Dunkin’ Donuts Adds Jazz to Get Less Pit and More Stop

June 7 (Bloomberg) -- Nigel Travis, chief executive officer of Dunkin’ Brands Group Inc., talks about competition in the fast-food market and the impact of the Affordable Care Act on the company and its franchisees. He speaks with Tom Keene and Sara Eisen on Bloomberg Television's "Surveillance." (Source: Bloomberg)

The world’s largest donut chain has long sold itself as a pit stop.

“America runs on Dunkin’,” goes the company’s slogan, and its customers typically stop in for a pre-work sugar-and-caffeine jolt and then split.

Now, in an effort to get customers to stick around and visit after the morning rush, Dunkin’ Brands Group Inc. (DNKN) has set in motion a cafe-style store redesign. With its earth tones and jazz soundtrack, the new look echoes Starbucks Corp. (SBUX), which has long provided a place for people to hang, sip coffee and surf the Web.

Until recently, the attitude at Dunkin’ was that “life finished” at 11 a.m., Chief Executive Officer Nigel Travis, 63, said in an interview at the company’s headquarters in Canton, Massachusetts. “We’ve attacked that mindset” with the new store designs because Dunkin’ has been losing out on the afternoon consumer, said the U.K.-born executive.

“We haven’t always been conducive to that relaxed environment,” he said. “So soft seating, the ability to watch TV, to listen to appropriate music and just do things slightly slower than you would in the morning is what we think we’ve been missing.”

Dunkin’ is joining an industrywide rush to upgrade restaurants as quick-service joints jostle with boutique coffee shops and such fast-casual chains as Panera Bread Co. (PNRA)

Photographer: Scott Eells/Bloomberg

A customer enters at a Dunkin' Donuts store in New York. Close

A customer enters at a Dunkin' Donuts store in New York.

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Photographer: Scott Eells/Bloomberg

A customer enters at a Dunkin' Donuts store in New York.

Wendy’s Co. is overhauling stores with flat-panel TVs, fireplaces and cushioned seating. Seattle-based Starbucks’ capital expenditures will be about $1.2 billion, of which about two-thirds will go to refurbish and improve cafes and build new stores, in its fiscal 2013, compared with $856.2 million the year before. The coffee seller has said it will renovate about 1,400 U.S. locations in the year ending in September.

Snack-Shop Growth

Dunkin’, which plans to double the number of stores to 15,000 as it pushes west across the U.S., is also looking to retain its position in the fast-growing coffee and snack-shop category. Sales at U.S. coffee shops rose 8 percent last year, while those of limited-service burger eateries increased 5 percent and full-service restaurant revenue advanced 4.5 percent, according to Chicago-based researcher Technomic Inc.

Since a July 2011 IPO, Dunkin’ shares have more than doubled. They rose 1.2 percent to $41.42 at the close in New York. Dunkin’ is trading at a 4.7 percent premium to Starbucks on a price-to-earnings basis, compared with trading at a discount in January. Net income at Dunkin’ Brands may increase 42 percent to $153.7 million this year, while Starbucks profit may rise 20 percent to $1.66 billion in its fiscal 2013, according to analysts’ estimates compiled by Bloomberg.

Second Lowest

Dunkin’ stores could use some improvement, according to a 2012 survey from Nation’s Restaurant News and WD Partners. The chain tied for the second-lowest atmosphere score among beverage and snack shops, coming in below Starbucks, Krispy Kreme Doughnuts Inc. (KKD), Caribou Coffee and Tim Hortons Inc., the report showed. Starbucks received the highest score.

So far, Dunkin’ has opened about 90 of the new stores and plans to have as many as 600 by year-end. Franchisees can choose from four options, which cost between $175,000 and $250,000 for a remodel and between $400,000 and $700,000 to build new. The fanciest can include stained-poplar rails, faux-leather chairs and glass partitions with LED lights that change hues -- bluish light is said to have a calming affect while store owners can switch to red or green for the holidays.

There are four color schemes, including Dark Roast and Cappuccino Blend. The most-expensive version, dubbed Jazz Brew, has dark orange and brown cozy booth seating, as well as hanging light fixtures that lend a soft glow to wall murals printed with words such as “break,” “fresh” and “quality.”

Digital Menu

Getting franchisees to buy in is particularly important for Dunkin’ because 99 percent of its stores are owner operated. “A lot” of owners are volunteering to remodel their stores and more than 1,000 shops are putting in $13,000 digital menu boards, Travis said. Dunkin’ Donuts franchisees are required to remodel their stores at least every 10 years.

“We can compete with Starbucks now,” said Yini Castaneda, manager at a remodeled Dunkin’ Donuts shop in downtown Chicago across the street from a Starbucks store. The location is doing more business in the afternoon -- the store gets about 50 customers during lunchtime now, compared with about 15 before the remodel earlier this year, she said.

Customers “actually do a lot of interviews here now; they sit down and have meetings,” said Castaneda, whose store features a new digital menu board, glass cases displaying croissants, as well as more electric outlets for laptops and smartphones. A sign in the window says “Free Wi-Fi.”

Grazing Americans

Dunkin’ is catering to the increasing number of Americans who graze and eat between meals, said Andy Barish, a San Francisco-based analyst at Jefferies & Co., who advises buying Dunkin’ stock. The chain this month started selling breaded-chicken sandwiches with barbecue sauce and is advertising iced teas and coffees for a discounted 99 cents from 3 p.m. to 6 p.m. to encourage afternoon noshing.

The donut chain has room to sell more afternoon fare. Starbucks’ U.S. stores generate about 50 percent of sales after 11 a.m., compared with 40 percent of sales at Dunkin’ Donuts.

Relaxing music and dimmer lighting changes a restaurant from a grab-and-go place to a destination, said Brian Wansink, professor of marketing at Cornell University in Ithaca, New York, and author of “Slim by Design: Mindless Eating Solutions for Everyday Life.” Dunkin’s new designs may help it pull customers from fancier cafes and restaurants, he said.

“It can compete on the taste of its coffee and the taste of its pastries -- of which a lot of people really, really liked,” he said. “They just didn’t like the atmosphere.”

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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