Dunkin’ Brands — facing a double-digit decline in the sale of K-Cup coffee packs at its franchised Dunkin’ Donuts locations — will expand distribution to U.S. and Canadian grocery, big-box and other retail outlets mid-year and online this spring, and split the net profit equally with franchisees.
The “unprecedented” agreement will allow the Canton company to grab a bigger piece of the $3.2 billion K-Cup business — 80 percent of which is sold where people buy groceries — build brand awareness and in turn drive traffic back to Dunkin’ Donuts restaurants, according to CEO Nigel Travis.
Franchisees also will reap 50 percent of net profit from sales of Dunkin’s other packaged coffee at non-Dunkin’ outlets and online under the 20-year deal.
“This is great for franchise economics, it’s great for us,” Travis said. “It’s going to enhance our sales because people will get used to the taste profile of Dunkin’ Donuts (coffee) in whatever channel. We are confident that it’s going to improve our traffic to our stores.”
The agreement will increase Dunkin’s K-Cup distribution from its 8,000 U.S. Dunkin’ stores to 67,000 retail outlets in addition to the online sales on Dunkin’s website and those of manufacturing/distribution partners Keurig Green Mountain and J.M. Smucker Co.
K-Cup sales currently account for about 2 percent to 3 percent of Dunkin’s annual U.S. sales or roughly $175 million.
Dunkin’ Brands launched K-Cups in its U.S. restaurants in 2011, when they were in their relative infancy, but the market has grown, particularly in grocery outlets, Travis said.
The K-Cup market is expected to grow by $5 billion next year, according to Barclays analyst Jeffrey Bernstein.
“Starbucks currently has about 15 percent share, and we believe it reasonable to assume Dunkin’ will be able to achieve half that,” Bernstein said.
The deal could translate into another $10 million to $15 million in Dunkin’ income annually, according to William Blair analyst Sharon Zackfia said.
“We believe the opportunity in the grocery channel will prove to be much greater than in the stores, as evidenced by Starbucks, for which we estimate over 80 percent of K-Cup sales occur in commercial channels,” she said. “Applying the same math to Dunkin’ would imply the potential for at least $500 million in incremental K-Cup sales after accounting for some potential cannibalization of franchisee sales.”
Dunkin’ started discussions with franchisees about expanded K-Cup distribution 15 months ago.
“Franchisees, like us, were concerned about the cannibalization of doing that,” Travis said. “Our studies basically said that it would be a good thing to go into retail, as it would allow us to compete against the competition in terms of taste profile (and) give new customers an opportunity to taste Dunkin’ coffee, particularly in the west of the country where we do not have too many stores.”
Franchisees hired an independent consultant to study the prospect and “came up with the same conclusions,” according to Travis, who wouldn’t disclose the opening proposed split of profits put on the bargaining table.
“We were very concerned about building the K-Cup business and not having any control over it,” Dunkin’ franchisee Clayton Turnbull, co-chairman of Dunkin’s Brand Advisory Council, a franchisee group, told Bloomberg News. “In 2011, K-cups were nowhere near where they are today. If we kept the same position, it would be a mistake.”
In addition to the four current K-Cup flavors, Dunkin’ will sell its Bakery Series Chocolate Glazed Donut flavor, currently a packaged coffee flavor, as K-Cups.
Dunkin’ shares were up 1.7 percent today, closing at $47.26.
