With almost 120 years of experience in the quick service restaurant space, Dunkin' Brands (NASDAQ:DNKN), owner of the Dunkin' Donuts and Baskin-Robbins chains, has achieved a respectable 60% market share in donuts.
Compared to Krispy Kreme Doughnuts (NYSE:KKD) or coffee giant Starbucks (NASDAQ:SBUX), Dunkin's revenue growth rate in the past two years has not been amazing. However, Dunkin's real growth story may be just starting.
The company plans to go beyond its traditional core business --being a doughnut shop -- by updating its decor, innovating its menu, expanding in emerging economies, and using technology to improve its customer service. Is Dunkin's transformation going to work?
A new Dunkin is in the making
Innovation isn't a new concept for Dunkin. Throughout its long history, Dunkin's menu selection and variety have increased considerably. For example, the company successfully introduced bagels in 1996.
More recently, the company has introduced bakery sandwiches, breakfast burritos, and even turkey sausage sandwiches to its menu. This could help to attract non-traditional consumers. The idea is simple: add high-margin items that fit well with the company's original menu selection. In this way, Dunkin can gain new customers while keeping its loyal customer base intact.
Dunkin's product innovation strategy shares some similarities with Starbucks. The coffee chain transformed the menu of 400 San Francisco locations this year to begin selling baked goods crafted by La Boulange. Also, just like Dunkin, Starbucks pays enormous importance to keeping consistency between new offerings and traditional values in order to protect its brand. That's why Starbucks' new sandwiches and baked products use high-quality ingredients and real butter.
Dunkin's plans go beyond menu engineering, though. The company is actively using technology to keep its customers engaged, and this goes beyond simply providing free Wi-Fi access. For example, Dunkin invested in developing a mobile app that delivers geo-targeted offers, includes a convenient store locator, and makes payments easy. This app has been downloaded more than 2 million times since its release.
There are also abundant geographical growth opportunities, even in the U.S., where Dunkin already has more than 7,000 locations. This is because most of Dunkin's restaurants are located in the east. Store penetration ratios in the west is still very weak, with only one store for 1.7 million people. Notice that there were early unsuccessful plans to expand in the west. The company has learned a lot about better site selection after failing twice in California, and as a result should do better this time. Management is committed to add 5,000 stores in this region over the next 20 years.
Emerging economies are another growth engine. In particular, business in India looks promising. Dunkin entered this market in 2011, and has a partnership with Jubilant FoodWorks to open 500 restaurants over the next 15 years. Dunkin's global supply chain management allows the firm to offer customers around the world the same taste and quality. The company also pays attention to menu localization. In China, its has introduced unique beverages like the Mango Coolatta and Rose Latte.
Dunkin's direct competitors, such as Krispy Kreme, may need to reinforce their competitive advantages to better compete against the new Dunkin.
With only 789 locations and no presence in China, the market believes that Krispy Kreme also has interesting growth opportunities. The company's stock has tripled in the last 12 months. This is not surprising, considering that the company has delivered 19 consecutive quarters of sales growth so far.
Notice that, despite its small scale of operations, Krispy Kreme does have some strong competitive advantages in motion like its delicious and unique Glazed doughnut. Technomic surveyed 22,459 adults to know their restaurant preferences and found that Krispy Kreme has a commanding lead.
Final Foolish thoughts
Dunkin has too many growth opportunities to be ignored. The company also has many competitive advantages, from enjoying strong branding to having an asset-light structure. Despite being completely franchised, the company is able to adapt to new market conditions and changes in consumer preferences quite well, which shows the firm's management leadership.
Adrian Campos has no position in any stocks mentioned. The Motley Fool recommends Starbucks. The Motley Fool owns shares of Starbucks. 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.