For snack chains, coffee drinks the best way to sweeten profits

By Susan Spielberg

Reprinted with the permission of Nation's Restaurant News

In an environment marked with uncertainty, the triumvirate of players in the Top 100's snack category has been moving ahead over the past year with new menu offerings and changes to the way they manufacture and distribute their products.

But while those three brands scurry to boost traffic and shore up their bottom lines, ownership uncertainties are a factor facing two of the players.

Dunkin' Donuts, which has more than 4,400 U.S. outlets, is poised for rapid expansion across the country even as its future ownership, along with that of sister chain Baskin-Robbins, remains a question mark.

Dunkin' Donuts and Baskin-Robbins, which is testing a reconcepting of its brand, are divisions of Canton, Mass.-based Dunkin' Brands Inc., an arm of the British spirits giant Allied Domecq PLC. At presstime, France's Pernod Ricard SA was set to acquire Allied Domecq and had said it planned to divest Dunkin' Brands, which also is franchisor of the Togo's sandwich chain, upon the completion of the $14.2 billion deal.

Meanwhile, snack rival Krispy Kreme Doughnuts Inc. is facing a crisis over its financial future, while it grapples with investor lawsuits and pending restatements of its potentially far-overblown past results. The company also is being sued by employees over the management of their 401(k) retirement plans, which were stuffed with the company's now-depressed stock.

Krispy Kreme, which is under investigation by the U.S. Attorney's office and the Securities and Exchange Commission, last year divested its Montana Mills Bread Co. bread store chain, which it bought in 2003, and closed six doughnut factory stores. The company has been so consumed by its travails that the only new product it has boasted about in recent months has been its limited-time Madagascar Tropical Sprinkle Doughnut, which was introduced on May 27, the day the DreamWorks Animation movie "Madagascar" was released.

However, the company quietly is plotting a potential menu diversification, apparently aimed at revivin flagging traffic, according to a Krispy Kreme franchisee who requested anonymity.

But uncertainties about Krispy Kreme's fate or even its own future ownership are not stopping Dunkin' Donuts from moving forward.

"Dunkin' Donuts' strategy is really appealing to consumers' needs for beverage and food rituals," says Jayne Fitzpatrick, strategy officer for Dunkin' Brands.

"We're [currently] only represented large-scale in the Northeastern market," she states. "Our strategy is then to take that value proposition and expand throughout the rest of the country."

Fitzpatrick says the brand plans to expand "as aggressively" as possible. "We're able to do that because we're a franchise system, so access to operators and capital is easier," she notes.

Dunkin' Donuts recently started shifting its doughnut production functions from the individual shops into centralized kitchens that can supply up to 100 stores each. Called Central Production Locations, the facilities prepare doughnuts and make deliveries to stores twice a day; although the doughnuts are fully cooked, they require frosting and filling at the shops.

The company plans to construct enough central facilities to supply 2,000 stores by 2006.

Although Dunkin' Donuts has not made big changes over the past year to its doughnut offerings, which account for 15 percent of its sales, the company has reformulated its cookies and muffins to remove trans fats. But the most visible changes on the menu board have been in the coffee category, which represent 67 percent of Dunkin' Donut's sales. Last year the chain launched an espresso-based beverage platform, which Fitzpatrick calls "enormously successful."

This summer the chain is rolling out an iced coffee drink called "Turbo Ice," which was tested last summer in Maine and contains a shot of espresso. The chain's iced-coffee lineup also includes such new flavors as blueberry, coconut, raspberry, marshmallow, caramel, toasted almond and cinnamon.

Sister chain Baskin-Robbins also is launching new iced beverages. Its Bold Breeze frozen drink, introduced this spring, comes in strawberry, citrus, wild mango and kiwi flavors. Patrons also can customize their drinks with frozen yogurt or a banana.

Meanwhile, Baskin-Robbins, which has more than 2,700 units in the United States, is looking to refresh its overall marketing profile.

"With Baskin-Robbins we're currently testing a reconcepting of the brand, which includes new products and a new image," Fitzpatrick says.

"Our intention, provided the test is successful, is to then roll that new concept to both the existing store base and then [have] that become our primary development vehicle," she continues. The new prototype is "a much more contemporary store, versus the traditional ice-cream parlor look," she explains, adding that it still will feature dipping cabinetry that allows the customer to peer in to see the ice cream.

Ice cream is among the top-three desserts in the country for both at-home and restaurant consumption, according to Harry Balzer, vice president of the NPD Group, a global market research firm based in Port Washington, N.Y.

The other major offerings of the doughnut chains coffee and doughnuts are among the most popular items consumed in the morning nationwide, Balzer adds.

"Doughnuts and sweet rolls are the fourth-most-popular thing ordered in restaurants in America [for breakfast]," he says. NPD's data show that 16 percent of all breakfasts ordered in restaurants include a doughnut or sweet roll. The list of items selected most frequently at breakfast is topped by breakfast sandwiches, which are ordered 26 percent of the time. Eggs, not including those in breakfast sandwiches, are included in 18 percent of breakfasts, followed by hash browns, which are ordered 17 percent of the time.

"But the most popular [breakfast] item is not a food," Balzer notes. "It's a beverage, and it's coffee," he says, adding that coffee is part of 37 percent of all breakfast orders.

For snack chains, coffee drinks the best way to sweeten profits