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  • Dunkin' is placing a huge bet on coffee.

  • When you walk into a Dunkin' today, you'll notice way more coffee

  • options and far fewer donuts than you would have just a few years

  • ago. And it's not just drip coffee on the menu anymore.

  • There's everything from Cinnamon Sugar Pumpkin Lattes to Coolatta's

  • to premium espresso.

  • At the chain's newest stores you'll even find Nitro Cold Brew on tap.

  • It's all part of Duncan's $100 million investment to refresh the

  • brand and become a major player in coffee.

  • CEO David Hoffmann believes espresso is key to fueling the company's

  • long term growth.

  • The aggressive push into beverages comes at a time when the coffee

  • wars are heating up.

  • Competitors like McDonald's are slashing prices through deals.

  • While coffee giant Starbucks is taking bets on more expensive drinks,

  • a revamped loyalty program and delivery.

  • But Duncan's rebrand strategy encompasses more than just coffee.

  • The company also wants to aggressively expand across the country and

  • revamp its restaurants with new technology.

  • The chain changed its name, simplified its menu and started rolling

  • out new store designs.

  • It got a new CEO and made some changes to leadership at the top.

  • Dunkin' needs this strategy to work.

  • Traffic in stores has slowed and annual comparable store sales at

  • Dunkin took a one percent dip in 2017.

  • While slow traffic and lagging same store sales aren't unique to

  • Dunkin', they are dialing up pressure on the chain.

  • So will that $100 million dollar investment be enough to fuel

  • Dunkin's move into the big leagues with McDonald's and Starbucks?

  • Or will the hit to profits just cost the company in the end?

  • Dunkin' got its start here in Quincy, Massachusetts.

  • When Bill Rosenberg left school in the eighth grade, he dabbled in

  • catering but soon realized 40 percent of his revenue came from two

  • simple products -- coffee and pastry.

  • In 1948, Rosenberg opened a restaurant that sold five cent doughnuts

  • and 10 cent cups of coffee.

  • Two years later, Rosenberg renamed the restaurant "Dunkin' Donuts".

  • The restaurant was a hit.

  • In 1955, the first Dunkin' Donuts franchise opened.

  • That same year, the first McDonald's franchise opened too.

  • By 1963, Dunkin' Donuts opened its 100th location.

  • "This is one of the original publicly traded 100 percent franchise

  • businesses. I mean, it's a true asset light model.

  • Versus, you know, McDonald's is trending towards its 92 or 93 percent

  • franchise globally, moving towards 95, Wendy's is 95 percent, but

  • they weren't there five years ago.

  • Whereas Dunkin, when it went public, I think in 2011, it was already

  • 100 percent franchised.

  • And it really built the appreciation for those types of businesses in

  • the industry."

  • That growth model worked well for Dunkin'.

  • Franchising meant fewer actual assets and higher profits.

  • Dunkin' started expanding internationally in 1970 when it opened its

  • first overseas location in Japan.

  • As of Q2 2019, there are over 12,800 Dunkin' locations, in more than

  • 40 countries.

  • Dunkin' Brands went public in 2011, selling around $423 million worth

  • of shares. For comparison, Chipotle raised $193 million when it went

  • public in 2006 when adjusted to 2011 dollars.

  • Then CEO Nigel Travis told CNBC, the company would use profits from

  • its IPO to expand West and internationally and pay down its debts.

  • Analysts said the stock was overvalued because its price hinged on

  • the hope that Dunkin' would recreate its success in the Northeast,

  • across the rest of the country.

  • At the time of the IPO, there was only one Dunkin' Donuts on the West

  • Coast, in Portland, Oregon.

  • The company has since expanded its West Coast presence with 102

  • locations in California and 12 in Hawaii as of 2019.

  • But even as Dunkin' has pushed to grow its footprint west of the

  • Mississippi and internationally, it hasn't forgotten about the

  • Northeast.

  • Dunkin' is the largest chain in New York City for the tenth

  • consecutive year, with 624 locations as of December

  • 2018.

  • In 2018, after 70 years of Dunkin Donuts, the restaurant dropped the

  • doughnuts and became just Dunkin'.

  • "We think about it less about dropping doughnuts then just leaning

  • into Dunkin'. Dunkin' is what we're known as

  • for almost 20 years.

  • We've been America runs on Dunkin'".

  • Beverage sales make up almost 60 percent of Duncan's revenue, so

  • growth in the category is essential to the company's overall health.

  • In 2017, Dunkin' told Nation's Restaurant News, that most stores

  • would offer fewer than 20 different donuts.

  • That was a big decrease from the 30 varieties it typically offers.

  • While Dunkin' has simplified its food offerings, it keeps adding to

  • its coffee menu. For about 45 years, Dunkin's coffee offerings

  • extended only to its original blend drip coffee.

  • But in 1997, Dunkin' decided to make a big push into the beverage

  • market. That was the year it rolled out the Coffee Colada slush

  • drink. In 2000, Dunkin' started selling the blended Dunkaccino.

  • And by 2003, it began to offer espresso.

  • Dunkin' relaunched its espresso lineup in 2018 with new machines, new

  • recipes and new training for employees.

  • It's a move some say has a whole lot to do with Dunkin' angling to

  • become a premier brand on par with Starbucks.

  • "I think that the initiative to modernize would absolutely come from

  • their largest competitor, which is Starbucks, which it has really

  • reinvented what coffee means to consumers on a daily basis.

  • So, yeah, it's always good to kind of have a, you know, an arch

  • enemy, if you will, out there, a bad guy, whatever you want to call

  • them, because they force you to stay on your toes."

  • It seems to be working.

  • Espresso sales for Dunkin' are on a tear.

  • In its annual report for fiscal year 2018,

  • Dunkin' U.S., said it sells approximately 1.7

  • billion servings of hot and iced coffee each year, and espresso

  • accounts for about 10 percent of Duncan's overall sales mix.

  • The company reported sales of espresso based beverages were up 40

  • percent in the second quarter of 2019 when compared to the year

  • prior. "That move into the espresso beverages,

  • this is a space that their key competitor really owned and had an

  • advantage over them.

  • Think about the length of the order that somebody might give a

  • barista at a Starbucks, for example, versus, you know, just a cup of

  • coffee at Dunkin'".

  • But Dunkin' can't just mimic Starbucks to succeed.

  • It needs to stay true to its brand.

  • Dunkin' is all about a quick, affordable menu and making trends

  • accessible to everyone.

  • That's not necessarily a natural fit with espresso.

  • So analysts warn that Dunkin' has to be careful about its move into

  • espresso. Customers are typically suspicious when a brand tries to do

  • something that doesn't feel authentic.

  • But if Dunkin's espresso based beverage sales so far are any

  • indicator, this product could unlock big potential for the chain.

  • However, coffee remains a crowded market, and Dunkin' is fighting for

  • market share against some formidable opponents.

  • Starbucks with its vast footprint, McDonald's with all day breakfast

  • and the regional but beloved Tim Hortons and Krispy Kreme.

  • As of September 2019, Dunkin' has a $6.8

  • billion dollar market cap and its shares are up about 8 percent over

  • the last 12 months.

  • But, it still has a ways to go to compete with giants like McDonald's

  • and Starbucks, which have about a $167 billion and $115 billion

  • market cap, respectively as of September 2019.

  • In fiscal year 2018, Dunkin' U.S.'s

  • sales were also dwarfed by the competition.

  • Dunkin' reported revenues of $606.8

  • million dollars.

  • McDonald's sales were more than 12 times that.

  • And Starbucks brought in $16.7

  • billion in the Americas, which includes the U.S.,

  • Canada and Latin America.

  • Espresso is a premium product and typically costs more than other

  • beverages. That means it pushes the average check price higher, which

  • in turn makes up for slowing traffic because people are spending more

  • when they do walk through the door.

  • In 2018, a party's average check at Dunkin' was eight dollars and

  • five cents. That's higher than its Canadian competitor, Tim Hortons,

  • but lower than Starbucks.

  • The most recent check averages don't include 2019 data, so it may be

  • too soon to measure Duncan's revamped espresso lineup, which started

  • to roll out at the end of 2018.

  • Dunkin' has long struggled with how to drive up afternoon foot

  • traffic.

  • It has extended cold beverage offerings and offered deals ranging

  • from two bagels for $4 dollars to $2 lattes.

  • "The beverages in the morning, that's their core.

  • And that's where the franchisees make their money.

  • But as far as the afternoon business is concerned, the "Dunkin' Run"

  • and the "Go2s", a lot of times those promotions, if they are on

  • beverages, they're usually after two o'clock in the afternoon.

  • So, you know, the afternoon "Run" seems to be stabilizing the

  • afternoon business."

  • Dunkin' Brands has also tried, and arguably failed, at using ice

  • cream to drum up afternoon sales.

  • Baskin Robbins and Dunkin' are both operated under Dunkin' Brands,

  • but Baskin hasn't performed as well as Dunkin'.

  • Its sales growth has been lackluster.

  • From 2007 up until it changed course in 2011, the chain posted

  • negative annual comparable store sales.

  • Baskin Robbins again posted negative same store sales for the fiscal

  • year 2018.

  • Analysts say, Baskin might not be adding much in sales to the brand,

  • but it's not really deadweight either.

  • A dual store with both a Baskin and a Dunkin' is attractive to some

  • franchisees to boost sales outside the morning coffee rush.

  • A dual store costs as little as ten thousand dollars more to open

  • than a standalone Dunkin' and doesn't require extra workers or

  • machinery.

  • Dunkin' is also trying to keep up with change in the fast food

  • industry by testing plant based meat and a partnership with GrubHub

  • in some locations.

  • "The online ordering system now is much more robust.

  • And our guests can get products anytime they want, anywhere they

  • want. And, you know, we're living in a culture now of everything

  • being on demand. Now you can get your coffee on the demand."

  • Dunkin' started offering Beyond Meats sausage in Manhattan, and the

  • company says, it's selling well and drawing repeat customers to

  • Dunkin'. Dunkin' has been testing delivery through partnerships with

  • GrubHub, DoorDash and other local companies.

  • It plans to expand the partnership with GrubHub to other major cities

  • in the U.S.

  • "Consistency of experience.

  • It's not a big deal when you're ordered from a mom and pop pizza or

  • taco place. But for us, the consistency is really important."

  • But there are unique challenges in delivering coffee.

  • Experts say Dunkin' and other cafes might not be a natural fit for

  • delivery, because coffee has to maintain its temperature to be

  • appealing. Think, watery iced coffee or a room temperature latte.

  • It's also betting big on store format.

  • Part of that $100 million cash injection went toward the rollout of

  • an entirely new kind of Dunkin' shop.

  • It's a layout called the "Next Generation" store and Dunkin' hopes it

  • will modernize the brand's image and keep it relevant

  • for the next generation of customers.

  • Dunkin' plans to add 200 to 250 net new restaurants a year for three

  • years starting in 2019.

  • "It completely changes the way the customer interacts with our crews.

  • There's nothing between the crew from the customers, so the customers

  • can now engage with our crews and ask questions and learn about the

  • product."

  • Dunkin' says the new store is slightly more expensive than previous

  • remodels because there's more technology in this design.

  • The company didn't disclose the cost of the new layout to CNBC.

  • "The returns are actually very exciting and better than the previous

  • iterations. So working very closely with our franchisees, we've

  • gotten to a place that we feel very good, both sides on the

  • investment that they'll be making for this next gen transformation."

  • Next gen stores are also a big part of Dunkin's push to digital

  • ordering. Mobile ordering is another area where Starbucks has Dunkin'

  • beat. About 4 percent of orders at Dunkin' are made through mobile

  • phones. At Starbucks the number is closer to 16 percent.

  • Experts are optimistic that the next gen store will improve that

  • metric. The designs have a larger space for people who are picking up

  • online orders.

  • "And the next gen store has an even bigger area dedicated to this and

  • we're seeing probably twice the average percentage of on the go

  • orders through the next gen stores, which is tremendous."

  • Some of the new stores also have a dedicated mobile lane in the drive

  • thru. That should help prevent bottleneck issues like the ones seen

  • in some Starbucks when the company added mobile ordering in 2017.

  • Next gen stores also have an 8 tap system for cold drinks, just like

  • the doughnut cases

  • it's all about getting products in front of customers to increase how

  • much they spend. With drinks on tap, crew members function more like

  • bartenders than baristas.

  • "Bartenders are quick on their feet,

  • they know your name, they know how to sample drinks.

  • But most importantly, they're great at serving the customer."

  • As of 2019, customers rated the barista expertise at Dunkin' at a 90

  • out of 100. Starbucks scored at 94 out of 100.

  • While McDonalds was lower at 78.

  • In its next gen stores Dunkin' hopes that number will go up.

  • Dunkin' has been a reliable brand throughout its existence, growing

  • at a slow and steady rate.

  • It hasn't had any major scandals like some of its competitors and its