Thursday, October 20, 2016
Does America truly run – or just jog – on Dunkin'? Consumers are paying more for a cup of joe, even though they're buying less coffee overall.
Does America truly run – or just jog – on Dunkin'?
Consumers are paying more for a cup of joe, even though they're buying less coffee overall.
While Dunkin’ Donuts customers drank less coffee in the third quarter, their tastes become more refined (and expensive).
Double-digit growth of lattes and cold-brewed iced coffees buoyed the chain’s profits, even as its total number of same-store sales declined. This unexpected increase in revenue also offset slumping sales at its Baskin-Robbins ice cream chain.
Dunkin’s mixed success in the third quarter is a tale of two chains. Its increased revenue in coffee sales is further evidence American consumers have developed a taste for more high-end coffee. This is, in part, thanks to the Starbucks experience. But Baskin-Robbins and other restaurants face increased competition from the eat-in option. Low grocery prices and meal-kit delivery services like Blue Apron have made it cheaper and easier to eat at home.
Dunkin’ reported a 14 percent increase in profits in the third quarter, according to The Wall Street Journal. Its profits rose to $52.7 million, compared to $46.2 million in the third quarter of the previous year.
"Our Dunkin' Donuts US business delivered solid comps for the quarter, fueled by record-breaking beverage sales, with double-digit growth in the espresso and iced coffee categories," said chief executive Nigel Travis, according to The Street.
This increase came even as the coffee giant was hurt by another quarter of weak foot traffic, according to The Street. Its net sales fell 1.3 percent from a year ago to $207.1 million. Analysts anticipated its net sales would be $214.8 million.
Dunkin’s net revenue and sales are consistent with consumer trends. The number of cups of coffee Americans consumed in 2016 decreased slightly, according to the National Coffee Association. But revenue increased, showing consumers are willing to pay more for high-quality coffee.
According to the coffee trade association, this is because the market for specialty coffee has grown in the past eight years, as more consumers develop a liking for high-end coffees such as espressos, macchiatos, and nitro cold brews. The consumption of gourmet coffee drinks has increased from 13 to 36 percent among 18- to 24-year-olds and from 19 to 41 percent among 25- to 39-year-olds, according to the trade association.
Marketing experts have attributed this increase in more gourmet coffee tastes (and the higher price that comes with it) to the likes of Starbucks, as Husna Haq wrote for The Christian Science Monitor in 2014.
Starbucks is one of the most powerful brands in the country, the Sauvignon Blanc of coffee. It has successfully made a basic commodity a luxury, a regular indulgence that customers are happy to treat themselves to, even at $4 per cup.
The pricey coffee is also part of a routine, wrote Ms. Haq.
"[I]t’s hard to break a routine,” Karen Mishra, professor of marketing at Meredith College School of Business, told Haq.
Dunkin’ has tapped into this routine. Dunkin’ doesn’t offer the Starbucks’ ambience, with couches, luxury food, and ambient jazz music. But it has capitalized on American’s increasing willingness to pay more for better brew.
Dunkin’s ice cream have dropped off, however, in part because it has fallen victim to a changing restaurant market. Same-store sales at Baskin-Robbins fell 0.9 percent, as growth in sales of ice cream cups and cones didn’t offset sales drops in iced beverages and sundaes, according to The Street. American Baskin-Robbins, then, continues a trend of declining popularity in the face of the frozen yogurt craze, upstart chains, and low grocery market prices.
Deflating grocery store prices have particularly hurt Baskin-Robbins, as well as other casual-dining spots. Commodity prices for grocery stories have fallen for nearly 10 months, suggesting pressures on restaurants are only beginning to arrive, according to Nation’s Restaurant News. This has encouraged customers to cook more at home.
Baskin-Robbins has tried to counter these forces before by expanding its flavors to grocery store frozen aisles, as well as testing out delivery service. In 2014, Baskin-Robbins announced it would sell ice cream and other frozen treats in supermarkets and grocery stores, according to Entrepreneur. It has also started to test out ice-cream delivery services in Los Angeles and Chicago, according Mr. Travis, Dunkin’s chief executive, said in September.
“In the U.K., everyone’s talking about delivery. It has a very big future in the restaurant industry, not only in [quick-service restaurants], but in casual dining and also very high-end restaurants,” said Travis. “If you go to London, just about every restaurant has delivery now.”
These moves have Dunkin' making optimistic statements about the future. The company says it sees same-store sales at its coffee chain rising as much as 2 percent this year and rising slightly at Baskin-Robbins, too, a reduction from a previous estimate for 1 percent to 3 percent growth.