To grow into the global enterprise that management envisions, Dunkin' Brands (NASDAQ:DNKN) needs to extend beyond a few of its biggest competitive strengths. That challenge includes moving past a geographic focus that's been limited to just the eastern third of the United States. It also includes building competence and branding around breakfast and espresso drink options over the donuts and drip-style coffee that the chain is already known for.
In its recent earnings report, CEO David Hoffmann and his team said they're making good progress at transitioning the company to compete at that higher level even as they take on entrenched competition like Starbucks (NASDAQ:SBUX) and McDonald's (NYSE:MCD). Below are a few highlights from management's conference call discussing those results.
Launching new products
The success of cold brew and frozen beverages is a meaningful achievement as we strive to grow our beverage business outside of what we're most known for: hot and ice drip coffee. -- CEO David Hoffmann
Dunkin' managed its second straight quarter of modest growth in existing restaurants, with comparable-store sales rising 1.3%. Like McDonald's, the chain was forced to rely on higher spending per visit to make up for the fact that customer traffic declined slightly in the period.
However, management said they were encouraged to see Dunkin's cold and frozen drinks leading the beverage portfolio higher, since that success implies the company has a strong platform for extending beyond its traditional drip coffee offering.
Executives were similarly excited about results from their $2 snacking menu that included fresh-baked offerings. That initiative sparked Dunkin's fastest sales growth in the afternoon hours in over two years.
Finding new places to grow
We remain on track for 90% of our net [store] development [to] come from outside our core markets. We are also encouraged to see cash on cash returns continue to be in the 20% to 25% range for the 2017 cohort of new restaurants opened in our top 10 development markets, all of which are outside of our core. -- Hoffmann
The chain has told investors that there's room to at least double the U.S. store footprint from its current mark of about 9,000 locations. But to do that, Dunkin will need to extend well beyond the eastern third of the country into geographies with better established competitors, where its brand isn't nearly as popular.
Investors can judge the viability of that plan by following economic returns from these new stores, and so far, the news is good on that score. Executives said last year's class of new-market openings are meeting their financial targets.
We recognize the need to expand our beverage leadership beyond hot and iced brewed coffee, while maintaining our core advantage of speed, quality and value. -- Hoffmann
In what executives said would be one of the most transformative launches in Dunkin's history, the chain is now installing espresso equipment in all of its U.S. locations. If all goes according to plan, the company hopes to become known as a place to grab quality premium drinks like cappuccinos and lattes.
In a likely reference to Starbucks' hold on this segment, management admitted that it won't be easy to carve out a niche here. "We know in this competitive environment no one wakes up wondering where they can get a latte," Hoffmann said.
However, Dunkin believes its unique pairing of on-the-go value and premium beverages and drinks will let it modestly outgrow the market across a widening section of the country. The first big step in that direction will be the highly publicized rollout of its upgraded espresso-based menu over the coming weeks.
Demitrios Kalogeropoulos owns shares of McDonald's and Starbucks. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool recommends Dunkin' Brands Group. The Motley Fool has a disclosure policy.