Dunkin’ Brands talks with Inspire and closes restaurants

The company’s flagship coffee chain has closed nearly 700 locations this year, more than half of them inside Speedways, as it shifts strategy during the pandemic.
Photo courtesy of Dunkin'

Dunkin’ has closed nearly 700 of its U.S. locations this year as the pandemic has altered the industry landscape, particularly for urban concepts and chains largely devoted to breakfast.

More than half of the 687 U.S. closures this year, 447, have been of kiosks inside of Speedway convenience stores—giving the company 9,131 total domestic locations. Of the rest, most of them were underperforming locations that the company wants franchisees to replace with fresh new units in better locations and preferably with drive-thrus.

“We are working with our franchisees to scrub our asset base by eliminating low-volume, low-profit restaurants,” Scott Murphy, president of Dunkin’ Americas, said on Dunkin’s third-quarter earnings call. “For many franchisees, closing these restaurants will enable them to redeploy capital into the brand.”

Dunkin’ first announced plans to close units in July as part of a plan to retrench its asset base and replace it quickly with locations that fit with the future the company envisions—remodeled, stand-alone units, typically with drive-thrus, that can serve its full menu. Executives said on Thursday that the effort is “nearly complete.”

Dunkin’s sales figures announced on Thursday demonstrate how consumers have shifted. Its U.S. same-store sales rose 0.9% in the period ended Sept. 30, and sales improved throughout the quarter. Executives said on Thursday that those sales have improved into the low-single-digits in October.

But the locations leading that improvement have changed. Its urban markets, typically a strength for Dunkin’, have struggled.

But Dunkin’s newer markets in the West and the Southwest were in the double digits last quarter, executives said on Thursday. That’s good news for a company that has been aggressively pushing west in a bid to emerge into a major national player.

“Our performance in newer markets where we have the most significant growth potential continues to be a highlight during the pandemic,” Murphy said. He noted that traffic was positive in those markets and generated strong beverage sales and “rapid digital adoption.”

Those stores are also far more likely to have a drive-thru. About 70% of Dunkin’s domestic restaurants feature drive-thrus. But 90% of its restaurants in these newer markets have that lane.

“Of all the lessons we learned during COVID, the power of the drive-thru was overwhelmingly evident,” Murphy said. The company has now accelerated some of its drive-thru tests, including outdoor digital menu boards, handheld tablets and new speaker systems, all in a bid to make its drive-thrus more competitive.

The improvement in those growth markets could make the chain particularly attractive to Inspire Brands, the Atlanta-based brand operator that is in active discussions to buy Dunkin’ parent company Dunkin’ Brands.

Dunkin’ executives did not discuss the deal on Thursday, but they indicated that talks with Inspire, the owner of Arby’s and Sonic, have been ongoing. Executives said that any comment on the deal would come after it is completed or negotiations stop.

Executives did not take questions on the call from analysts, a rarity, and the company’s board did not declare a dividend given the uncertainty surrounding the Inspire discussions.

Dunkin’s improvement in growth markets offset what has been a challenging period in some of its traditional markets, notably New York City and Boston, where a lack of office workers has hurt the chain’s more urban locations.

The company said it plans to extend financial support for these restaurants, largely through royalty relief. Dunkin’ expects the relief could cost the company up to $4 million.

“We still have a small population of restaurants that we’re closely monitoring,” Kate Jaspon, CFO of Dunkin’ parent company Dunkin’ Brands, said on Thursday. “We have seen slight sales and traffic improvements on a week-to-week basis in many of them, but they are still not close to early first-quarter levels.”

Still, the improving sales has helped most franchisees get back to profitability. The company said it expects franchisee cash flow to be positive, including Paycheck Protection Program funds many operators received.

A few things worked for Dunkin’ in the third quarter. The company’s promotion with Charli D’Amelio, a 16-year-old TikTok personality, helped the company set a new record for daily app users. The company had 5.4 million active app users, a 30% increase over the second quarter. With that along with delivery and curbside, digital orders now make up more than 20% of Dunkin’ orders.

Dunkin’s product offerings were also aimed at a consumer coming in less often in the early mornings and more often later, such as Bagel Minis and Croissant Stuffers.

The chain also introduced its Pumpkin Spice Signature Latte and its Pumpkin and Apple Cider Donuts earlier than normal, in August. The products drove record sales of espresso and a “significant increase in donut sales,” Murphy said.

“We knew guests were craving the comfort of autumn,” he said.

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