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Dunkin' Brands Tells Investors Why Customers Are Paying More for Breakfast

By Demitri Kalogeropoulos – Updated Feb 18, 2020 at 3:04PM

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The snack and coffee chain is finding that shoppers are willing to pay up for innovation and higher quality.

Dunkin' Brands (DNKN) might be on to something. The restaurant giant recently posted its fastest quarterly expansion pace in six years while rewarding shareholders with a robust dividend hike.

Many factors went into that positive operating and financial performance, but in a conference call with Wall Street analysts, CEO David Hoffman and his team highlighted the biggest ones. They also went into detail about why they see their expensive remodeling and brewer upgrade strategies as worthy investments in 2020. Below, we'll look at a few key takeaways from that chat with investors.

A woman smiling and holding up a to-go coffee cup

Image source: Getty Images.

Upsized checks

Dunkin' is a menu-driven brand, and it is important to give our customers on-trend choices.

- Hoffmann

The core Dunkin' franchise notched its best growth rate since 2013 despite posting another year of declining customer traffic. The good news is that spiking average spending more than made up for that slack, and those gains were powered by the chain's push into higher-quality espresso beverages and popular food launches such as the Beyond sausage sandwich.

The combination of these hit drink and snack offerings was a powerful growth driver. Average check values passed $9 for customers ordering the plant-based sandwich, in fact, as many opted to pair it with a premium cold brew coffee beverage. Dunkin' is pressing this consumer spending advantage into 2020, including with special seasonal espresso drinks, like for Valentine's Day.

Traffic improvement

Obviously, we are not declaring victory, but we feel the business is moving in the right direction and we plan to build on this momentum in 2020.

- Hoffmann

The restaurant chain isn't alone in seeing reduced customer traffic but higher average spending. McDonald's noted the same trends in 2019, although its 6% global growth was about double the rate of Dunkin's expansion. Starbucks is the industry leader today, with customer traffic rising 3% over the last six months.

Dunkin' Brands noted that traffic was negative for the full year and for the quarter that just closed. On the bright side, the recent declines represented a five-year low despite plenty of competition on both the premium and value sides of the breakfast and coffee niches. That success has executives feeling optimistic that shopper traffic might finally break back into positive territory soon.

Spending money to make money

Dunkin' Brands will make an investment of approximately $60 million in new state-of-the-art volume brewing equipment for all Dunkin' U.S. restaurants. And, similar to the previous beverage equipment investments, our franchisees will make an equal or even larger contribution.

- Scott Murphy, President of Dunkin' Americas

Dunkin' in 2020 is continuing its multiyear initiative of upgrading and diversifying its beverage capabilities. Back in 2018, that plan involved adding an espresso platform to its entire U.S. sales base. Last year brought cold brew and new iced coffee machines.

This year's upgrade will be focused on the drip coffee that has formed Dunkin's core competitive appeal. New drip machines should be quicker and allow for more flavors and varieties while reducing waste and boosting satisfaction for both customers and employees.

The investment will mean unusually weak earnings growth in 2020, but Dunkin' is confident that the brand elevation it delivers will support faster long-term sales gains and healthier profit margins over time.

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.

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