Since
its IPO in July 2011, Dunkin’ Donuts has performed strongly in the US in the
particularly unforgiving environment of the financial crisis. Their share price
has equally grown from its IPO price of $22 to $49.76 currently. Their rise
fits within the pattern of the greater trend of superbrands pulling away from
their average competitors and into a league of their own. Dunkin’ Donuts will
continue to provide more dough, but not just from their donuts.
Dunkin’
Donuts is headquartered in Canton, Massachusetts and runs itself as one of the
world’s leading franchisors of coffee, donuts, baked goods and ice-cream under
the Baskin-Robbins brand. With over 16,000 distribution points in 57 countries,
and the number one position in the USA in terms of brand awareness for coffee,
breakfast sandwiches, donuts, bagels, and ice-cream, Dunkin’ Donuts are in a
strong position to continue to grow their superbrand, particularly when their
low capex strategy and franchise model are taken into account.
Around
75% of their global sales of around $8 billion come from the USA and 75% of
sales are generated under the Dunkin’ Donuts brand. The Dunkin’ Donuts USA
division has achieved revenue growth of 7-9% over the past few years and this
is expected to continue. Dunkin’ Donuts has high market penetration in its core
New England market with one distribution point per 9,700 people. It is in the
West of the USA and parts of the East USA that Dunkin’ Donuts has very low penetration of one store per 1,200,000 people and this is where growth
opportunities can be leveraged. This is evident when compared to their competitors
such as Starbucks with 1 distribution point per 20,600 people and McDonalds
with 1 distribution point per 21,700 people. Moreover, Dunkin’ Donuts began
leveraging their brand through K-Cups rolled out nationwide in August 2011,
before competitors such as Starbucks (who only began to do this in November
2012). Having stolen a march on its competitors in this market, Dunkin’ Donuts
are in a strong position to maintain market leadership over the next few years
and to consolidate its 6% market share of all K-cups sold (roughly 7 portion
packs per day per distribution point).
Additionally,
Dunkin’ Donuts’ defensive business model is facilitated by its low operating
leverage. By the end of 2017, Dunkin’ Donuts will be fully unlevered as a
US$1.5 billion floating rate term loan ends. Moreover, their franchise model
means that 100 new distribution points in the USA is valued at roughly 3%
increase to its Earnings per share.
On
the international scene, there is also plenty of room for the superbrand to
expand. Dunkin Donuts and Baskin Robbins are already saturated in Japan and
South Korea. However, they also expanded by roughly 300 stores a year
internationally during the financial crisis, demonstrating the business’
resilience. The strategy is now to focus on Russia, India and China as well as
expand in the Middle-East. They had an agreement with Jubilant Foodworks in
2012 to open 500 distribution points in India, which has helped progress their
international strategy. With the brands’ presence currently skewed towards
Japan and South Korea (at 75% of revenue), there is excellent potential growth
opportunities for this superbrand internationally, especially in Asia, Russia,
and Latin America.
Therefore,
buy Dunkin’ Donuts at its share price of approximately $50 as this is a long-term
growth stock. Our hypothesis is for superbrands to continue to grow their
market share and consequently their shareholders’ wealth, particularly in a
globalised world. It is also evident that other competitors, such as Dominos
and Chipotle, have taken the same growth trajectory – based on the same
principles of lower operating leverage, franchise strategy and a defensive
business model. With a market capitalization of around US$5.4 billion, there is
significant growth to be achieved both in Western USA and internationally –
over the next 10-15 years expect to see that market capitalization expand to around
US$15 billion with a consequent rise in share price.