More Dough from Dunkin’ Donuts

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.