Dunkin’ Donuts’ appetite for expansion

A line of more than 200 anxious donut fans waiting in front of a new location in Iceland could be a good sign of things to come for Dunkin’ Donuts. The 65-year-old US-based coffee and pastry chain is expanding its restaurants across Europe, and believes it has a winning strategy for success. “We’ve really begun to connect well with consumers in Europe,” says Jeremy Vitaro, Vice President of International Development for Dunkin’ Brands, the restaurant’s parent company. Dunkin’ is a household name in America, with more than 8,100 restaurants in its home country. In some of its core markets, there are as many as one store for every 8,900 people.  Europe, however, has proved a tougher market to crack. Despite a previous attempt to break through in the 1990s, Dunkin’ has a little over 200 stores spread out across the vast continent. But the market has changed and so has the company. With this, Dunkin’ is taking another stab at expanding in European markets with some of the largest coffee consumers in the world. In addition to recent franchise agreements to add 44 stores in Poland and 33 in Switzerland over the next few years, Dunkin’ wants to expand in countries it is already in. It is also seeking franchise partners to enter Scandinavian markets including Norway, Finland, the Netherlands and Belgium. Vitaro spoke to GCR to explain why market conditions, consumer behaviour, and an appetite for US-style donuts make Europe a prime area for growth. “We’ve got opportunities to keep growing in each of the countries we’re already in.” THE RIGHT PLACE AT THE RIGHT TIME With the slogan “America Runs on Dunkin’”, the chain is a staple in the American fast food breakfast sector. This year has proved particularly rewarding for investors. In the first half of 2015, it saw nearly 10 per cent revenue growth and US comparable sales growth of 2.9 per cent due to customers spending more and visiting more often. Dunkin’s strong financial results were also attributed to a faster-than-expected launch of Dunkin’ K-Cups in thousands of retail outlets across the Americas. While the company is soaring on its home turf, it has had challenges gaining ground in Europe. It has more than 3,000 restaurants outside the US, but historically very few of those have been on the continent. Dunkin’ made an attempt to break into the UK in the 1990s, but fell short due to poor real estate choices and inexperienced franchisees. While the company’s international presence lags significantly behind Starbucks, its top competitor in America, Vitaro is optimistic about the future. “The [European] market is probably more receptive to what we’re offering today than it was in the past,” he says. He believes everything from the growth of café culture to the amount of disposable income presents a good opportunity to give Europe another shot. “It’s a pretty on-the-go consumer,” says Vitaro. “That plays well with our combination of our menu, speed, and value.” Starbucks is also sinking its teeth into the European market, looking at doubling its stores to more than 4,000 by the end of fiscal 2019. While Dunkin’s growth plan is significantly more reserved than its rival juggernauts, Vitaro says its strategy will build on the chain’s previous success in Germany. It moved into Berlin in 1999, and now has 58 locations strategically placed around transit hubs in some of Germany’s largest cities. One store at a Munich railway station generates over US$40,000 in sales per week, which is almost double its average American counterpart. “We’ve had a lot of success in transit and non-traditional environments like highway rest areas and other areas of great pedestrian flow,” he says. Vitaro says working with local realtors to choose the right locations will be key to its success moving forward. Economist Chris Christopher believes lower fuel prices and employment growth in certain European markets are making Europe fertile ground for the fast food industry. “If you are going to work, you have to pick something up,” says Christopher, who is Director of Consumer Markets for IHS Global Insight. “If employment is doing well, this is good for your fast food markets.” He says the economic growth in northern tier European countries, such as UK and Germany, bodes well for companies like Dunkin’ who serve the on-the-go consumer. “What differentiates us is great food,” says Vitaro. “It’s combination of beverage, donuts and sandwiches at a good value pricing.” MORE THAN DONUTS While customers may be lining up for a taste of US-style pastries, Americans may be surprised by what’s in store abroad. Dunkin’ is adapting its menus to cater to local palates with items likely to appeal to their new audiences. In Sweden, for instance, you can find a salmon bagel offered on menu which wouldn’t be offered in the US. “I think it’s one of the smartest things I’ve heard in a long time,” says Darren Tristano, Vice President of Technomic, a US research firm. Tristano specialises in national and emerging restaurant chain concepts, menu trends and consumer dining behaviors. He says his company’s research findings consistently lead toward local influence, preference and profile. “Often brands don’t adapt to local markets,” he says. “It can be very difficult because consumers’ taste palates don’t recognise the flavour and don’t appreciate the product because of that.” Dunkin’ is also adapting its beverage menu to centre around espresso drinks, whereas its American stores focus largely on drip coffee. “In Europe it’s particularly important,” says Vitaro. “It’s really driven off the espresso platform.” Some of the latest coffee consumption figures indicate it’s likely a wise move. Dunkin’ already has a presence in the five European countries that consume the most coffee per capita. According to Statista, Finland drinks the most coffee per capita at a whopping 1,252 cups per year, which is more than triple of that in the US at 369 cups per year. The Netherlands’ average of 2.4 cups per day is almost the same as those of the US, UK, Spain, and France combined. And while Dunkin’s reputation for donuts may be the entry point for new consumers, Vitaro says they tend to also connect with other menu items that eventually increase brand loyalty. “Over time, we introduce them to other items and what we’ve found across markets across world is that they become loyal not just on the donut side, but beverage and sandwich side.” SUPPORTING THE FRANCHISE With impressive growth in the US, it’s hard to ignore Dunkin’s success. Some investors are even suggesting Restaurant Brands International, the recently merged parent company of Tim Hortons and Burger King, take a cue from Dunkin’s successful business model and growth in the US. The chain operates on a 100 per cent franchised model with more than 11,400 stores in nearly 60 countries. While it does not own or operate many of its stores, Dunkin’s asset-light, franchise-heavy model has its benefits by reducing capital expenditures and allowing it to focus on marketing, menu innovation and other growth strategies. It’s a business model that Vitaro says works well for the company, and is key to its success in Germany. “The single most important factor is the quality of our franchise group,” he says, noting that they know their territories very well. According to Vitaro, one of the key things the company has done to support their expansion in Europe is increase their franchise support in foreign markets. “The functional support we bring today is much different than in the past,” he says, adding they place a lot more focus on supply chain, marketing, real estate, and design. He says the menu and how they communicate with consumers is also taken into consideration. “Donuts is still a really important part of what we do and who we are. But now the beverage line is a very important part of our menu.” He says that while the chain has mostly focused on brand in previous attempts at international growth, there is now a greater focus to tailor store design and environment to suit local customer behaviours and tastes. One store in Leeds, for instance, can seat 100 people. It’s a significant contrast from its typical grab-and-go style. “We’ve evolved and the market has evolved too,” Vitaro says. While it may never become the fast food behemoth it is at home, Vitaro is optimistic about the opportunities that lay ahead for Dunkin’ in Europe. “I do think we’ve got a long way to go to become mainstream or ubiquitous, but we have a lot of growth potential. I think we can keep growing in all the markets we’re in today.” GCR