more studies show additional negative effects of high-sugar diets, it could become more of an issue.
This is probably one of the reasons Dunkin' has removed the word "Donuts" from its name in a few locations. The company is currently conducting a test to see if sales at these stores will be affected by the name change. Depending on the results, it may decide to roll out the name change across all of its stores.
All told, Dunkin' Brands Group remains an intriguing investment opportunity, but if it's going to deliver on its promising potential, it will need to find solutions to these challenges.