On the Margin
Dunkin' Donuts

Dunkin’ fixes pricing problem

Blog: Company now targeting national value amid intense coffee competition

This post is part of the On the Margin blog.

A year ago, Dunkin’ Donuts found itself struggling with price competition from, of all places, Starbucks Corp.

The problem, as Dunkin’ executives explained, was that franchisees would raise prices aggressively, worried mostly about higher minimum wages and labor costs. In some markets, it was said, prices for coffee at Dunkin’ were higher than they were at Starbucks, its theoretically higher-priced rival.

That might have played a role in slowing sales. Same-store sales — which increased 7 percent and 6.1 percent in the third and fourth quarters of 2015, respectively —have been flat to up 2 percent in the five quarters since.

“Franchisees sometimes go ahead of themselves into increasing prices,” Dunkin’ Brands Group Inc. CEO Nigel Travis said on an earnings call last year. “They see minimum wage go up; they also have pressure from the labor shortage.”

Dunkin’ has been working with operators to keep prices at bay. Speaking at an investor conference this week, Travis suggested that the company has made progress.

“They’ve shown a great understanding of how over-pricing impacts the business,” he said. Franchisees in the past several months have kept prices at bay.

The company is now targeting national value in a bid to attract budget-conscious beverage consumers. This spring, Dunkin' Donuts started offering $1.99 frozen coffee. And Travis said it was the start of more national value-oriented offerings. 

“The $1.99 is the start,” he said. “We’ll have national value in some form or shape the rest of the year. You’re going to see a lot more value oriented pricing from us in the future.”

National value is a big change for Dunkin’, which has traditionally kept price promotions regional.

“Our franchisees are really smart,” Travis said. “It took a little time to get on board with national value. But we can advertise the same thing at once and don’t get cross messages.”

To be sure, investors have largely blown off Dunkin’s sales concerns — the company’s stock is up more than 30 percent over the past year and established a new all-time high late last month.

But keeping prices in check is a key element for Dunkin’, especially in the rough-and-tumble competition for the beverage business. Dunkin’ not only faces competition from Starbucks, but from convenience stores, which have been aggressively promoting prices in many Dunkin’ heavy markets.

Tim Hortons, meanwhile, is looking to aggressively grow in those markets. And this year McDonald’s Corp. unleashed $1 coffee and $2 McCafe drinks, and is now offering slushies in many markets.

Indeed, Travis noted that the company has done well in the morning, but has “struggled somewhat in the afternoon” in part because of competition from McDonald’s and Burger King. The comment sent Dunkin’s stock down 4 percent on Wednesday, but the stock has recovered somewhat on Thursday, up nearly 2 percent.

Jonathan Maze, Nation’s Restaurant News senior financial editor, does not directly own stock or interest in a restaurant company.

Contact Jonathan Maze at [email protected]

Follow him on Twitter: @jonathanmaze

TAGS: Sales Trends
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