Markets & Finance

Dunkin' Donuts' Cheap Chic


Dunkin' Donuts' new multi-million dollar ad campaign, which launched on Apr. 10, reminds one of Wal-Mart (WMT) in more ways than one. An ad features a young woman wearing jeans and a yellow t-shirt (similar to the Wal-Mart's trademark yellow) who chugs on a Dunkin' Donut iced latte, does a somersault, and climbs up a tree to fetch her 8-year-old, who is stuck on a branch.

"We're emotionally connecting with everyday Americans celebrating life," says John Gilbert, Dunkin' Donuts vice-president of marketing. Indeed, his reference sounds very much like the "everyday" low prices message Wal-Mart promises its "everyday" customers.

This is more than just coincidence. Dunkin' Donuts hopes to capitalize on the same taste for high quality at low prices that has led to the success of Wal-Mart and other retailers. It's the shopping revolution that's overtaken America in the past five years where even upscale customers are looking for more value.

VALUE EXPLOSION. Besides Wal-Mart's high-profile success, there's been an explosion nationwide of low-price stores, such as Family Dollar Stores (FDO), Dollar Tree Stores (DLTR), and Dollar General (DG). A quarter of the people poking through the aisles of these Dollar stores earn more than $100,000.

"There's been an extraordinary shift in terms of people's expectations regarding quality and taste and at the same time they have become wise shoppers who look for quality and value, which is why the rich shop at Wal-Mart for their groceries," says Robert Passikoff, president of Brand Keys, a brand consulting firm. "The same is true for coffee drinkers."

Starbucks (SBUX) may have introduced many Americans to gourmet coffee, but it could be Dunkin' Donuts that will benefit from the nation's sharper palates. "We provide our customers with the sweet spot of coffee, where value meets quality," says Dunkin' Donuts' Gilbert. Already, Dunkin' Donuts is more about coffee than doughnuts. Beverages account for nearly 63% of sales, while doughnuts make up only about 17% of Dunkin' Donuts' sales.

JAVA AS DESSERT. The doughnut chain features flavors such as French vanilla, cinnamon spice, and hazelnut, as well as whipped cream to top off its java. "The attraction is that Dunkin' Donuts has made coffee a dessert item," says Marcia Mogelonsky, senior research analyst at Mintel International, a market research firm.

The current ad campaign is just the beginning of Dunkin' Donuts ambitions. The company plans to triple in size over the next 10 years, from its current 4,953 stores in the U.S. This year, it plans to expand in Southern and Midwestern markets, including Cleveland, Charlotte, Cincinnati, Nashville, Jacksonville, and Tampa.

It also marks a significant repositioning effort in the company's 55-year history, a sign of fresh infusion of cash and a growth strategy after being acquired last month. The private equity consortium that bought the chain for $2.4 billion included Bain Capital Partners, The Carlyle Group, and Thomas H. Lee Partners (see BW Online, 12/20/05, "Of Donuts, Debt, and Deals").

NO LOUNGE. Still, Dunkin' Donuts isn't planning to transform its stores to resemble Starbucks. It's aiming to update its look and make its storefronts more modern, with sleeker lines. But don't expect the same kind of lounge seating or setting as Starbucks, where people socialize.

"We are not interested in a Starbucks-like ambience," says Dunkin's Gilbert. "The drive-through is the centerpiece of our expansion. We are interested in speed of service vs. the sit and stay experience of Starbucks." (See BW Online, 3/21/06, "A Taste for Tim Hortons").

Indeed, Dunkin' Donuts hopes that it will grab this new wave of customers who not only have more discriminating taste-buds, but are conscious of value. It won't be easy, though. Already the market is getting crowded. Just last month, on Mar. 6, McDonald's introduced a premium roast coffee at its 13,000 locations, a move that followed the installation of gourmet coffee stations at 7-Eleven's 5,800 convenience stores.

But Robert S. Goldin, executive vice-president at food consultant Technomic in Chicago, is bullish about the trend. "People are demanding bolder flavors and coffee has defied gravity when it comes to growth," says Goldin (see BW Online, 3/1/06, Mickey D's New Brew").

TASTE SHIFT. Also, customer-behavior trends might help Dunkin' Donuts. Brand consultant Passikoff's research shows that, in the past, consumers ranked "customer service" higher than "quality and taste." This year, Pasikoff saw that "customer service" had moved down in importance, while "quality and taste" moved up. "At the same time, customer loyalty to Dunkin' Donuts has gone up," says Passikoff.

Indeed, in a survey conducted recently by Greenfield Online for BusinessWeek, 65% of respondents said they would consider cutting back on pricey café coffee and specialty brews due to the cost. The survey also found that 34% of the 1,096 respondents go to premium places like Starbucks when they get coffee outside the home, while 29% favor lower-price outlets such as McDonalds or Dunkin' Donuts (see BW, 10/10/05 "Coffee Drinkers and Their Habit").

Perhaps the gap between Dunkin' Donuts and Starbucks isn't that wide after all. And Dunkin' Donuts is working to narrow it with its expansion and current ad campaign. The tagline may be the company's ultimate goal: "America Runs on Dunkin'."


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