Dunkin’ takes a second shot at the pod people

Dunkin’ Donuts is throwing its losing K-cup strategy into reverse,announcing a partnership today with Keurig and J.M. Smucker to distribute its coffee pods to thousands of grocery and specialty stores, mass retailers, and online channels.

The distribution will start midyear, and Dunkin’ will split the profit from its K-cup business 50-50 with U.S. franchisees for the next 20 years.

Until now, the only place you could buy the K-cups has been a Dunkin’ Donuts restaurant, a strategy that has started to work against the chain as options at supermarkets and other retailers quickly expanded. Even as Dunkin’ was losing out at those venues, its strategy was failing right in the store. K-cup sales in Dunkin stores fell nearly 30 percent last quarter, as consumers picked up other K-cups at the supermarket and elsewhere.

How did Dunkin’ lose its way in the fastest-growing part of the coffee market?

The company launched the pods in stores in 2011 and held off on wider distribution because of push back from franchisees, who worried that increasing at-home availability would reduce visits to restaurants.“We were very concerned about building the K-cup business and not having any control over it,” said Clayton Turnbull, co-chairman of Dunkin’ Donuts’ Brand Advisory Council, the franchisee group. Protecting its operators also was a priority for the company, which gets about three-fourths of its U.S. revenue from royalties and franchise fees.

As Dunkin’ proceeded cautiously, competitors’ K-cup sales rose. Starbucks became the second-best-selling brand, after Green Mountain, with K-cup sales of nearly $449 million in the year ended Jan. 25, according to data from Chicago market research firm IRI,and its cafe business still grew. Recently, both McDonald’s and Krispy Kreme rolled out their own pods.

Dunkin’ saw the boom in sales of competing K-cups in grocery stores, Dunkin’ Brands Chief Executive Nigel Travis said, and figured that getting its pods into grocery stores would increase not only revenue but also brand awareness, particularly in western markets where the chain was just starting to open stores. This would encourage more visits to the restaurants, which would benefit both franchisees and the corporation.

In late 2013, the company started discussing expanded distribution with franchisees, who then hired a research firm to evaluate the impact of a bigger roll out. The firm found that 80 percent of all K-cup packs are purchased where consumers buy their groceries and said it expected the market to grow 90 percent over the next five years. Surveys showed that Dunkin’ customers didn’t expect to reduce restaurant visits even if K-cups became more available, and by limiting sales to its own stores, Dunkin’ would forgo more than 3 billion potential purchases over the next five years.

“Could we have done it six months earlier? Perhaps, but you never get it 100 percent right. We think this is the right time,” Travis said.

Turnbull, the franchisee, agrees that now is the moment. “In 2011, K-cups were nowhere near where they are today,” he said. “If we kept the same position, it would be a mistake.”

Wedbush Securities analyst Nick Setyan doesn’t see Dunkin’s original strategy as a blunder. K-cup sales may be growing fast, but to Dunkin’, unlike Green Mountain, they are a small part of revenue. Prioritizing store business makes sense, Setyan said, since K-cup revenue earned from licensing fees is still much smaller.

“From their perspective, cannibalizing coffee is important because the opportunity cost is much greater. If you lose one cup of coffee sold in your store, you’re losing much more than what you’d gain in a license model,” he said.

To get the restaurant operators on board, Dunkin’ agreed to split its K-cup revenue which comes from licensing fees on the sale of the products by Keurig and J.M. Smucker with franchisees. They estimate this will add roughly $2,500 to $3,000 in revenue per store annually in the first five years, although the amount will vary with the size of the store. Dunkin’ says the plan doesn’t change its 2015 targets.

About 20 million U.S. households have Keurig machines, although brewer sales fell last quarter. Keurig Green Mountain CEO Brian Kelley said he expects the expanded distribution of Dunkin’ pods to lure new consumers who don’t yet own a Keurig brewer. Existing users have told the company they want broader availability of Dunkin’ K-cups.

The new deal also revises how revenue from bagged coffee and creamers is shared with franchisees. As with K-cups, Dunkin’ will now split the profit with franchisees. Previously, the company set aside about one-third of bagged coffee profit for a fund for such things as equipment that franchisees had some control over.

More Dunkin’ products may be coming to grocery stores.

“We’ve become more open to retail outlets,” Travis said.

READ MORE:https://www.cemachinery.com/semi-automatic-nespresso-capsules-filling-sealing-machine-for-irland-customer/




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