Along with second quarter earnings, Dunkin’ Brands announced the likely closure of 800 locations in 2020. It’s a shocking number, but as the company explained during an earnings call, it’s an acceleration down a path the company was already on.
Dunkin’ reported negative 18.7 percent same-store sales in the second quarter and revenue sank by 20 percent. That puts Dunkin’ behind Starbucks, which reported negative 10 percent same-store sales, but well ahead of the broader restaurant industry, which saw negative 37.9 percent same-store sales.
Scott Murphy, president of Dunkin’ Americas, said the company improved sequentially each month, down 30 percent in April, 15 percent in May and 9 percent in June.
"With the morning commute mostly on hold, I’m quite pleased with the business," said Murphy during an earnings call discussing the quarter.
He credited menu innovation, namely Dunkin' Refreshers, for helping drive daytime traffic to help replace the typical morning sales. The new tea product seemed incremental for the brand, said Murphy. Purchases including Refreshers add up to more than $7 and come with an "attachment rate" of 70 percent, meaning most customers who bought one of the drinks also got a food item or more beverages. He and the management team said the ongoing push to digital also helped.
CEO Dave Hoffmann said bringing the app development in-house proved very beneficial, part of the digital transformation he’s been pushing since taking over as CEO in February. He said that allowed the company to shift quickly to new COVID-19-era operations.
"We launched new curbside functionality for any franchisee that wanted it," said Hoffmann. "We now have more than 1,400 locations with curbside."
Another leg of that strategy was third-party delivery. The company reported 5,700 locations were plugged into the delivery platforms.
But there were some big, persistant challenges. Because Dunkin’s two biggest markets are New York and Chicago, the slow return to office life continues to impact the brand. Sports hubs, travel centers and other non-traditional outlets are also either slow or closed altogether.
Drive-thru operations, as seen across the industry, have been a major bright spot. Murphy said drive-thru locations performed four times better than non-drive-thru locations.
As for the big, scary closure number, CFO Kate Jaspon explained during the earnings call that COVID-19 accelerated something that was already happening.
"We decided to take this time to work with our franchisees to reassess our real estate portfolio and set Dunkin’ up for strong U.S. growth," said Jaspon.
The company had already outlined the closure of 450 locations in Speedways as part of its "Raising the Bar" strategy. Ten of those locations closed in the second quarter, along with 30 other Dunkin’ locations. She said more locations were identified in that real estate reassessment.
"At this time, including the 450 Speedway locations, we believe there could be approximately 800 low-volume locations, primarily alternative points of distribution that could permanently close," said Jaspon. "If all of these closed, it would represent 8 percent of total U.S. locations, but only 2 percent of systemwide sales."
She went on to say that most locations were unprofitable for franchisees with earnings below average and weekly sales of just about 25 percent of the system average. She said a similar rationalization was happening internationally too, where as many as 350 locations could close.
"I’d say it this way, since this management team took over, we have been focused on quality over quantity and repositioning the brand to be beverage led," said Hoffman. "These locations weren’t part of that future. This crisis allowed us to accelerate the closures and strengthen the portfolio. They were unprofitable for the franchisees and they had minimal impact on sales."
Jaspon added that unlike in the Great Recession, franchisees are able to get access to capital for new store development and remodels, suggesting that franchisees closing stores would push into drive-thru operations where possible.