If Dunkin’ Donuts’ famous ad featuring Fred the Baker were made today, his catchphrase wouldn’t be “Time to make the donuts.” It’d be more like “Time to make the Hot Chocolate Coolattas and iced lattes.”
Last week, Dunkin’ Donuts CFO Paul Carbone acknowledged a fundamental shift in company strategy that’s been happening internally for years. “We’re a beverage company,” he said, while also putting to rest any hopes that Fred the Baker would be brought out of retirement. That’s because for Dunkin’, it’s not merely about making the donuts anymore. In 2012, espressos, Dunkacinnos, sweet teas, and its two dozen other beverages accounted for 58% of all sales at Dunkin’ Donuts locations in the U.S.
“Donuts are still a significant part of their business,” says Andy Barish, a restaurant analyst for Jefferies & Co. “But at the end of the day, it’s a coffee company.”
Dunkin’ Donuts shift away from donuts toward coffee, and lately, breakfast sandwiches, has been occurring for almost two decades, even when Fred the Baker was still employed. But only recently has Dunkin’ Donuts seemed comfortable saying that the product featured in its name is now a secondary menu item.
The transition began around 1995, when Dunkin’ Donuts launched its line of flavored coffees after Starbucks opened its first location in Boston – where Dunkin’s headquarters is located. But the biggest shift occurred in the mid-2000s. By then, coffee was already dominating Dunkin’s sales, so in 2006, the company launched what it called “the most significant repositioning effort in the company’s 55-year history.” The extensive advertising campaign featured the new slogan “America Runs on Dunkin’,” a sharp break from older slogans like “America’s Donut Shoppe” or “Always Dunkin’.” As Fast Company put it back then, the company was positioning its coffee as “fuel” rather than a lifestyle choice a la Starbucks.
Competing with Howard Schultz’s ever-growing coffee chain has certainly pushed Dunkin’ to focus on beverages, but changing consumer preferences toward specialty items like flavored and iced coffees have also had an effect. And since the recession, many consumers have rationalized paying a dollar or two more on coffee as an “affordable indulgence,” says Darren Tristano, executive vice president at Technomic, a food industry analysis firm.
For years, Tristano says Technomic had an entire “Donut” category, dominated heavily by Dunkin’ Donuts and Krispy Kreme, alongside Bakery/Café and Coffeeshop categories. But in 2012, Technomic changed its categorization of restaurants to reflect shifts in the industry. Today, the Donut category is gone. Instead, there’s Coffee/Cafes – where Starbucks, Tim Horton’s, and Dunkin’ now belong — along with Bakery/Cafes, which includes restaurants like Panera Bread.
Getting rid of its donut category also reflects Americans’ changing preferences toward seemingly healthier items than donuts, says Tristano. But the biggest driver for the ever-expanding beverage category is its incredibly high profit margin. Dunkin’ Donuts’ coffee margins have been estimated at an astonishing 95%.
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“They’re definitely the highest margin category on the menu,” says Barish of Jefferies & Co.’s.
The growing popularity of coffee and coffee-like drinks over the last couple decades can be seen at almost every so-called quick-service restaurant. McDonald’s, for example, released its McCafe coffees in the U.S. in May 2009, and since, the company has seen several quarters of double-digit profit gains it largely attributes to its coffee business. Soon after, West Coast chain Jack in the Box began offering premium coffees, and just last February, Burger King released its new line of coffees through a partnership with Seattle’s Best Coffee. According to a 2010 report by fastfoodmarketing.org, beverages now make up a third of fast food revenues.
To visually represent Dunkin’s focus on coffee, the chain is redesigning its stores using four new design themes, including “Original Blend,” “Cappuccino Blend,” “Dark Roast,” and “Jazz Brew” – many of which either feature coffee or coffee beans in its artwork.
As Dunkin’ plans a major push west of the Mississippi River over the next few years, however, the biggest new driver of growth may be from something besides coffee. This summer, Dunkin’ released the Glazed Donut Breakfast Sandwich – a mashup of a donut and a bacon, egg, and cheese sandwich. It’s just one of several new breakfast items the chain now offers, including the Big N’ Toasted, Egg White Flatbreads, and a Wake-Up Wrap.
And the motivation for offering breakfast sandwiches? It’s quite similar to what’s driven beverage expansion over the last several years, says Barish: “The profit margins aren’t as high as the coffee business, but they’re certainly a nice addition.”