Changes to Dunkin’ Brands Group Inc.’s (DNKN, Financial) menu could create a more efficient and flexible business model in the long run. A simplified menu may reduce preparation time, improve customer satisfaction levels and deliver greater flexibility when it comes to the variety of options available to consumers.
In addition, the company’s pace of new store openings is set to increase. Although there is a chance of increased competition within the informal dining sector, diversification through boosting the number of products it sells via retailers could reduce its overall risk.
Even though the company’s stock price has risen 26% versus 6% for the S&P 500 over the last year, further outperformance could be ahead.
Simplification
One potential catalyst for Dunkin’ Brands’ financial performance is its simplified menu. It has reduced the corporate required menu items for franchises by around 10%, with 23 optional products also having been disposed of. Although this put comparable sales growth under pressure in the second quarter, which was the first quarter where the new menu was fully in effect, the change is expected to provide greater efficiency and flexibility once customers adjust their purchasing habits.
Labor costs declined during the second quarter despite rising minimum wage rates due to the simplified menu having less complexity and reduced time requirements. This could improve customer satisfaction rates since waiting times will be lowered. Menu simplification could also improve efficiency through optimizing spending on raw materials, as well as increase customer throughput.
A simpler menu also provides greater scope for flexibility, with limited-edition offerings of products being easier to deliver when the core menu items are right-sized. This may provide greater variety for consumers in the long run and encourage higher sales efficiency. With the company marketing itself as being an on-the-go option for consumers, a simpler menu could help it to deliver on its corporate message.
Growth potential
New store openings are ahead for Dunkin’ Brands, with the company aiming to double its number of locations. In the second quarter, 64 stores were opened in the U.S. Much of the focus of new store openings could be on the West Coast and the Midwest, where Dunkin' is relatively unrepresented.
It continues to target opening 275 new stores in fiscal 2018. A key reason why such strong growth may be possible is the returns which the business offers to its franchisees. It has been able to deliver cash-on-cash returns of around 20% previously, which could help to attract new franchisees in new geographic regions. The company is also investing $100 million as part of its drive to become a takeaway beverage specialist, and will target the investment in areas which could improve customer satisfaction rates, such as staff training.
Potential threat
In the second quarter, Dunkin’s menu simplification provided the opportunity for the company to launch its "Go2" breakfast value offering. Improved operational performance meant the company was able to offer a deal where customers could order two sandwiches for either $2, $3 or $5, with over 75% of transactions containing a beverage.
The combination of a high-margin beverage and a value sandwich proposition may have boosted sales and profitability, but it also means that competition from rivals such as McDonald’s (MCD, Financial) could increase. The company has noted the increased prevalence of value deals from its competitors, saying it intends to become increasingly aggressive in its own pricing structure. Although it has a dollar menu, it will seek to compete in customer groups other than the value segment.
While this could cause an increasing level of competition, Dunkin’ is seeking to diversify its business model. The company is increasing the number of items it sells in grocery stores and other retail locations. It has also partnered with companies like Coca-Cola (KO) to increase sales of its ready-to-drink coffee products. This strategy may strengthen its exposure to consumers who do not visit its stores, which could make it easier to build a customer base in new areas at a time when it is seeking to increase its store footprint.
Outlook
The company’s menu simplification could lead to greater efficiency and improved flexibility. It may provide customers with greater variety, as well as reduced waiting times. This could improve customer satisfaction rates and build higher levels of customer loyalty.
The increasing number of stores may also catalyze its financial performance, with strong franchisee returns making the expansion of its footprint more straightforward. Although there is a risk from increased competition within the informal dining segment, diversification into new areas could reduce risk and improve returns. Therefore, following its outperformance of the S&P 500 in the last year, the stock has investment appeal.
Read more here:
