America: Dunkin’ Donuts’ Next Frontier

Dunkin’ Donuts (DNKN) has 1,748 restaurants in South Korea and the Philippines. In California? Only one, at a Marine Corps base near Oceanside that opened in 2012.

Now Chief Executive Nigel Travis has announced his intention to spread the chain up and down the West Coast, starting with 150 stores in southern California. This is the third time in the past 30 years it will try to hook Californians on its sugary baked goods and coffee drinks. The chain actually had about a dozen stores in California until it pulled out in the late 1990s. In 2002, it made a short-lived effort to reenter Sacramento. “For one reason or another, usually down to the partner, it didn’t work out,” says Travis, citing inadequate franchisee support, including “world-class bad” training. “Just about every brand has had some of these stops and starts.” It now plans to have more than 1,000 restaurants eventually throughout the state.

As a lot of fast-food chains look abroad for growth, Dunkin’ is now rediscovering opportunities back home. It has opened stores in 31 countries outside the U.S. over the past five decades, but 85 percent of its 7,300 domestic stores are in or near the Northeast. It still plans to develop in South Korea, the Middle East, and emerging markets, such as China (it even signed Lebron James on as a “brand ambassador” in Asia in 2012) and Russia, but comparable store sales growth in the U.S. outpaced international growth last year, 4.2 percent vs. 2 percent.

The key to growth in the U.S. is actually not donuts but drinks and breakfast sandwiches, which are “more ritualistic products.” Coffee and other beverages accounted for about 58 percent of Dunkin’ Donuts’ U.S. franchisee-reported sales in 2012. The company states in its 10-K filing that it’s “positioned to capture additional coffee market share through an increased focus on coffee offerings.”

Expanding west means California, as well as the 12 states back home still sans Dunkin’Donuts: Alaska, Hawaii, Idaho, Minnesota, Montana, Nebraska, North Dakota, Oregon, South Dakota, Utah, Washington, and Wyoming. By 2015, about two-thirds of the chain’s new U.S. stores will be in the western part of the country (Travis says going to Hawaii and Alaska would be “opportunistic” at this time).

As for challenges, “real estate in California is going to be tough. California has some strong competitors, we’re aware of that,” Travis says. He hopes the new restaurants will pick up business from East Coast transplants who are familiar with the brand, people sick of bad supermarket coffee, and customers of independent coffee houses and competing chains.

The chain is known to localize menus—it did, for instance, offer a kimchi donut in Korea. Hopefully, California will provide some inspiration. A munchkin gushing with Napa Valley wine? One can only dream.