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Dunkin' Brands turned in positive fourth quarter and year-end results this week, including Q4 same-store sales growth of 3.2 percent at Dunkin' Donuts U.S. The company's revenue for 2012 increased 6.1 percent.
Although Dunkin' Donuts is expanding its net footprint at a rate of about 5 percent, these results were mostly driven by traffic and ticket gains across Dunkin' Donuts' morning and afternoon dayparts.
According to CEO Nigel Travis, Dunkin' Donuts U.S. launched 30 new products in 2012, including breakfast burritos, an Oreo Coolatta, red velvet donuts and mocha and pumpkin K-Cups.
"We also tested more than 40 new products in market tests. Our product pipeline is the longest it's been in our history, and our success rate with the products is very high," Travis said.
He expects a similar pace in 2013, starting with the recent launch of the turkey sausage breakfast sandwich and dark chocolate mocha beverages. Next month, Dunkin' will roll out the Angus steak and egg breakfast sandwich, featuring a new pepper-fried egg.
"I'm more positive than ever about our pipeline. Products are competing with each other to get into restaurants, driving both traffic and ticket," Travis said, adding that the products are high-margin.
To keep up with the rapid introductions, Dunkin' Brands has developed a new product launch process to ensure that franchisees and consumers approve. Before a test is even started, a group of franchisees screen the product to determine if it meets the company's "profitability standards."
Product launch process
Dunkin's chief global marketing and innovation officer John Costello outlined the new product launching process during the company's Q4 earnings call Thursday.
Product ideas come from consumer research, franchisee input and the company's culinary team. Once an idea is pitched, it is put through "extensive concept testing," as well as sensory testing.
"We've also built an in-house proprietary new product model. Once it makes it through that, we involve franchisees in the process and our own operations folks," Costello said.
If the product is still on the table, it then goes into alpha and beta tests, which Costello said are primarily designed to figure out the operational needs for its introduction. Finally, the product goes into a market test to quantify its sales potential before being rolled out more broadly.
The length of time an LTO runs depends on the level of sales.
"If a product is selling very well, like turkey sausage, we generally have the ability to increase our supply and extend the time it's available," Costello said. "It's a highly disciplined process but it doesn't slow us down."
Dunkin' facilitates these rollouts on both a national and regional level. For example, its sweet iced tea was only introduced in the Southeast region.
Paul Carbone, chief financial officer, said fourth quarter comp sales growth was especially driven by strong total coffee sales led by flavored hot and iced espresso beverages, as well as momentum from the core breakfast sandwich platform.
"Our bakery sandwiches continue to grow at a rapid pace and have been instrumental in driving our overall afternoon growth," Carbone said.
Additionally, Dunkin's fledgling K-Cup program generated 30 percent comp sales for the category during Q4. The company introduced two LTO flavors during the period, peppermint mocha and hot cocoa, and also upgraded the retail K-Cup merchandiser in stores during the holiday shopping season.
"Our K-Cup LTOS were very strong and cannibalized each other and core K-Cups less, so they generated stronger incremental growth," Costello said.
Travis added that with the increase in K-Cup brewers, the company's K-Cup line should continue to achieve growth.
Another major highlight from the Q4 call was Dunkin's growth in the mobile space following the August launch of its app.
Travis believes the company's comps will be driven this year and beyond by its mobile and loyalty plans. His goal is to become the mobile technology leader in the QSR segment in the next couple of years.
"We want to enable an entirely new level of speed and convenience and engage (customers) on a much deeper level to further distinguish our brand from the competition. I view mobile as a game changer," he said.
Dunkin's new app generated more than 1 million downloads by the end of the year, and the company hopes to double that in 2013. In November, the company began sending weekly mobile offers through the app, and expects the initiative to accelerate this year, in addition to geographically targeted offers.
Dunkin' Donuts will also roll out an enhanced loyalty program this year. Travis skimped on details but said it will be robust and will focus on "driving changes in consumer behavior in frequency, ticket, loyalty" and payments.
"The real power of mobile and loyalty is the one-to-one marketing they enable. I believe they will be significant drivers of our growth in the next few years," Travis said.
Costello added that Dunkin's mobile approach will focus on ease of payment, store locators, the ability to send e-gifts, the ability to store multiple payment sources within one card, and a fast in-store experience.
"What we're seeing is that mobile users do, in fact, spend more per transaction than non-mobile users," Costello added.
Supporting the acceleration of mobile and loyalty platforms is Dunkin's new Radiant POS technology that began deployment last year. The system now exists in a "vast majority" of stores.
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