Dunkin’ Seeks to Replicate ‘Cult-Like Following’ in U.S. West

Dunkin’ Brands Group Inc. may struggle to duplicate the loyalty of its northeastern customers as the doughnuts-and-coffee chain expands across the U.S.

Dunkin’ has “really not been proven west of the Mississippi, but it does have a cult-like following in the Northeast,” said Christopher O’Cull, a Nashville, Tennessee- based analyst at researcher SunTrust Robinson Humphrey. “The question is: can that be replicated?”

Based on expectations that Dunkin’ can take on the likes of Seattle-based Starbucks Corp. (SBUX) and Peet’s Coffee & Tea Inc. (PEET) nationally, investors have driven up the chain’s shares 44 percent since last month’s initial public offering, compared with a 16 percent drop for the Standard & Poor’s 500 Index.

Investors are “betting that it’s going to grow a lot faster than it has been growing,” said Darren Fabric, managing director at Chicago-based IPOX Schuster LLC, which oversees about $2.5 billion and bought Dunkin’ shares for a managed mutual fund. “They have lofty growth plans.”

Canton, Massachusetts-based Dunkin’ has 6,800 U.S. stores, mostly in the east. Its growth plan includes opening as many as 250 new U.S. locations per year in 2011 and 2012. In the next 20 years, the company plans to more than double its number of U.S. stores to 15,000. McDonald’s Corp. (MCD) has about 14,000 U.S. locations, while Starbucks has 10,900.

Dunkin’s speedy service and brand power mean the chain will “get a good reception” in the western U.S., Chief Executive Officer Nigel Travis said in a telephone interview. About two- thirds of the stores Dunkin’ opened last year were outside the company’s home region, he said.

Lower Sales

So far, locations outside the northeast have generated lower sales than the home-region stores. Midwestern locations brought in, on average, $602,029 in sales for the year ended Oct. 31, compared with $996,247 for New England locations, according to the company’s Franchise Disclosure Document. The 100-plus store in the West averaged $718,100 in sales.

McDonald’s stores on average generate more than double the unit sales of Dunkin’ locations, which brought in an average of $866,042 in the U.S. last year, according to the franchise disclosure document. Starbucks cafes, which are company owned in the U.S., average more than $1 million in sales, Cliff Burrows, president of Starbucks’s U.S. stores, said during an investor conference last year.

Stealing caffeine addicts from other coffee shops in the western U.S. won’t be easy because people may prefer mom-and-pop cafes and smaller chains such as Peet’s Coffee & Tea, said Conrad Lyon, a Los-Angeles-based analyst at B. Riley & Co. “You do have a different kind of customer out West that likes the more distinctive, different type of product.”

Anti-Corporate Streak

“People are willing to pay a bit of a premium for an ultra-premium coffee brand that is somewhat unique and different,” said Nima Samadi, a Los Angeles-based analyst at market researcher IBISWorld Inc. “In California, there is a bit of an anti-corporate streak.”

The U.S. West already contains a disproportionately high number of coffee and snack stores -- 26 percent of the U.S. total, compared with 17 percent of the population, according to IBISWorld. Dunkin’s “target market probably will be and should be low to middle income,” Samadi said.

Emeryville, California-based Peet’s has more than 180 stores on the West Coast, while Starbucks has about 1,670 stores in California and more than 400 in its home state of Washington.

“In San Francisco, every block has some place that’s got character,” said Matt Spowart, a 44-year-old teacher waiting for a coffee outside a Blue Bottle Coffee Company cafe in San Francisco. “I prefer to go to a place that’s not a chain.”

Bagel Twists

To boost sales, Dunkin’ is expanding its food menu, particularly in the traditionally slower hours between 2 p.m. and 5 p.m. The chain aims to lure customers with stuffed breadsticks, bagel twists, wraps and sandwiches.

“Food is an important part of our mix,” said CEO Travis. “In terms of sandwiches, which we see as part of snacking, we’re pleased with the success we’re having.”

Other restaurants in the U.S. are already pushing food in the afternoon. McDonald’s introduced its line of chicken snack wraps about five years ago and has since started selling McCafe- branded fruit smoothies as a post-lunch pick-me-up.

Starbucks has revved up its afternoon food with chicken wraps and noodle “Bistro Boxes.” This year it started selling smaller desserts for people craving an afternoon sugar rush.

Moving beyond breakfast will take some doing, according to Dennis Lombardi, executive vice president at restaurant consultant WD Partners.

“Dunkin’ started out with a history of coffee and doughnuts,” said Lombardi, who is based in Dublin, Ohio. “It’s always been difficult and challenging to sell a broader category of food, whether that be lunch or dinner.”

If Dunkin’ “can replicate their customer loyalty and almost fanaticism for their coffee that they enjoy in the Northeast across the country, they will be a wildly successful company,” Lombardi said. “But there lies the challenge.”

To contact the reporter on this story: Leslie Patton in Chicago at lpatton5@bloomberg.net

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net

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