Dunkin' Donuts' strategy

by L. Joshua Sosland
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CANTON, MASS. — Increasing market penetration and expanding Dunkin’ Donuts’ position in the afternoon daypart are among growth strategies identified in a preliminary prospectus issued by Dunkin’ Brands Group, Inc.

The Form S-1 registration statement for an initial public offering of common stock was filed by Dunkin’ May 4 with the Securities and Exchange Commission.

The prospectus offers considerable background about the company and its strategy for growth in the years ahead.

The company, which includes the Dunkin’ Donuts and Baskin-Robbins businesses, has been owned since March 2006 by private equity investors, including Bain Capital Partners, L.L.C; The Carlyle Group; and Thomas H. Lee Partners, L.P.

The investors acquired the business from Pernod Ricard, which gained control of Dunkin’ Brands as part of a July 2005 acquisition of Allied Domecq P.L.C. For several years before that, Dunkin’ and Baskin-Robbins had operated as a subsidiary of Allied-Domecq.

According to the filing, net proceeds from the offering, together with proceeds from a $100 million term loan, will be used to repay debt outstanding under its Dunkin’ Brands 9.625% senior notes due in December 2018. Remaining proceeds will be used for working capital and general corporate purposes. As of April 30, 2011, $475 million in the 9 5/8% notes were still outstanding.

An overview of the Dunkin’ Brands business described the company as the leading franchisor of quick-service restaurants that serve coffee beverages and baked goods, as well as hard ice cream. The company has 16,000 points of distribution in 57 countries.

“Dunkin’ Donuts holds the No. 1 position in the U.S. by servings in each of the Q.S.R. categories of ‘hot regular coffee,’ ‘iced coffee,’ ‘donuts,’ ‘bagels,’ and ‘muffins’ and holds the No. 2 position in the U.S. in each of the Q.S.R. subcategories of ‘total coffee’ and ‘breakfast sandwiches,’” Dunkin’ said.

The company operates its business in four segments: Dunkin’ Donuts U.S., Dunkin’ Donuts International, Baskin-Robbins International and Baskin-Robbins U.S.

While Baskin-Robbins is the top U.S. quick-service restaurant chain in the hard ice cream category, the business is far smaller than Dunkin’ Donuts. In 2010, Dunkin’ Donuts (domestic and international) accounted for $416.5 million, or 76%, of total company sales. Within the Dunkin’ business, U.S. revenues totaled $402.4 million with international sales totaling $14.1 million.

Many quick-service restaurant chains comprise a mix of franchise and company-owned stores, but Dunkin’ is nearly 100% franchised, which the company said is advantageous.

“Because we do not own or operate a significant number of stores, our company is able to focus on menu innovation, marketing, franchisee coaching and support and other initiatives to drive the overall success of our brand,” Dunkin’ said.

Elaborating on the growth strategy, Dunkin’ said it plans to focus on existing markets east of the Mississippi river where the company currently has one Dunkin’ Donuts store for every 48,400 people. By contrast, the company has one store for every 9,700 people in its traditional core markets of New England and New York.

“In certain eastern U.S. markets outside of our core markets, such as Philadelphia, Chicago and South Florida, we have already achieved per capita penetration of greater than one Dunkin’ Donuts store for every 25,000 people,” the company said.

While finding ways to build its coffee and beverage sales received top billing in the company’s growth strategy, grain-based foods also were identified as offering opportunities.

“As we maintain and expand our current leading market position in the breakfast daypart through innovative bakery and breakfast sandwich products like the Big ‘N Toasty and the Wake-Up Wrap, we plan to expand Dunkin’ Donuts’ position in the afternoon daypart (between 2:00 p.m. and 5:00 p.m.), which currently represents only approximately 12% of our franchisee-reported sales,” Dunkin’ said. “We believe that our extensive coffee- and beverage-based menu, coupled with new ‘hearty snack’ introductions, such as Bagel Twists, position us to grow share in this daypart. We believe this will require minimal additional capital investment by our franchisees.”

Financial results during the years the private equity group has owned Dunkin’ Brands have been checkered. In the year ended Dec. 25, 2010, Dunkin’ Brands net income was $26,861,000, down from $35,008,000 in 2009. By contrast, the company sustained a loss of $269,898,000 in 2008.

Revenues during this period were similarly bumpy. Total revenues of $577,135,000 in 2010 were up from $538,073,000 in 2009 and compared with $544,929,000 in 2008.

Comparable stores sales growth for Dunkin’ Donuts in 2010 was 2.3%, versus a minus 1.3% in 2009, a minus 0.8% in 2008 and 1.3% in 2007. Baskin-Robbins had a tougher time still, with negative sales growth of 5.2% in 2010, 6% in 2009 and 2.2% in 2008. Only in 2007 did Baskin-Robbins have positive comparable store sales growth, at 0.3%.

Under the proposed offering, Dunkin’ Brands shares would trade under the market symbol DNKN on Nasdaq.

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