Dunkin Brands Group Inc (DNKN): The Economics of Doughnuts and Coffee

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National Doughnut Day celebrations are over. But investors can still celebrate with Dunkin Brands Group Inc (NASDAQ:DNKN), the parent of Dunkin’ Donuts and Baskin Robbins, as the stock has almost doubled since its IPO in 2011 and is still moving up. And there is a lot more that is happening, especially at Dunkin’ Donuts, which can bring more upside going forward.

Dunkin Brands Group Inc (NASDAQ:DNKN)

It is looking at store expansions, restaurant makeovers, national menu roll-outs, and more. These initiatives can change Dunkin’s game considerably, and help it achieve the double-digit long-term growth that it has been eyeing.

The expansion strategy

Unlike most quick service chains, Dunkin Brands Group Inc (NASDAQ:DNKN) is more focused on domestic stores expansion. The company opened 78 Dunkin’ Donuts outlets in the U.S. during the first quarter, the highest rate in the last five years. It ultimately wants to double the store count of this chain to 15,000 over the next 20 years. While that is too far off to figure in any consideration, it does indicate the company’s intent.

Presently, Dunkin’ will add a whole many Dunkin Brands Group Inc (NASDAQ:DNKN) stores across the length of the West Coast. It does not make sense that California has just one store from the chain. So, around 1,000 store additions are on the cards starting with 150 in Southern California. Dunkin’ will also focus on 12 other states that do not have the chain’s presence.

The chain’s international expansion is at a much slower pace than domestically, although China remains high on the agenda. The company intends to triple the count of Dunkin Brands Group Inc (NASDAQ:DNKN) stores in China over the next ten years. Other key markets are South Korea, Russia, and India. Currently, the chain has 3,100 odd locations in 31 foreign countries.

Rival Krispy Kreme Doughnuts (NYSE:KKD) is following an exactly opposite strategy. Its current expansion drive is focused overseas rather than in domestic markets. It has only 146 U.S. stores out of its total 678 locations. It is planning to increase its store count to 1,300 by 2017 with 900 overseas locations. India has the maximum development agreements for new store openings with 114 commitments.

Starbucks Corporation (NASDAQ:SBUX) is also focusing on international store expansion. But then, it already has a formidable presence at home with almost two-thirds of its 18,000+ stores in the U.S. So, it is trying to improve sales from its existing domestic stores while spending its capital expenditure budget on fast growing Asian markets. It plans to open as many as 1,500 Starbucks stores in 70 cities in China alone by 2015.

The fact that the rival chains are less focused on store additions in domestic markets is a boon for Dunkin’.

Driving demand

Dunkin’ is equally focused on growing same store sales of its existing outlets. Although Dunkin’ Donuts saw a moderate 1.7% increase in U.S. same store sales in the first quarter, it is taking some big steps to improve this.

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