Brand New Buzz

By Anita Hamilton / Sarasota

If it weren't for the pink door handle shaped like the letter D at the new Dunkin' Donuts shop in Sarasota, Fla., you might think you had stumbled into a Starbucks. Bags of beans and oversize coffee mugs near the door? Check. A waiting area for lattes and cappuccinos? Check. Heck, there's even free wi-fi and a rack of gift cards by the register.

This is the Dunkin' Donuts of the future, a chic space with soaring ceilings and earth-toned walls that will be the prototype for every new store the 57-year-old chain opens. "We're not a sleepy little New England company anymore," says Dunkin' Brands CEO Jon Luther, 63. Sure, they'll still have time to make the doughnuts for your morning commute, but Luther thinks the slightly musty chain is ready to take on the industry giants--Starbucks and McDonald's--on their turf. He started small, rolling out espresso drinks in 2003; they now account for 5% of sales. Next he plans to triple the number of U.S. stores, to 15,000, by 2020; expand the menu with pizza and flatbread sandwiches; and give the stores a much-needed makeover.

The new look and a bulked up $125 million national ad campaign ("America runs on Dunkin'") are part of a carefully orchestrated plan to spiff up the brand with an eye toward taking the company public. A year from now, "we'll sit down and say, Is the company at this point geared for a reasonable IPO?," says Carlyle Group co-founder Dan D'Aniello. Carlyle, together with Bain Capital and Thomas H. Lee Partners, bought Dunkin' Brands from the French beverage giant Pernod Ricard for $2.4 billion in March 2006. To make that investment pay off, Dunkin' will have to fend off competitors trying to take a bite out of its core breakfast business while it hopes to eat some of their lunch. "The biggest challenge is to be able to achieve growth, given the competitiveness of the market," says D'Aniello. "That's the whole deal."

Dunkin' Donuts, which is based in Canton, Mass., had comfortably enjoyed the second spot in the breakfast market for years. Customers relied on Dunkin' for a doughnut and a cup of joe; they went to McDonald's for anything more. That easy division worked for years. Dunkin' rang up more than $3 billion in U.S. breakfast sales last year, compared with the Golden Arches' $7 billion, according to research firm A.G. Edwards. But the heat is on. In January McDonald's, which is in the middle of its own revival, scored big when its coffee beat Dunkin's in a Consumer Reports survey. Starbucks, meanwhile, rolled out hot breakfast sandwiches last fall while Burger King debuted a dollar menu featuring the Hamlette, a knockoff of the Egg McMuffin, on Feb. 19.

Instead of trying to compete head on at lunch and dinner, Dunkin' is betting on snacks like smoothies and miniature pizzas. Drive-through customers account for 60% of its business, so Dunkin' is focusing on food you can eat with one hand on the steering wheel. Since people stop in for coffee all day long, the hope is that they will be more inclined to grab a quick snack too. The prototype store uses high-speed ovens that can heat sandwiches in less than a minute while giving the bread those toasted brown edges no microwave can imitate.

But you won't find a dollar doughnut menu at Dunkin'. Rather than engage in a price war with the fast-food giants, Dunkin' is trying to close the gap between itself and Starbucks. Although it makes more money on breakfast sales overall than the Seattle-based chain, the average Dunkin' check is just $1.85, vs. $3.75 at Starbucks, notes food analyst Tom Miner of research firm Technomic. Dunkin' has positioned its breakfast sandwiches as quick quality, at the same price as Starbucks, $2.99. "I think they're in a good position against their competitors," says Miner. "Their biggest challenge is to focus on a couple of very popular items and do them really well."

Joe Scafido's job is to dream up those big hits. As chief creative and innovation officer, he is working on everything from an iced-tea-- lemonade Coolatta (it's an acquired taste) to a cherry chocolate strudel (now, that's addictive), both of which will roll out nationwide this spring. Not every idea hits the spot. Plans for a pomegranate smoothie were nixed because of limited supplies of the fruit. ("We'd have everyone who drinks pomegranate martinis mad at us," jokes Scafido). But a new Cuban sandwich has been a hit, and the chain may soon start serving a darker-roasted coffee.

To get people to try out its new menu, the company first has to get them in the door. That's not a problem in places like Providence, R.I., where there is one outlet for every 6,000 people. But Dunkin' has had a rougher time west of the Mississippi River, where it has only about 60 of its 5,200 U.S. stores. Previous efforts to go cross country were haphazard, and those lonely outposts got blasted by stronger regional brands. This year, when Dunkin' rolls out in such new markets as Phoenix, Dallas and Las Vegas, it will blanket them with up to 150 stores. It's also planning to open more outlets abroad in Malaysia and Taiwan. To quick-start its plan for up to 1,000 new stores a year, Dunkin' now requires new franchisees to open at least five shops instead of just one.

All these changes are making some longtime franchisees nervous. Store owners typically net about $170,000 on revenues of $850,000 per store each year, even after Dunkin' takes its 5% cut of sales and 5.9% in advertising and management fees. But upgrading to the new look, mandatory by 2015, will cost more than $200,000 per store, wiping out a year's worth of profits. And some question whether the $7,500 TurboChef ovens are worth buying when the new hot food items may bring only marginal sales increases. Microwaves work fine for breakfast sandwiches, they say. Currently 63% of revenues in a typical store comes from coffee and 17% from doughnuts. "We like innovation, but we don't want to lose any ground," says Mark Dubinsky, president of Dunkin' Donuts Independent Franchise Owners, which represents about 200 owners of 1,500 stores.

To win over nervous owners, Dunkin' is pointing south, to Sarasota. At the prototype store, franchise partners Marvin Kaplan, Kevin Millard and Shawn Cabral say new chicken biscuits, flatbreads and pizzas account for 10% of sales. Their shop, close to popular Siesta Key Beach, is packed by 10 a.m. on weekends. It opened on Jan. 26 and is already beating sales at their other store, which is about a mile farther from the beach and brings in $1.2 million a year, according to Cabral. With more than 5,000 customers turning out for the first week and the average sale totaling $4.25--only half of that from coffee--the store is an emblem of what Dunkin' hopes is its highly profitable future.

On a recent Saturday afternoon, that day feels far away. It's 3, and Dale and Martha Yoder, the only customers, are sticking to coffee. Martha, 67, says the store looks "snazzy," but neither she nor her husband has any plans to plunk down $2.99 for the new turkey-bacon-cheddar flatbread sandwich. "I like my eggs and ham and bacon," says Dale, 68, as he dunks a chocolate glazed into his hazelnut-flavored coffee. Then again, says Martha, "those pizzas look good." Maybe next time.