Dunkin Brands (NASDAQ:DNKN) just reported its first same-store sales decline since 2011, as revenue from established stores fell 0.8%. A drop in comparable sales can indicate any number of challenges facing the company. It could be a sign that overexpansion is cannibalizing sales from the comparable base, or that competitive forces are threatening sales.
Management offered up some weak excuses for the sliding comps. The earnings release said that grocery-store sales of K-cups helped push comps down, and also blamed warmer weather, which is an odd excuse for a restaurant chain. Though Dunkin' argued that hot coffee sales are driven by colder temperatures, Starbucks saw comps jump 9% in the Americas during the same period.
Dunkin' CEO Nigel Travis also alluded to one new threat on the call, saying, "The competition is fierce and getting fiercer and promotional activities steadily increased in 2015, not only from our traditional competitors, but also from convenience chains and the revitalized burger players."
McDonald's Corporation (NYSE:MCD) launched its all-day breakfast menu in October, which led to a same-store sales jump of 5.7% domestically, and management said the extended breakfast hours were better received than thought. It would seem logical that some of those breakfast sales came from Dunkin' Donuts' pockets, as Dunkin' had been the leader in all-day breakfast.
On the earnings call, an analyst asked Travis directly if Mickey D's all-day breakfast was presenting a challenge. Travis responded: "We've analyzed this to death, and our analytics show that the impact of, let's say McDonalds All-Day Breakfast was marginal. What we do believe All-Day Breakfast has done is to stimulate the other burger competitors, in other words, the other burger category players, to engage in a value price war."
It's hard to see how the success of all-day breakfast would have a bigger impact on other burger brands like Burger King and Wendy's. Customers who are ordering an Egg McMuffin for lunch are doing so because they want a breakfast sandwich at that time of day. If they wanted a burger, they would order one from the menu, or visit another burger joint.
Keep in mind also that McDonald's fans have been asking for all-day breakfast for years. Presumably, some of those disappointed by not being able to get a McMuffin at 10:45 a.m. would head to Dunkin' instead.
Ronald's newest rival
McDonald's dominates fast-food breakfast with annual sales of $10 billion in the category, making nearly a third of the national total. The company regularly ranks No. 1 on surveys of America's favorite fast-food breakfast, and the most important meal of the day has become the company's biggest strength. Breakfast is growing faster than any other category, explaining why other fast-food chains like Taco Bell have recently launched their own breakfast menus.
McDonald's also has a quality advantage. It uses fresh cracked eggs, while Dunkin's are frozen, including ingredients like "natural sauteed flavor." Without a grill to cook eggs on, the donut chain has no other choice than to use a frozen product.
Coffee at McDonald's is also much cheaper. The average price of a small cup o' joe is $1 at Mickey D's, but $1.59 at Dunkin'.
In addition to those advantages, McDonald's has nearly twice the number of domestic locations as Dunkin' Donuts, and many Dunkin' restaurants are located near a McDonald's, as the two chains target the same demographic.
After just one quarter, Dunkin's same-store sales slide could be a temporary aberration, but McDonald's all-day breakfast seems like the most likely explanation. Dunkin's guidance for same-store sales this year was just flat to 2%, an indication that it doesn't expect the current challenges, McDonald's-related or otherwise, to disappear overnight.
Jeremy Bowman has no position in any stocks mentioned. The Motley Fool owns shares of and recommends 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.