McDonald’s, Starbucks, Dunkin Updates: Trying New Ways To Spark Slow Sales

With restaurant chains struggling to generate the desired same-store sales growth, many are experimenting with non-traditional options such as retailing packaged items and company products in their stores in the hope of posting higher sales. A number of restaurants such as Dunkin’ Brands (NASDAQ:DNKN), McDonald’s Corporation (NYSE:MCD) and Chipotle Mexican Grill Inc (NYSE:CMG) reported a slowdown in sales in their latest earnings due to a weak consumer spending which remained precarious prior to the elections.

Who’s Selling What ?

Dunkin’ Donuts same-store sales slowed down to 4% in the second quarter from 7.2% in the quarter prior to that. This result comes in spite of the fact that sales had been helped by the availability of its K-cups and packaged coffee in participating stores across the U.S. Excluding the effect of K-Cups, the comparable sales figure would have been a lowly 2.5%.

Similarly, Starbucks also sells its K-cups at its restaurants. It has now introduced its own single cup brewer, called the Verismo, which are again available at Starbucks stores besides other retail outlets. The company will also expanding the packaged juice bottles sold under its Evolution brand to a greater number of its stores in 2013. Starbucks reported a strong same-store sales growth of 6% for the U.S. in its latest quarter.

McDonald’s will be introducing bagged coffee under its brand to its Canadian restaurants in November. ^[1] The world’s biggest fast food chain has seen its sales slow down considerably in 2012 with the figures turning negative in October, something which hadn’t happened since 2003. Success at its Canadian restaurants might pursue the management to replicate the strategy to its American counterparts.

See full analysis for Dunkin’ Brands

Selling company labeled products through their own stores/restaurants has a couple of advantages:

(a) It helps the company report higher same-store sales growth; a key figure on the basis of which the investors usually gauge the performance of a restaurant chain.

(b) The nationwide stores provide a significant amount of shelf space without having to separately set up a distribution network. Moreover, once the customers enter a restaurant/store, they might end up spending on other items too.

The downside, on the other hand, is that the sales of these packaged products could cannibalize the sales of items served at the restaurants. Also, an overdose of a particular brand could be detrimental to the company in the long run as consumers just get tired of it and move on to something new.

We have a $32 price estimate for Dunkin Brands, which is about 5% higher than the current market price.

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1. McDonald’s to Roll Out Bagged Coffee in Canada, October 26, 2012, wsj.com [↩]