Chipotle takes on craft beer with addition of 5 Rabbit

January 14, 2013

CT  biz-5-rabbits-cover 1030 kmFor years, Chicago’s Chipotle restaurants have offered the beers you might expect at a Mexican fast-food place, including Corona, Pacifico and, to satisfy the most American of palates, Miller Lite.

However, in an experiment that could reveal just how far craft beer has moved into the mainstream, a small Chicago craft brewery with a Latin theme is being added to the roster.

Fifteen Chicago Chipotles will carry two beers from 5 Rabbit brewery in the coming week: a simple golden ale called 5 Rabbit that is reminiscent of Corona, and 5 Vulture, a dark ale brewed with chiles and spices that is akin to Negra Modelo.

If sales are brisk, Chipotle said, it could expand 5 Rabbit to its approximately 75 Chicagoland stores, as well as add other craft brands. Chipotle’s foray into craft beer underscores a growing mainstream interest in the craft industry that was perhaps best highlighted by Anheuser-Busch’s 2010 acquisition of Goose Island.

That sale came more than 20 years after Goose Island started as a small brew pub on Clybourn Avenue and spent years building its name and reputation. With interest and sales in craft beer booming, small breweries needn’t wait so long to jump into the mainstream anymore.

 Darren Tristano, executive vice president with Chicago-based research firm Technomic, Inc., said that’s because matchups such as 5 Rabbit and Chipotle have become easy wins for both parties. For 5 Rabbit, the deal means an expanded audience, while Chipotle solidifies its position as an upscale casual restaurant with an edgy product, Tristano said.

 “Craft beer has become a pretty big driver, and especially for a more affluent crowd,” he said. “It’s very well in their customer base to add these beverages.”

Chipotle and 5 Rabbit are a natural fit in several ways: Founded by a Mexican and Costa Rican who moved to Chicago, 5 Rabbit has positioned itself as the nation’s first Latin-themed craft brewery. For the last 18 months, its beer has been made under contract at six breweries in Illinois, Wisconsin and Michigan. But sales were so brisk that 5 Rabbit sped up construction of its brewery in Bedford Park, which should be in production by year’s end. It produced about 2,000 barrels in its first year and aims to make about 6,000 in 2013.

Chipotle will present the small brewery with its largest and most mainstream audience yet. With the added production from the new facility, brewery co-founder Isaac Showaki said they will have no problem keeping up with demand.

Showaki said he spent eight months trying to get the deal done, highlighted by a meeting in mid-July with a company executive at a downtown Chipotle for which Showaki arrived with bottles of 5 Rabbit to pair with the food. He said he was confident going into the meeting — “They spend all this money on liquor licenses, but the stuff on the shelves is boring. Why not bring in more exciting stuff?” — but also amazed to get the attention of a large chain.

“At a place like McDonald’s, it would be almost impossible,” Showaki said. “The first people they would talk to is Anheuser-Busch and Miller.”

That said, Showaki said, “They want to see results. It’s a go, but it’s a trial period.”

Scott Robinson, a Chipotle marketing strategist for national events, said Chipotle restaurants have carried regional craft beer, but that 5 Rabbit will be the first in Chicago.

“I was impressed with their non-traditional approach of taking these Mexican-style beers and adding a whole lot of personality to them,” Robinson said. “We think the downtown Chicago folks will recognize the beers, and that it will bring some excitement.”

Julia Herz, of the Colorado-based Brewers Association, noted that “in the recent past most craft brewers have not had the interest of the chains.”

“It’s a wonderful sign of the times that businesses update their models to include local brands beyond the mass produced,” she said by email.

Showaki said he has no concerns about being perceived as a “sellout” for taking his beer mainstream.

“To go mainstream is nothing negative,” he said. “We embrace it. The more people that enjoy your product, the better for everyone.”

Laura Blasingame, owner of The Map Room who was an early champion of 5 Rabbit, agreed.

“It says a lot when a big firm like Chipotle knows well enough to serve a good beer with its supposedly good food,” she said. “I think it says they’re waking up and the American palate is changing.”

Blasingame said she has no concerns about pouring the same product available at a fast-food Mexican restaurant. In fact, she said, a keg of 5 Rabbit beer sits in The Map Room cooler, waiting to be tapped.


National Restaurant Association Partners with Technomic to Bring Adult Beverage Expertise to Members

December 21, 2012

To strengthen its commitment to providing business-enhancing resources to its members, the National Restaurant Association (NRA) has partnered with Technomic to provide actionable information on adult beverages and restaurant bar programs.
“Wine, spirits and beer can be a profitable part of a restaurant’s offerings. Having the latest information at their fingertips will help operators maximize profitability and provide guests a selection of adult beverages to meet their increasingly sophisticated palates,” said Dave Matthews, executive vice president of Innovation & Membership Advancement for the National Restaurant Association. “Technomic is a recognized leader in the adult beverage information space, and we are confident that our strategic partnership will provide ready-to-implement expert advice and insights to help restaurants succeed.”

“Adult beverage is a dynamic element in the hospitality business, now and for the foreseeable future, and numerous opportunities exist for operators and suppliers to build sales and revenue,” said Darren Tristano, executive vice president, Technomic. “We are pleased to bring our adult beverage information and expertise to NRA members and contribute to their success in 2013 and beyond.”

Technomic will provide content for the NRA’s Restaurant.org website and e-newsletters on adult beverage topics to help NRA members strategically plan their bar programs. Additional content will be provided in the form of subject matter experts for webinars and seminars at the 2013 International Wine, Spirits & Beer Event, to be held May 19-20, in conjunction with NRA Show 2013 in Chicago. In addition, Technomic provided a special adult beverage report that was included in the NRA’s .

Technomic is a leading research and consulting firm serving the food and foodservice industries. The company has over 40 years of experience and specializes in benchmarking studies, customer satisfaction and need assessments, organization effectiveness programs and trade channel research.

Founded in 1919, the National Restaurant Association is the leading business association for the restaurant industry, which comprises 980,000 restaurant and foodservice outlets and a workforce of more than 13 million employees. We represent the industry in Washington, D.C., and advocate on its behalf. We operate the industry’s largest trade show (NRA Show May 18-21, 2013, in Chicago); leading food safety training and certification program (ServSafe); unique career-building high school program (the NRAEF’s ProStart, including the National ProStart Invitational April 19-21, 2013, in Baltimore, Md.); as well as the Kids LiveWell program promoting healthful kids’ menu options.


Seattle’s Best Rolls

November 30, 2012

Copyright 2012, The Seattle Times Company. All Rights Reserved. Distributed by NewsBank Inc.2019676824

No, there won’t be bikinis.

In Seattle’s Best Coffee’s latest divergence from corporate parent Starbucks, every new location will be a 523-square-foot drive-thru-only cafe.

Unlike at so many Northwest drive-thrus, though, the baristas won’t be in bikinis.

The first drive-thru, slightly larger than 523 square feet, debuts Wednesday just off the sidewalk in front of SoDo Gateway Shopping Center at 2990 Fourth Ave. S.

The chain expects to open thousands of little red stores from which baristas will dispense brewed coffee, sweet flavored lattes, handheld pies and breakfast sandwiches that resemble Egg McMuffins.

If all goes according to plan, the tiny cafes will be situated mostly in empty suburban spaces, such as corners of Best Buy parking lots — affordable real estate that can be leased from a handful of corporate chains rather than lots of different landlords.

The stores will be owned by franchisees who can afford multiple locations, with launch costs at the low end of Seattle’s Best’s current startup range of $265,000 for a kiosk to $442,000 for a full cafe.

Seattle’s Best is aiming for busy customers who do not have time to noodle whether they want one shot of espresso or two. They barely have time to swing by a cafe, and often pick up their brew while getting gas or breakfast at a fast-food drive-thru, said Jim McDermet, who runs the chain for Starbucks.

“A lot of people out there don’t have cafe lifestyles,” he said. “There are people working two jobs or going to school at night, and coffee helps get them through the day, but they’ve had to choose coffee that’s not really good.”

If that sounds like a veiled shot at McDonald’s, consider that the burger giant has greatly expanded its coffee offerings in recent years and is making a big play for Starbucks’ market.

McDermet said there was some question whether Seattle’s Best should even have its own retail presence. Most of its stores disappeared during the past few years, along with the Borders Books locations that housed them; it has only about 100 cafes left.

Seattle’s Best’s revenue, which the company doesn’t disclose, is divided between grocery-store sales of packaged coffee and brewed-coffee sales at other retailers.

“We wouldn’t bother (with cafes) if we were going to re-create what Starbucks does,” McDermet said.

Seattle’s Best was founded in the late ’60s, shortly before Starbucks started, but it mostly languished after Starbucks bought it in 2003. Then a companywide shake-up sparked by the recession revived Seattle’s Best, which in recent years has gone where Starbucks would not.

The drive-thru strategy clearly is not a Starbucks play. In fact, like much of what Seattle’s Best has done in recent years, it violates multiple tenets dear to the parent ship.

•Seattle’s Best Coffee is served in tens of thousands of Subway, Burger King and Chevron convenience-store locations. Starbucks CEO Howard Schultz, by contrast, has often said Starbucks is not a fast-food company, and his chain rejected an advance from McDonald’s years ago when the fast-food chain was getting into fancy coffee.

•In recent years, Seattle’s Best began numbering its grocery offerings one through five to make its choices easy to understand for customers upgrading from Folgers. Starbucks’ coffees have names like Caffe Verona and Organic Yukon Blend.

•Seattle’s Best is big into coffee vending machines; Starbucks uses them in other countries, but not the United States.

•Seattle’s Best uses the franchise system and plans to continue with the concept. Starbucks never franchises; it sometimes licenses to grocery stores, airport vendors and others.

•In contrast to Seattle’s Best’s new strategy, Starbucks has few drive-thru-only locations.

Still, Darren Tristano, executive vice president of the Chicago food-industry research firm Technomic, said he was surprised at first by Seattle’s Best’s drive-thru-only strategy.

“Now that I see the brand and what they’re trying to accomplish, it makes sense,” he said.

Tristano lives near the Seattle’s Best test store where for the past eight months the chain has operated a cafe with seating and a drive-thru, and has tested various menu items.

“The seats aren’t bolted to the floor, but overall it’s not done in a way to invite people in,” he said. The new drive-thrus will not have any seating.

Tristano described the new concept, which includes a $2.79 combo of oatmeal and any size coffee, as “a little north of Dunkin’ (Donuts) and south of Starbucks.”

In price, it resembles McDonald’s, where oatmeal is $2 and coffee is $1.

The new Seattle’s Best menu includes food for people who need to grab a meal as well as coffee. It has handheld fruit and savory pies (stuffed, for example, with spicy macaroni and cheese), sandwiches made with pretzel bread, and English muffin and biscuit egg sandwiches.

The brewed coffee comes in original, dark, decaf and iced.

Seattle’s Best intentionally does not call out the specific roast numbers it will use for original and dark, because they might vary across markets — possibly lighter on the East Coast and darker in the Northwest.

The drive-thrus will begin rolling out next year, but the company would not disclose where it intends to open first. It also does not say how quickly it will reach thousands of locations, but officials said the plan is to move quickly.

Seattle’s Best also hopes to launch an urban concept that might be walk-up versions of the drive-thrus.

Even if Seattle’s Best’s little cafes eventually outnumber Starbucks’ 11,000 stores in the U.S., its revenues will be smaller, Tristano said.

“It’s like Subway and McDonald’s,” he said. Although McDonald’s has only 14,000 U.S. locations compared with Subway’s 25,000, its annual sales per location are about $2.5 million compared with Subway’s $400,000.

Just as Subway is not likely to catch McDonald’s, he said, “it would take a very, very long time” for Seattle’s Best drive-thrus to best Starbucks.


Mixing More Dough In The Java Business Starbucks Hopes to Spur Sales With New Acquisition

October 24, 2012

GARY M. STERN, (c) 2012 Investor’s Business Daily

Most people flock to Starbucks (SBUX) to buy coffee, Frappuccinos and lattes. But Starbucks is sending out a siren call for customers to add sandwiches and pastries to their java orders. In fact, it spent $100 million to acquire La Boulange, a San Francisco-based bakery with 19 outlets, in June. Integration is slated to begin by early 2013.

How does the hefty acquisition fit into Starbucks’ long-term strategy? The skinny is that to grow revenue, companies must go beyond their core products. Known for coffee, Starbucks has to expand its repertoire in order to boost income. As a result of the merger, La Boulange’s products will be sold at Starbucks outlets and supermarkets nationally.

Starbucks’ springing for La Boulange achieves two primary goals, says Darren Tristano, a Chicago-based executive vice president at Technomic, a food industry research and consulting firm. The first is boosting sales of its baked goods, which only account for about 20% of total sales. The second focuses on the fact that selling La Boulange’s products in supermarkets adds to its line of consumer packaged goods like coffee.

‘We Are Bakers Too’

At the time of the acquisition, Starbucks CEO Howard Schultz said, “This is an investment in our core business. After more than 40 years, we will be able to say that we are bakers too.”

David Tarantino, a Milwaukee-based senior research analyst with Robert W. Baird, says Starbucks views this purchase as a “strategic asset to grow their food sales dramatically.” Currently, about one-third of its customers buy food, and if La Boulange can boost that number to 40% or more, Starbucks will see a return on its investment.

Tarantino says the fact that Pascal Rigo, the founder and CEO of La Boulange, is staying on and joining Starbucks as a senior executive is critical to the acquisition.

“His involvement will help make sure that Starbucks maintains the quality, recipes and execution of its food items as it rolls out nationally,” he said.

Moreover, it allows Starbucks to become more of a fast-casual cafe rather than a quick-service coffee shop. That will let it compete vs. Panera Bread (PNRA), one of the most rapidly expanding chains in the restaurant industry.

Since Starbucks lures hordes of coffee drinkers, its target clientele will have an opportunity to increase spending. Consumers will be able to buy freshly made croissants, muffins and sandwiches to accompany their beverages at breakfast and lunch, Tristano says. Starbucks will have to develop kitchens in several regional locales to transport the pastries to its outlets and ensure freshness.

In the past, Starbucks has offered panini sandwiches that needed microwave heating. This led to mixed results in sales. “It slowed down service and took baristas away from their specialty,” Tristano said.

But why spend $100 million to acquire 19 bakeries, a premium price, instead of developing their own? “Buying the bakeries accelerates growth,” Tristano said. Panera is expanding quickly and Dunkin’ Donuts (DNKN) offers specialty coffees, so the La Boulange purchase primes Starbucks to vie in a more upscale way against two rivals.

Rather than spend millions in R&D, La Boulange offers immediate help. “They now have a supply chain that can provide its 10,875 U.S.-based stores and create retail products for supermarkets,” Tristano said.

Tarantino says that customers currently spend $1.5 billion on food at Starbucks annually. He says this justified the $100 million price of the acquisition because Starbucks “sees the potential return they might get from having La Boulange products in its cafe.”

Expanding La Boulange beyond the U.S. is a strong possibility. Tarantino said that “Starbucks is a global brand. It’s clearly possible you could see La Boulange outlets outside the U.S. in Asia and Latin America.”

Of course, any major M&A has risks. Tarantino says this purchase could “start to stretch the management bandwidth too far and could lead to management losing focus on its core.”

Global Expansion

Starbucks has said that it wants to retain La Boulange’s identity and not rebrand it as Starbucks. That strategy enables it to franchise the bakery and expand it nationwide, Tristano says. Growth won’t happen overnight and could take several years to achieve, but Starbucks could ramp up revenue by opening many new La Boulange bakeries.

Starbucks faces challenges maintaining its brand. Tristano says it acquired Evolution Juice for $30 million in November 2011 to expand its juice offerings and tackle industry leader Jamba Juice (JMBA), and despite adding the bakeries, it’s still “a coffeehouse at heart.” It must continue to focus and specialize on the coffee while adding to its repertoire of products.

But Tarantino sees La Boulange spiking Starbucks’ revenue when combined with Starbucks’ ubiquity.

“Starbucks has significant growth potential of its retail brand,” he said. “Coffee is a convenience, and if you have to walk six blocks to find it, it can be too far.”


Starbucks to add wine, beer, small plates menu at Woodfield cafe as Starbucks Evenings plan expands beyond Pacific Northwest

October 22, 2012

 By Emily Bryson York, Chicago Tribune

Starbucks’ customers in Schaumburg will have a new coffee alternative beginning Friday that some might find surprising: wine.

The Streets of Woodfield cafe will be the first Starbucks location outside the Pacific Northwest to host a new concept the chain has dubbed Starbucks Evenings. Beginning at 4 p.m., customers may order wine priced at $7 to $15 a glass and up to $50 per bottle,and choose food from a small plates menu, including warm rosemary cashews, bacon-wrapped dates, flatbreads or chocolate fondue. Beer will also be available.

“This concept is trying to deliver the same atmosphere and the same service that everybody’s grown to love and expect from Starbucks,” said Rachel Antalek, director of new concept development at Starbucks Coffee Co. “We’re constantly innovating and trying new things, and this is something our customers have asked us for that in a lot of ways hearkens back to European coffeehouse heritage.”

The concept is just the latest in a string of new ventures for Starbucks, which is the third-largest restaurant chain in the U.S., with nearly $9.8 billion in sales at its nearly 11,000 restaurants as estimated by Technomic. But some experts wonder if the company is straying from its core coffee-and-espresso mission, a problem that plagued the chain four years ago.

Antalek said customers will order at the counter as usual, but the cafes will offer limited table service to ask patrons if they’d like anything else after they’ve gotten comfortable. The cafe eventually will feature live music and poetry readings. The idea is to create the opportunity for a “no-stress book club” or for busy moms to unwind after dropping the kids at soccer practice.

“As soon as customers see it, they see all kinds of ways to use it,” Antalek said.

The seven Starbucks cafes offering wine and beer in the Pacific Northwest have seen double-digit same-store sales increases after 4 p.m., the company said.

Antalek said the chain won’t do much advertising for the evening offerings, aside from social media outreach. Stores will post signs to make customers aware of the service, and baristas will encourage morning customers to visit again in the evening.

Starbucks is planning to offer wine and an evening menu at as many as six more Chicago-area locations by year end, including openings in Burr Ridge and in the city at Sheffield and Diversey avenues by early August. Two more Chicago locations are in the permitting process.

The Schaumburg cafe is the first to introduce the small plates menu, but the new food items will be offered at the seven locations already selling wine and beer. Items include warm cashews for $3.45 and a shareable chocolate fondue for $6.95.

Starbucks began experimenting with alcohol on the menu at a Seattle location in October 2010.

“Wine has a tendency to appeal more to women … and heavy users of specialty coffee,” Bonnie Riggs, restaurant industry analyst at NPD Group, said, noting that the concept bodes better for Starbucks than such chains as Burger King and White Castle, which have been experimenting with wine and beer.

Riggs said she thinks the Starbucks Evenings plan could be successful in “large markets and, maybe, airports.”

Later this year, Starbucks will extend the wine and evening menus to Atlanta and Southern California, where the chain is eyeing locations in Los Angeles and Orange counties.

Some experts believe Starbucks might be moving too far afield from its core.

“I think it’s going to create a lot of confusion for their customers,” said Darren Tristano, executive vice president of Technomic. “They may be headed from being a great place to go for coffee and baked goods in the morning or afternoon to trying to do way too much.”

Starbucks Evenings is the latest expansion into new business for the quick-service chain, which removed the word “coffee” from its corporate logo early last year to underscore its ambitions beyond coffee. Within the last six months, Starbucks has opened test stores for Tazo Tea, Seattle’s Best Coffee and Evolution Fresh juice. In May, Starbucks announced the acquisition of La Boulange bakery, promising to bring the products to its stores and expand the bakery chain.

Starbucks spokeswoman Alisa Martinez said the coffee giant has an emerging-brands team that handles the auxiliary retail concepts, adding that each brand is relevant to the company’s core customer.

Starbucks has returned to industry darling status after navigating a turnaround nearly three years ago. Founder Howard Schultz returned to the CEO position in 2008, as the chain’s store traffic and stock price began to slip. At the time Schultz said the company had lost its focus and a bit of its “soul” after years of rapid growth.

The company closed underperforming stores and trimmed ancillary businesses, like in-store music, homing in on coffee and espresso drinks and working to boost the quality of its food. Starbucks has posted same-store sales gains since the fourth quarter of 2009.

Other observers said that mixing alcohol and a quick-service atmosphere could be a recipe for conflict, with young employees overseeing a situation that could become charged if patrons are overserved.

But Antalek said alcohol in restaurants hasn’t been a problem so far, adding that the company has a comprehensive alcohol training program in place.

“We don’t find we have customers coming in to overindulge,” she said. “They’re not using the space that way.”


Starbucks Believes M&A Bolsters Company’s Core

September 14, 2012

A pedestrian passes by a La Boulange outlet in San Francisco. Starbucks is paying $100 million for the chain.

Most people flock to Starbucks to buy coffee, Frappuccinos and lattes. But Starbucks is sending out a siren call for customers to add sandwiches and pastries to their java orders. In fact, it spent $100 million to acquire La Boulange, a San Francisco-based bakery with 19 outlets, in June. Integration is slated to begin by early 2013.

How does the hefty acquisition fit into Starbucks’ long-term strategy? The skinny is that to grow revenue, companies must go beyond their core products. Known for coffee, Starbucks has to expand its repertoire in order to boost income. As a result of the merger, La Boulange’s products will be sold at Starbucks outlets and supermarkets nationally.

Starbucks’ springing for La Boulange achieves two primary goals, says Darren Tristano, a Chicago-based executive vice president at Technomic, a food industry research and consulting firm. The first is boosting sales of its baked goods, which only account for about 20% of total sales. The second focuses on the fact that selling La Boulange’s products in supermarkets adds to its line of consumer packaged goods like coffee.

‘We Are Bakers Too’

At the time of the acquisition, Starbucks CEO Howard Schultz said, “This is an investment in our core business. After more than 40 years, we will be able to say that we are bakers too.”

David Tarantino, a Milwaukee-based senior research analyst with Robert W. Baird, says Starbucks views this purchase as a “strategic asset to grow their food sales dramatically.” Currently, about one-third of its customers buy food, and if La Boulange can boost that number to 40% or more, Starbucks will see a return on its investment.

Tarantino says the fact that Pascal Rigo, the founder and CEO of La Boulange, is staying on and joining Starbucks as a senior executive is critical to the acquisition.

“His involvement will help make sure that Starbucks maintains the quality, recipes and execution of its food items as it rolls out nationally,” he said.

Moreover, it allows Starbucks to become more of a fast-casual cafe rather than a quick-service coffee shop. That will let it compete vs. Panera Bread, one of the most rapidly expanding chains in the restaurant industry.

Since Starbucks lures hordes of coffee drinkers, its target clientele will have an opportunity to increase spending. Consumers will be able to buy freshly made croissants, muffins and sandwiches to accompany their beverages at breakfast and lunch, Tristano says. Starbucks will have to develop kitchens in several regional locales to transport the pastries to its outlets and ensure freshness.

In the past, Starbucks has offered panini sandwiches that needed microwave heating. This led to mixed results in sales.“It slowed down service and took baristas away from their specialty,” Tristano said.

But why spend $100 million to acquire 19 bakeries, a premium price, instead of developing their own? “Buying the bakeries accelerates growth,” Tristano said. Panera is expanding quickly and Dunkin’ Donuts offers specialty coffees, so the La Boulange purchase primes Starbucks to vie in a more upscale way against two rivals.

Rather than spend millions in R&D, La Boulange offers immediate help. “They now have a supply chain that can provide its 10,875 U.S.-based stores and create retail products for supermarkets,” Tristano said.

Tarantino says that customers currently spend $1.5 billion on food at Starbucks annually. He says this justified the $100 million price of the acquisition because Starbucks “sees the potential return they might get from having La Boulange products in its cafe.”

Expanding La Boulange beyond the U.S. is a strong possibility. Tarantino said that “Starbucks is a global brand. It’s clearly possible you could see La Boulange outlets outside the U.S. in Asia and Latin America.”

Of course, any major M&A has risks. Tarantino says this purchase could “start to stretch the management bandwidth too far and could lead to management losing focus on its core.”

Global Expansion

Starbucks has said that it wants to retain La Boulange’s identity and not rebrand it as Starbucks. That strategy enables it to franchise the bakery and expand it nationwide, Tristano says. Growth won’t happen overnight and could take several years to achieve, but Starbucks could ramp up revenue by opening many new La Boulange bakeries.

Starbucks faces challenges maintaining its brand. Tristano says it acquired Evolution Juice for $30 million in November 2011 to expand its juice offerings and tackle industry leader Jamba Juice, and despite adding the bakeries, it’s still “a coffeehouse at heart.” It must continue to focus and specialize on the coffee while adding to its repertoire of products.

But Tarantino sees La Boulange spiking Starbucks’ revenue when combined with Starbucks’ ubiquity.

“Starbucks has significant growth potential of its retail brand,” he said. “Coffee is a convenience, and if you have to walk six blocks to find it, it can be too far.”


Donut Shops Have Big Expansion Plans, Especially Out West DUNKIN’ BRANDS GROUP

September 7, 2012

19 June 2012, Investor’s Business Daily, (c) 2012 Investor’s Business Daily  

 The line at the Dunkin’ Donuts cafe in Midtown Manhattan stretched to the door on this June weekday morning.

 Iced coffee, cappuccino, latte — name the java drink, and customers were sipping it down. Donuts and muffins were also going fast.

 Dunkin’ Donuts shops have become popular stomping grounds for Americans craving a cup of joe and the snacks to go with it.

 It’s the top quick-service restaurant chain in America for hot coffee, iced coffee, donuts and bagels and muffins, says Paul Carbone, chief financial officer at the chain’s parent Dunkin’ Brands (DNKN).

 Carbone expects that popularity to continue as Dunkin’ Donuts steps up expansion east of the Mississippi River while moving westward beyond its home base in the Northeast.

“We believe we have the capability of growing in all parts of the country, and by having Dunkin’ Donuts coffee available in grocery stores nationwide we are raising awareness of the brand there before we open stores in that market,” Carbone said.

 Ice Cream Shops

 Dunkin’ Brands, which went public last July 27, also owns the Baskin-Robbins ice cream chain.

 The bulk, or roughly 75%, of annual revenue, comes from Dunkin’ Donuts, which has more than 10,000 stores worldwide, approximately 7,000 of which are in America. Some 60% of Dunkin Donuts’ U.S. franchisee sales come from coffee.

 Dunkin’ Brands is roughly a 100% franchised business model, which essentially eliminates store operating expenses, resulting in higher margins than its peers, says Stephens analyst Will Slabaugh.

 The company’s game plan involves boosting Dunkin’ Donuts’ presence outside its core markets of New England and New York, where it has one store for roughly every 10,000 people.

 The firm’s focus on upping it presence east of the Mississippi could lead to a boost of its one Dunkin’ Donuts store for every 100,000 people.

 It also sees a big growth opportunity in the West, where it has only 130 stores and just one store per 1.2 million people.

 Dunkin’ Brands aims to more than double the total number of U.S. Dunkin’ Donuts stores to 15,000 over the next 20 years.

 The company sees the potential to have 5,000 Dunkin’ Donuts stores in the West, says Carbone. That move is in a “contiguous fashion,” he said.

 It has stores in Dallas, Phoenix and Las Vegas, which, says Carbone, serve as the hubs for its Western development.

 It also recently started recruiting franchisees for markets such as Denver and Colorado Springs.

 As Dunkin’ Donuts expands westward, it will be competing head to head with the likes of Seattle-based coffee giant Starbucks (SBUX), which has a large West Coast operation.

 But watchers expect Dunkin’ Donuts’ business to stay piping hot as it expands throughout the U.S.

 Its low coffee prices, at roughly $1.75 for a regular-size hot coffee in Manhattan, are a big draw, say followers.

“Their value price points and differentiated doughnut offering should provide them with a good opportunity to add stores and be competitive with more expensive brands like Starbucks,” said Darren Tristano, executive vice president at industry consultant Technomic.

Dunkin’ Donuts continues to be innovative with items such as breakfast sandwiches, he adds.

“That, combined with the affordability of its products, has given the company a very good positioning in a somewhat difficult economic climate,” he said.

Slabaugh says Dunkin’ Donuts’ aggressive expansion into new markets presents an “attractive franchising opportunity.”

Dunkin’ Donuts is a well-known brand, he says, and as it enters a new market, consumers are already familiar with the bagged coffee it sells at grocers.

That elevated brand awareness helps push revenue in the new stores to high levels.

So far, so good. Carbone says Dunkin’ Donuts has been successful in leveraging the brand’s strength and existing franchisee base as it’s expanded in new markets such as Pittsburgh and Charlotte, N.C.

“There is a strong national brand awareness and consumer demand for Dunkin’ Donuts,” he added.

That demand showed up in the latest results from Dunkin’ Brands.

Dunkin’ Donuts’ first-quarter U.S. same-store sales rose 7.2% vs. a year earlier as the chain enjoyed nice gains in everything from cold drinks to its steak, egg and cheese breakfast sandwich.

It got a nice jolt from sales of the K-Cup portion packs used with the Keurig single-cup coffee brewing system made by Green Mountain Coffee Roasters (GMCR).

Dunkin’ Donuts restaurants began offering 14-count boxes of Dunkin’ Donuts coffee in K-Cup portion packs in August.

Carbone says K-Cups are driving significant incremental franchisee profit and helping to further expand the brand. “We were pleased with the first-quarter performance of K-Cups, which represented approximately 30% of our comp-store sales growth during the quarter,” he said.

Jefferies & Co. analyst Andy Barish says K-Cups and Dunkin’ Donuts’ increasing focus on breakfast sandwiches have been the key drivers of same-store sales and should continue to do so.

Same-Store Sales

Barish feels “comfortable” with a long-term target of 2% to 4% annual same-store sales growth for Dunkin’ Donuts.

Breakfast sandwiches are a big hit. Internal research shows consumers like Dunkin’ Donuts because they can get breakfast sandwiches anytime of day, says Carbone.

That helps differentiate the chain from other brands in the market, he adds.

Dunkin’ Brands has been enjoying a nice run since its market debut. In the most recent first quarter, earnings rose 213% to 25 cents a share. Dunkin Brands’ revenue grew 9% to $152.4 million.

Systemwide sales grew 10.9%.

Baskin-Robbins’ same-store sales rose 9.4% vs. a year earlier. The chain benefited from new product news around its Valentine’s Day cake bites and its new “More Flavors, More Fun” ad campaign.

Analysts polled by Thomson Reuters expect full-year earnings to rise 33% to $1.25 a share. They see a 16% gain in 2013.

“We have a buy rating on the Dunkin’ Brands’ stock,” said Barish. “It’s a well-positioned business, given the predictable quality of its predominantly franchised business model.”

Tristano places Dunkin’ Donuts in the coffee cafe segment, which includes chains such as Starbucks. He estimates the segment’s sales will rise 5% to 6% in 2012 vs. a 5% gain in 2011.

Dunkin’ Brands expects Dunkin’ Donuts’ U.S. same-store sales to grow 4% to 5% in 2012 and Baskin-Robbins to see a 2% to 4% gain.

It plans to add 260 to 280 Dunkin’ Donuts restaurants this year.

It also expects to open 350 to 450 units overseas for Baskin-Robbins and Dunkin’ Donuts combined this year .

Carbone says international expansion is an important focus. It recently opened the first Dunkin’ Donuts restaurants in India and Guatemala.