Dunkin’ Donuts is throwing its losing K-cup strategy into reverse, announcing a partnership today with Keurig and J.M. Smucker to distribute its coffee pods to thousands of grocery and specialty stores, mass retailers, and online channels.
The distribution will start midyear, and Dunkin’ will split the profit from its K-cup business 50-50 with US franchisees for the next 20 years.
Until now, the only place you could buy the K-cups has been a Dunkin’ Donuts restaurant, a strategy that has started to work against the chain as options at supermarkets and other retailers quickly expanded. Even as Dunkin' was losing out at those venues, its strategy was failing right in the store. K-cup sales in Dunkin stores fell nearly 30 per cent last quarter, as consumers picked up other K-cups at the supermarket and elsewhere.
The company launched the pods in stores in 2011 and held off on wider distribution because of pushback from franchisees, who worried that increasing at-home availability would reduce visits to restaurants. “We were very concerned about building the K-cup business and not having any control over it,” said Clayton Turnbull, co-chairman of Dunkin’ Donuts’Brand Advisory Council, the franchisee group. Protecting its operators also was a priority for the company, which gets about three-fourths of its US revenue from royalties and franchise fees.
As Dunkin' proceeded cautiously, competitors’ K-cup sales rose. Starbucks became the second-best-selling brand, after Green Mountain, with K-cup sales of nearly $449 million in the year ended 25 January, according to data from Chicago market research firm IRI, and its cafe business still grew. Recently, both McDonald'sand Krispy Kreme rolled out their own pods.
In late 2013, the company started discussing expanded distribution with franchisees, who then hired a research firm to evaluate the impact of a bigger rollout. The firm found that 80 per cent of all K-cup packs are purchased where consumers buy their groceries and said it expected the market to grow 90 per cent over the next five years.
To get the restaurant operators on board, Dunkin’ agreed to split its K-cup revenue—which comes from licensing fees on the sale of the products by Keurig and J.M. Smucker—with franchisees. They estimate this will add roughly $2,500 to $3,000 in revenue per store annually in the first five years, although the amount will vary with the size of the store. Dunkin' says the plan doesn't change its 2015 targets.
Bloomberg News, edited by ESM
