Some Coffee to Freshen up Your Portfolio
Himanshu is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Here is a debutant which has made an impact through its mind blowing performance at a time when most of the established industry players are finding it difficult to sustain. Dunkin Brands (NASDAQ: DNKN), the franchisor of restaurants which offer coffee, foods and ice creams, posted surprisingly decent second quarter results which brought some relief to investors. Let’s understand how.
What Was The Strategy?
It is actually amazing to see a company which is quite a small player in the industry and went public a year ago has been like a ray of light in pure darkness. With continuous new product launches after its debut, the coffee and ice cream maker managed to capture a huge market, especially in the eastern U.S. This enabled revenue for the quarter to surge 10% to $172.4 million and earnings go up by 7.6% to $18.5 million. Its products such as K-cups, breakfast sandwiches and 99-cent Tea rocked the market, increasing traffic into its restaurants, and leading its same store sales towards healthy gains.
Dunkin Brands owns the Dunkin’ Donuts’ chain of restaurants, which provide coffee and baked foods, and Baskin Robins, which offer ice creams. Both the brands performed well during the period and the company is on the verge of expanding its presence by opening a total of 400 to 450 restaurants by the end of the year. It has been focusing on its international and western U.S. footprints mainly. Dunkin has huge potential in the emerging markets such as India and China where the market is highly untapped. Moreover, the western U.S. continues to be an attractive bet since there is huge demand for the same in the rest of the U.S. where Dunkin has a significant presence. Also, franchisees in the region are interested in opening Dunkin’ Donuts’, which highlights the overwhelming demand in spite of weak consumer spending.
In Comparison With Peers…
However, the coffee maker’s biggest challenge in the West will be huge competition from Starbucks (NASDAQ: SBUX), the biggest coffee chain in the region. Starbucks, too, has launched its own K-Cups, mocha flavored coffee pods to be used with Keurig brewers, which proved to be very successful for Starbucks in the latest quarter. For Dunkin, K-Cups was significant in pushing Dunkin’ Donuts’ revenue, which makes three-fourths of the overall company's revenue, and was a major driver for the growth in same store sales in the Donuts’ chain. Therefore, along with strong market presence Starbucks will now pose a threat to the new product market which may also be a cause of concern for Dunkin Brands. But Dunkin’s large market for sandwiches is still a shining segment which is expected to yield significant benefits.
The company might also consider selling K-Cups in its ice cream parlors so that the product is well promoted and brings sweet returns. Moreover, the biggest advantage enjoyed by Dunkin is its franchise based model which is light on costs. It does not pose a huge cost burden to the company which is possibly the best way of surviving in the times of economic crisis since large restaurant chains such as McDonald’s (NYSE: MCD) and Yum! Brands (NYSE: YUM) have been facing high costs related to company -owned restaurants. They have been trying to keep costs to a minimum as rising input costs have also started putting a lot of pressure on the bottom line. Dunkin has fared better in the face of these cost related problems. Even costs such as maintaining and renovating restaurants require funds in great amount. With the franchisee model it is easier to escape the high costs issue since the burden falls more on the franchisees.
The company has been innovating continuously and expanding. With already 140 new stores opened during the quarter it has increased its expansion plans further. Dunkin is also planning to launch a mobile application in the coming quarter. Moreover, its huge demand in the U.S. and growing popularity in the international market are attractive points. Additionally, it has raised its outlook for the year which is quite an appreciable move. I believe, a light weight company with a lot of innovation in place is a good bet in the current economic conditions.
justhimanshu has no positions in the stocks mentioned above. The Motley Fool owns shares of McDonald's and Starbucks. Motley Fool newsletter services recommend McDonald's, Starbucks, and Yum! Brands. 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.If you have questions about this post or the Fool’s blog network, click here for information.