Caffeine High
Dunkin’ Donuts drives sales and traffic by bringing espresso-based drinks to the average Joe.

By Maya Norris

Capitalizing on its position as one of the largest coffee retailers in the country, Dunkin’ Donuts launched a line of espresso-based drinks in fall 2003 that has boosted sales and traffic for the Canton, Mass.-based QSR.

U.S. systemwide sales increased from $2.9 billion in fiscal 2003 to $3.4 billion in fiscal 2004. Same-store-sales increases were 4.4 percent in ’03 and 6.9 percent in ’04. Average unit volume in 2003 ran at $840,811, while 2004 AUV tracked at $911,270.

“The business that we derived from espresso has been totally incremental. So we didn’t give up anything to get it. Our top-line sales are up high single digits, low double digits,” says Vice President of Marketing John Gilbert. “So our same-store-sales performance has got to be near the top of the industry. Espresso is driving that. So it would be safe to say that the products have met or exceeded expectations.”

Coffee Over Donuts
According to Dunkin’ Donuts, selling lattes and cappuccinos is a natural extension of the 55-year-old brand. In an interview with Chain Leader in November 2003, CEO Jon Luther called coffee the “strategic heartbeat” of Dunkin’ Donuts. The chain continues to sell 2.7 million cups a day, with coffee accounting for 50 percent of sales. Doughnuts only make up 15 percent.

The company wanted to take advantage of the growing popularity of espresso that Starbucks had cultivated. However, it claims it is not trying to take on Starbucks. Rather it wants to offer options beyond brewed coffee to its working-class, on-the-go customers.

Dunkin’ Donuts spent about 18 months of active research and development to create a line of authentic, quality espresso drinks that could be delivered to the customer quickly, consistently and at a low price point.

According to Rick Hendrie, president and chief experience officer of Cambridge, Mass.-based Link Inc., a restaurant, retail and hotel consulting firm, Dunkin’ Donuts is smart to build the coffee side of its business. “They recognized a long time ago that their doughnuts would not be the driving force for their sales increases,” Hendrie says. “The real profit is in coffee. It always has been.

“The idea of creating an espresso line, especially with the lattes, is smart,” he adds. “It’s definitely entered the mainstream culture. I think that most people first of all can pronounce the word and know what it means. In popular culture, it’s filtered down to where people don’t feel weird about ordering it.”

No Barista Experience Needed
The program centers around an $8,000 espresso machine. The easy-to-operate machine features push-button technology with simultaneous but separate brewing and frothing functions that can turn out a drink in about a minute, resulting in an average ticket time of 1.5 minutes to 2 minutes. “So you still have the theater and the authenticity, but you have the speed,” says Dunkin’ Donuts Director of Operations Kevin Wright.

“In traditional older machines, there’s more of an art and a lot of training around how to make an espresso beverage,” he says. “And this particular piece of equipment has simplified this. That’s how we’re able to get the quality and speed.”

“It’s critical when you’re selling a product that’s only a couple of bucks that you keep that speed up because you make your money on volume,” Gilbert says.

Before rolling the drinks systemwide, Dunkin’ Donuts provided three-hour cluster training to franchisees and their managers to teach them how to train their employees on how to use the machine and make the drinks. The managers then trained unit employees using a Web-based program that took one to two hours to complete before they practiced making the espresso beverages. They also posted job aids on the espresso machines as a quick reference guide on how to build the drinks.

Espresso Buzz
Dunkin’ Donuts rolled the espresso program systemwide on Sept. 30, 2003. The cappuccinos and lattes are available plain or with flavors such as hazelnut or mocha swirl. Priced about 20 percent to 25 percent less than Starbucks, the drinks cost $1.79 for a small, $2.29 for a medium and $2.69 for a large. A serving or extra shot of espresso is 99 cents. The best-selling iced lattes cost $2.29 for a small, $2.79 for a medium and $3.49 for a large. Prices vary slightly in different markets.

Espresso makes up 10 percent of sales, with coffee still accounting for 50 percent. While the average check has remained about the same, the company says guest counts have increased, especially in the afternoon, traditionally a slow time for the QSR. Gilbert won’t quantify how much.

While Gilbert keeps mum, franchisees Seema and Salim Ali are proud to say that they have seen a return on their investment since they introduced the drinks in March 2004 in their Lincoln Park, Mich., store. The husband and wife team spent about $9,500 to purchase and install the espresso machine.

“It’s an integral part of our business now. It’s one of the best investments we did,” says Salim Ali. “It’s more than expected. We all as a market didn’t know there was so much potential in these products. But after launching it, we are finding out that we are attracting new customers, especially with the cold lattes.”

Prior to the espresso line, coffee made up 38 percent to 42 percent of the Alis’ sales. Coffee and espresso now make up 48 percent of sales. Traffic has increased 10 percent in the afternoon and between 5 percent to 10 percent in the evening. Since the morning is already strong at their store, it’s difficult for them to determine how much traffic has increased. “But every third or fourth customer buys the product,” says Ali, who opened two more stores with his wife in western Detroit in 2004.

Adding to the Grind
As Dunkin’ Donuts prepares to expand westward, the company is adding new drinks to the lineup. This summer it will introduce Turbo Ice, iced coffee with a shot of espresso. Building on its best-selling iced latte, it has launched the Chocolate Dipped Banana Iced Latte and Chocolate Dipped Strawberry Iced Latte as limited-time offers through May 29.

The company is also experimenting with adding flavors such as coconut, blueberry and toasted almond to its core line of drinks or as LTOs.

To complement the drinks and drive traffic in the afternoon and evening, Dunkin’ Donuts is looking into offering bite-sized treats like brownies and cookies as well as stuffed sandwiches.

According to published reports, the company will debut a prototype this summer, but it is not releasing any details. It is also experimenting with WiFi Internet access in some Chicago locations and is considering adding music to the stores. “Our redesign efforts and reconcepting efforts will be aimed at making Dunkin’ easier and faster to use for the on-the-go consumer. So we probably won’t put couches and fireplaces in,” Gilbert says.

As Dunkin’ Donuts continues to build its espresso business, the company must “continue to educate the mass of American consumers—blue-collar workers, construction guys, the everyday Joe—that espresso products are for them,” Gilbert says. “Our job is to communicate that it’s a great-tasting beverage you can use any time of day no matter who you are.”