Dunkin Brands Group, Inc.

Intro Dunkin Brands Group, Inc. went public on July 27, 2011 at an offering price of $19.00 per share. Over a year later Dunkin trades around $29.13. This represents an increase of 52.63 % since the company went public. After evaluating the company and preparing a DCF model we found the price to be valued at only $24.17. Dunkin Brands also has a price to earnings ratio of 64.88. These indicators signal a company that is vastly overpriced, however its explosive growth prospects might somewhat justify the high multiples. What is nerve wracking is the lack of financial records stretching back further in time, due to the recent offering of shares.

Macroeconomic and Industry Analysis Dunkin’ Brands Group headquartered in Canton, Massachusetts consists of two of America’s most recognizable brands: Dunkin Donuts and Baskin-Robbins. The two brands both have a rich history dating back to the 1940s when Bill Rosenberg founded his first restaurant, subsequently renamed Dunkin’ Donuts, and Burt Baskin and Irv Robbins each founded a chain of ice cream shops that eventually combined to form Baskin-Robbins. Incorporated on November 22, 2005, the combined companies were renamed Dunkin’ Brands Group, Inc. The company went public on July 27, 2011 at an offering $19.00 per share. Dunkin’s plan was to use the money to pay down debt and expand the chain. Upon the completion of the IPO, the common stock became listed on the NASDAQ Global Select Market under the symbol “DNKN.” Dunkin’ Brands Group, Inc. owns, operates, and franchises restaurants, serving quick service coffee, baked goods, and ice cream. As of December 31, 2011, the Dunkin’ Brands franchise consisted of 10,083 Dunkin Donut restaurants and 6,711 Baskin-Robbins establishments, with 16,800 points of distribution in 58 countries. Approximately 60% of Dunkin Donuts franchisee reported sales for fiscal 2011 came from coffee and other beverage sales. The Dunkin’ Donuts franchise is heavily concentrated on the East Coast and on the international side; Baskin Robbins possesses a large presence. Westward expansion of the Dunkin’ Donuts brand represents the primary growth opportunity for the company moving forward. International growth opportunities for both brands exist, but adapting to local tastes is important and challenging. As the company operates in a highly competitive segment of the food industry brand recognition, product quality, customer service, and competitive pricing are essential to building and maintaining market share. While the firm has high operating margins, high interest expenses have tempered net margins. The company’s performance after the recent recession may have been okay, many of its largest rivalries have illustrated more robust financial health. In particular, the Dunkin Brand’s substantial debt may hamper its ambitions to expand profitable if access to affordable financing is diminished. The company’s heavy debt burden and relative illiquidity also increases its vulnerability to adverse changes in macroeconomic conditions. In order to sustain growth, mitigate long-term risks, and provide financial flexibility, Dunkin Brands must begin to significantly pay down its debt. Internal Rivalry At the center of the five forces model is industry competition arising from the rivalries among existing firms. Within the coffee and snack industry many large competitors already exist. Included in these are Peet’s Coffee, McDonald’s McCafe, and more, with the most significant threat coming form Starbuck’s. A method in which Starbuck’s and other rivals compete on quality is through the environment and atmosphere presented in the cafes. While Dunkin Donuts offers a quick stop purchase experience, Starbucks creates an atmosphere in which customers feel comfortable, relaxed, tend to stay for conversation or do work. This may lead to a more pleasant customer experience, but it may also contribute to higher costs and be outside of Dunkin Donut’s strategy. If the target market is not looking for a sit down experience, but rather a bargain price, on-the-go experience, this may be a more successful strategy. The costs for a customer to switch from Dunkin Donuts to a rival or vice verse is relatively low, however customer loyalty is vital in this industry and Dunkin Donuts has been considered to have one of the highest customer loyalty. Not only does Dunkin Donut have to worry about large competitors, but also small local ones. These small stores may be able to control quality more efficiently and have more agility in providing a product suited to the local markets in which they are within. Barriers to Entry The second force in Porter's model, which will be applied to the analysis of the industry environment in which Dunkin Brands was incubated, is the potential for new entrants. The primary deterrents to new entrants into any industry are the barriers to entry. The higher the barriers to entry are within any given industry the smaller the threat of new entrants to that industry. The entry barrier for the coffee industry is relatively low, even for premium coffee vendors like Starbucks. Any large and well-funded company where capital is not a problem could be potential entrants. There may be a first mover advantage—early entry allows time to establish brand recognition and foster customers’ trust. In regards to westward expansion it is essential DD thinks of this advantage. Threat of Substitutes Another force, which acts upon an organization and is included in Porter’s five forces model is the threat of substitute products. The primary substitute products for coffee are the caffeinated soft drinks and of course tea. In addition, a substitute for coffee bought in a Dunkin Donuts is store-bought coffee or snacks. Both Starbucks and Dunkin Donuts offer store-bought alternatives, although the profit margin on these products is lower so they can be seen as a substitute that poses a threat to profits. Supplier Power As with any commodity suppliers, the bargaining power of suppliers to the specialty coffee industry would be exerted by either threatening to raise the price of the Arabica beans which are used in the production of dark roasted coffee, or by a threat of reduction in the quality or quantity of the coffee beans themselves. However due to the importance of Dunkin Donut’s business and the possibility of switching suppliers bargaining power for the coffee bean suppliers is low. Similarly supplies of paper and plastic products also have little bargaining power due to the large amount of alternative sources Dunkin Donuts could draw from. There is indeed more bargaining power for suppliers of technological innovations such as the automated coffee machines, latte and espresso machines, etc., because there are not that many of them as there are for coffee beans. Buyer Power The force of the buyer’s bargaining power is proportional to the ability of buyers to force down prices, bargain for higher-quality products or more services, and pit rival organizations against one another. If buyers are price sensitive they may have more power especially where one of Dunkin Donuts’ strategy is maintaining cheap prices. For example, McDonalds came out with new cold coffee drinks while already having a breakfast menu and Starbucks is already in competition with Dunkin Donuts with coffee. The way Dunkin Donuts is reducing the buyer power is by offering certain perks to customers such as a Dunkin Donuts’ coffee subscription. With this subscription that can be done online the customers will get 20% off of the everyday prices. In this sense Dunkin Donuts is not too bad with this power but still needs more perks because this industry is still booming.

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