It's Not About the Doughnuts

Luther didn't need the bankruptcy of Interstate (the venerable bakery behind such American pastry icons as Twinkies and Wonder Bread) to see the writing on the oven door. Buffeted by the public's phobia of baked goods, and their embrace of over-the-top beverages (white chocolate raspberry mocha latte, anyone?), Luther and his team, a troop of fellow-travelers from his days at Popeye's Chicken and Biscuits, determined that the future was not in the cruller, but in the coffee.

"We're marching to a real evolution in our menu," chimes in Joseph Scafido, chief menu officer, at a meeting at the company's headquarters in suburban Boston. "We're taking what has been a doughnut bakery-centric concept to a beverage-centric concept. That, we think will be our long term competitive advantage."

The Challenge: The Battle of the Beans

But Dunkin' faces more challenges than simply brainstorming fancy drinks and devising little treats to go with them. While many of the chain's suburban New England shops are clean and shiny, albeit bereft of any upholstered furniture, a fair number in more urban locations are -- how can we say this diplomatically? Down right scuzzy. In the late afternoon, when the bins are empty but for a few dispirited doughnuts, and the fluorescent light is harsh against the winter night, they're hardly an appealing beacon to a customer searching for a soothing place to re-energize. They make a veritable mockery of the company's new mission statement: "Rituals that revive." Those locations are less about a pleasant ritual, which speaks to the idea of self-nurturing, than about the urgent need for revival: coffee as a cheap fatigue-fighting drug, to be gulped while rushing to your second shift job.

That may be a problem going forward, says Udo Schlentrich, Director of the William Rosenberg International Center of Franchising at the University of New Hampshire. "When you look at Dunkin's store sales beyond the peak hours of drive-to work, drive-from work, you have this incredible void," he says. "How do you bring people in for a little break? Starbucks is already in more locations, and it has the feeling and décor of a hang-out place. Dunkin' is a hit-and-run place."

A recent analysis of the two chains by Smith Barney's restaurant group expressed reservations that the introduction of the espresso-based coffee line alone would make much of a long-term difference in the chain's revenues. The report scrutinizes the Quick Serve Restaurant (QSR) business of the British liquor giant Allied Domecq PLC, which is the parent company of Dunkin' Donuts, and its sister restaurants Baskin Robbins and Togo's. Looking at sector's first half fiscal 2004 results, they reported, "The division's profits did get a strong uplift from the introduction of new products (the new coffee range)... but since this is a one-off step, we would not expect the QSR business to be anywhere close to the first half's strong growth rate. Going forward, we expect sales growth of 6% (same store and new store combined.)"Dunkin' Donuts had sales of $3.4B in fiscal year 2004.

Give us some time, the Donuts guys say; lattes are only the beginning.Taking a look at data that indicates that Americans have become a nation of snackers, not meal-eaters, Dunkin's menu gurus are currently brainstorming an array of little treats -- some sweet, some savory -- that could satisfy that fitful craving, and add additional 'day parts' to the chain's traffic. They point to the explosion of tapas menus in the trend-setting precincts of the restaurant business, and the vast appetizer menus now appearing at such national chains such as Houlihan's and The Cheesecake Factory, as proof that the concept has legs.

"Most of the (quick serve restaurant) industry got caught up in the idea of home meal replacement, thinking people eat three meals at home" says Gilbert. "But the consumer has jumped. They're looking for five snacks a day instead." The average lunch hour, he says, is now a pathetic 19 minutes -- just time enough to run to the corner, grab a bagel, and get back to your computer (much to the chagrin of the IT folks charged with cleaning up gunky keyboards).

For his part, Luther is undaunted by the challenge he faces. Indeed, he sounds a little like Howard Dean on the night of the Iowa primaries when he talks about moving beyond the chain's parochial base in New England to conquer America's heartland: "I tell everybody we're crossing the Hudson, we're crossing the Delaware, we're crossing the Potomac, and someday we're going to cross the Mississippi!" he declaims, stopping just short of a whoop.