Dunkin' CFO: Beverages are the 'holy grail' of profitability

Dunkin' Donuts, the flagship brand in the Dunkin' Brands portfolio, has shifted its focus from donuts to beverages in the past 10 years for a reason: higher margins.

And now, the company's product pipeline has "never been deeper" and its beverage marketing focus has never been stronger, according to CFO Paul Carbone, who spoke Tuesday at the Bank of America Consumer & Retail Conference in New York City.

"We all loved Fred the Baker, but we're a beverage company. It's not going to be time to make the donuts anymore," he said. "Beverages are the holy grail of profitability."

What's also helped the Dunkin' Donuts business as of late is its breakfast sandwiches, which have margins "slightly below beverages and significantly above bakery."

Dunkin' gets a strong lift from its 12 limited-time offers a year, as well. For 2013 thus far, the brand has launched the turkey sausage breakfast sandwich (January), the heart-shaped brownie batter donuts (February) and the Angus steak wrap (March). The LTO strategy can be traced back to 1996, when the bagel breakfast sandwich was first introduced. In 2004, the chain came out with iced lattes. In 2008, it introduced DDSMART, then Wake-Up Wraps, then K-Cups and the Big 'n Toasted Sandwich in 2011.

"We have perfected this strategy of 12 LTOs a year. We have a very deep pipeline; it's never been deeper, and it's both new products and a twist on older products," Carbone said. "In 2010, we launched the waffle breakfast sandwich. At that time it was our best-selling LTO in history. Today it's not even in the top five. We just keep launching newer items that take this (LTO strategy) to the next level."

Marketing and in-store support

As part of its higher margin item strategy, Dunkin' Donuts has upped its national media attention to beverages. So much so, in fact, the company has had a TV presence in California since 2010, but won't open its first unit in the state until 2015.

In already existing and new units, Dunkin' has even changed in-store queues to highlight beverages, featuring beverage photos on its digital menu boards, training managers to offer beverage samples as opposed to donuts, bringing beverages to nearby businesses when a new store opens, etc.

"The top line has gone up incrementally because of the queues and talking about beverages," Carbone said.

Branding Dunkin' Donuts as a beverage destination is one of the challenges the company has in expanding internationally. Carbone said it's still often thought of as a donut destination in most global markets. 

Mobile loyalty program on deck

Carbone also discussed Dunkin's new mobile app, introduced in September, and plans for its next phase. The company would not have been able to have its specific app if it hadn't unified its POS system across franchised locations two years ago.

The app hit more than 1 million downloads by the end of the year, has sped up service times and has boosted one-on-one marketing efforts with location-based offers.

"So, offers that come through here in New York will be different than if you're in Vegas. It allows us to talk to the consumer more and what that has done is set us up for loyalty," Carbone said.

Mobile loyalty is a 2013 project for Dunkin' and will have two focuses: payment migration and behavior migration.

Payment migration, Carbone said, is moving people from Visa and MasterCard to My Dunkin' Card.

"What that does is lowers transaction costs and improves franchisee profitability and (the company gets) all the data," he added.

Behavior migration is using all of that data for marketing and promotions.

"If I come in every day and I buy a breakfast sandwich, how do I do an offer through one-on-one marketing for a beverage? Or if someone only buys a beverage, how do I do an offer for a breakfast sandwich?" Carbone said.

The loyalty effort has both opportunities and challenges for Dunkin' because it's a franchised model. While company-owned Starbucks, for example, can offer a $5 deal if you join its loyalty program, Dunkin' doesn't have that ability.

"We have to figure out that customer acquisition piece in a franchise," Carbone said. "It's probably why there's not a lot of franchise businesses that do (mobile) loyalty programs. But we are actively working on it and we'll launch something this year."

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