Dunkin’Donuts Case Analysis
Dunkin’Donuts Case Analysis
Thefood industry is one of the economic sectors where companies can findlucrative investment opportunities. Dunkin’ Donuts is among themajor American-based companies that operate in the food and beverageindustry. It was established in 1950 and its head offices aresituated in Canton, Massachusetts (Holder LLC., 2016). Dunkin’ hasa total of 11,300 restaurants that are located in about 36 countries(Holder LLC., 2016). The chain of products offered by Dunkin’includes coffee, bagel, donut, baked goods, and ice beverages. Thecompany has been using different strategies (such as entry into theforeign markets, product diversification, and opening new stores inthe local market) to increase its growth as well as market share. Thestrategic management of Dunkin’ will be discussed in this paper.
Improvementsbeing achieved in the technology industry have impacted all sectorsof the economy, including the coffee and fast food businesses. Mostof the coffee houses are now applying technology as one of theleading factors to increase the level of their competitiveness.However, the success of individual firms is determined by itscapacity to adopt the technology (including the vending machines)that is easy for the consumers to use as opposed to a complex one(Mashhadi & Rehman, 2012). Therefore, Dunkin’ operates in anenvironment where technology disruption is real and intense.
Mostof the demographic trends seem to support the future growth ofDunkin’ Donuts. The first trend is the general growth in theworld’s population. The company operates in over 36 countries,which implies that it has the capacity to reap from the 1.3 % annualgrowth in the size of the population (World Meters, 2016). Dunkin’Donuts has also been able to target countries (such as China) withthe highest population size, which has increased its market share.The main demographic groups targeted by the coffee shops owned byDunkin’ Donuts include the high income, senior age, and Caucasian(World Meters, 2016). The size of all the target groups has beengrowing steadily.
Thereare several economic trends that affect the growth of Dunkin’Donuts negatively. The European countries and the U.S., where thecompany has based most of its operations have been recoveringsluggishly after suffering from the financial crisis in 2008 (Getty,2016). In addition, the high rate of unemployment (4.9 % in the U.S.,4.04 % in China, and 8.5 % in Europe) has reduced the buying power ofmillions of people who would have been potential customers (Getty,2016). The continuous increase in the rate of inflation has raisedthe cost of inputs that the company uses to produce coffee anddonuts, which is likely to lower its return on investment.
Manyorganizations prefer to operate in a stable legal and politicalenvironment. However, these environments vary from country toanother. Most of the operations of Dunkin’ are based in the U.S.,where the political environment is stable and the government’sinterference in the fast food sector is limited (Mashhadi &Rehman, 2012). The political as well as the legal environment inChina and other Asian countries has improved, which favors the growthof the fast food companies.
Thefact that many communities have a tradition of consuming baked foodsduring breakfast suggests that Dunkin’ has a large market size thatneeds to be exploited. However, the increase in the level of healthconsciousness in the modern society is a major drawback for coffeeshops and fast food restaurants (Mashhadi & Rehman, 2012). Theyare likely to lose some customers who will be going for products(such as fresh juices, vegetables, and fruits) that are considered tobe healthier than coffee and donuts.
Thereare two key global trends that are likely to have a direct impact onDunkin’. First, trends indicate that there is a general increase inthe price of foods across the globe, which will continue limiting theincome generating capacity of companies, such as Dunkin’. They willbe forced to buy inputs at a higher price than usual (Fryett, 2016).Secondly, there is an increase in the food safety concerns across theglobe, which has resulted in the development of laws that regulatefood supply. The need to observe numerous laws will limit theefficiency of coffee and donut businesses as they import inputs andsell their products to the end consumers.
IndustryAnalysis: Porters Five Forces
Thelevel of threat associated with the bargaining power of buyers isvery low. The coffee sector is characterized by the existence of alarge number of consumers who buy small quantities of the products(Cheng, 2013). This suggests that there is no single consumer who hasthe capacity to influence the direction of the entire market, theprice of coffee, or the donuts. In most cases, customers buy a snackand a cup of coffee and rarely purchase more than that at a time.However, the lack of extra cost when switching from one coffee shopto another enhances the level of consumers’ bargaining power tosome extent.
Dunkin’faces a low threat from the bargaining power of its suppliers. Thereare three key factors that limit this power. The first factor is theexistence of a large number of large numbers of firms and individualsthat supply coffee to the company. This suggests that a singlesupplier does not have the capacity to make a major impact on theproduct in terms of the price and quantity that is offered in themarket (Jaradat & Almomani, 2013). The second factor is thediversity of suppliers. There are suppliers who offer the products inretail while others sell coffee in wholesale. Third, the moderatesize of each supplier and the fact they are located in differentareas reduces their ability to bargain for better prices from thecoffee shops.
Thelevel of threat of competition for Dunkin’ is extremely high. Thecompany faces a stiff competition from large coffee shops (such asStarbucks) and those that are emerging every year. The high level ofcompetition is attributed to several external factors, including theexistence of a large number of other coffee shops and the lowswitching cost (Jaradat & Almomani, 2013). The low switching costis associated with the fact that consumers have the freedom to movefrom one coffee shop to another.
Thethreat of substitution of the products offered by Dunkin’ is alsoextremely high. Consumers who patronize Dunkin’ shops can easilysubstitute coffee with other types of drinks, such as juices, tea,and bottled beverages that are sold in restaurants. The ease ofsubstitution lowers the competitiveness of the company (Jaradat &Almomani, 2013). All these drinks address similar needs and they areeasily accessible, which is a confirmation of the high probability ofusing them to substitute coffee. Moreover, most of the alternativedrinks that can be purchased from ordinary restaurants are cheaperthan coffee. Therefore, competition is the major concern for themanagement of Dunkin’.
Thethreat resulting from new entrants
Thetype of threat that might result from the entry of new coffee shopsis quite moderate. This threat is reduced by the cost of starting andoperating a business in the coffee sector. The cost of establishingand maintaining a supply chain is also moderate (Jaradat &Almomani, 2013). New shops are also likely to experience somemoderate challenges in trying to establish their own brands.
Theprimary competitors of Dunkin’ include Burger King, Dairy Queen,7-Eleven, Starbucks, Tim Hortons, and McDonald’s. Dunkin’ hasfaced a stiff competition from Starbucks as it moves westwards, wherethis competitor have been operating for many years (Holsted &Slade, 2012). The ability to establish franchisees is one of the keystrategies that have helped Dunkin’ minimize the impact ofcompetition and achieve its mission.
Strongbrand recognition is the most important strength of Dunkin’. Thestrength of the brand is attributed to the company’s widegeographical coverage since its shops can be found in over 36countries in different continents (Holder LLC., 2016). Most of theloyal customers know Dunkin as a quick or fast service restaurant.The company has also managed to take advantage of the emergingmarkets (such as China) where it has established more than 1,400coffee shops (Holder LLC., 2016).
Thehigh level of convenience is another strength that is associated withDunkin. Most of its brands are located in strategic places, such asairports, travel ports, and train stations (Holder LLC., 2016). Mostof its locations have the drive in services, which enable customersto access the shops easily. The high level of convenience hasincreased Dunkin’s competitive advantage.
Dunkin’faces the challenge of a limited opportunity for expansion in thedomestic market. Although the company has managed to diversify itsoperations in about 35 countries outside the U.S., most of its shops(7,667 out of 11,300) are located in the local market (Holder LLC.,2016). The U.S. market is saturated with the brand, which the companyhas failed to take a full advantage of emerging markets to guaranteeits future growth. In addition, sales in the North and Midwest havebeen dropping, which limits the probability of attracting newfranchisees in the local market.
Apoor relationship with franchisees in the past is among the keyweaknesses that could affect the future progress of Dunkin’. Thecompany has suffered from numerous law suits (about 15 in 2015 alone)brought before the court by different franchisees (Turgeon &Destrempes, 2015). This has discouraged investors from joiningDunkin’.
EnvironmentalOpportunities and Threats
Dunkin’has two major opportunities that can be exploited to increase itsfuture growth. The first opportunity is menu diversification, whichcan be accomplished by selling healthy brands. The increase in thelevel of health consciousness among the members of the societycreates an opportunity for restaurants and fast food stores todiversify their menus by selling fruits, vegetables, and yogurt,among other low-calorie and low-fat foods (Euromonitor International,2013). Secondly, international expansion is a lucrative investmentopportunity that Dunkin’ should seek to exploit. Most the company’sstores are situated in the U.S. while the world has a lot of emergingmarkets, especially in Asia and Middle East.
Thereare two key threats that are likely to limit the capacity of Dunkin’to achieve its growth targets. Most of the raw materials (includingcoffee) that are used by Dunkin’ are agricultural products thatsuffer from frequent fluctuation in price and shortage of supply(Euromonitor International, 2013). The increase in climate changewill continue reducing crop productivity, which will interruptDunkin’s business. Secondly, Dunkin’ faces a stiff competitionfrom other companies (such as Starbucks, Restaurant Brands, andKrispy Kreme) that sell the same product. The level competition islikely to increase following the entry of new coffee shops andrestaurants. This competition will reduce the company’s return oninvestment.
Menudiversification: An increase in the number of products that Dunkin’sells in its stores can help it increase its market share byattracting new customers. For example, a decision to start sellingfruit, yogurt, and vegetables can enable Dunkin’ to attractconsumers who are concerned about the impact of the fast foods ontheir health. Diversification will also enable Dunkin’ to enhanceits competitiveness by offering products that are not available inother coffee shops.
Expansionin emerging markets: The amount of disposable income in developingeconomies has been increasing gradually, which will enable Dunkin’to expand its brand in those segments (Dunkin Donuts, 2016). Thisstrategy will give the company an opportunity to increase its revenueand the level of competitiveness.
Aggressivemarketing: Dunkin’ has not been marketing its brand with the samelevel of aggressiveness as its competitors who have been advertisingtheir products (Dunkin Donuts, 2016). Dunking can minimize the levelof competition by advertising its brand online and in the mainstreammedia. Although this strategy will increase brand recognition, itcould cost time and money, thus reducing the company’s revenue.
Outof the three alternative courses of action, Dunkin’ should adoptthe first one, which is the expansion of the current menu. Healthconsciousness among consumers is a force that companies operating inthe food industry cannot withstand. To this end, Dunkin’ cansafeguard its going concern by offering new lines of products thataddress this emerging opportunity. The implementation of thisstrategy should follow three steps. First, Dunkin’ should conductsome research in order to identify the type of food products that arehealthy and likely to satisfy consumers. Secondly, the viability ofthe strategy should be assessed by offering the food products in afew stores. Lastly, the successful food products should be includedin the menus of all stores. Unsuccessful products should beeliminated. This strategy mare requires some changes in the kitchenand sections where consumers will be taking their foods.
Dunkin’has managed to establish a strong brand that is popular in domesticand foreign markets, but there are weaknesses and threats that mightlimit the company’s capacity to grow in the future. Most of thetechnology and demographic trends favor the growth of Dunkin’.However, most of the economic and political trends will put the goingconcern of the company at risk. The bargaining power of suppliers andbuyers is relatively low, but the level of competition and the threatof substitutes are extremely high. The threats associated with theentry of new companies are moderate. Strong brand recognition and ahigh level of convenience are the major strengths that have enhancedthe competitiveness of Dunkin’. Although the company has managed toachieve a high rate of growth, there are more opportunities (such asthe sale of healthy foods) that can be exploited in order to increaseits revenue.
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