When McDonald’s invaded our collective consciousness in the 90s, there was a certain delirium that accompanied it. Indians were just waking up to the Western fast food chains. Even though the taste of a burger may have been alien to most, there were long queues to try out the product. Since then, not only McDonald’s grown in India, but it has inspired a lot of other fast food chains to enter India and charm the great ‘Indian middle class’ to try out its wares.
Among those who attempted to woo the Indians with gastronomical delights has been Domino’s Pizza, brought to India by Jubilant Foodworks (JUBI IN). When we met Jubilant a few months ago, it told us that the underlying demand momentum was quite robust and that it is confident of achieving the 18% guidance of same store sales (SSS) growth. There has been some growth deceleration in the past quarter; nevertheless, the 30%+ growth rates were too high to sustain in any case and would have corrected some time. Jubilant will add 100 stores this year (against 465 outlets as at March-end). In the next 3-5 years, it aims to increase its presence by more than doubling the cities and towns it is present in.
Although all its outlets are company-owned (no franchisees), it is still an asset-light model since the outlets are all rented. Jubilant has enough pricing power to pass on raw material cost increases as it has done in the past. Margin expansion will be led by gains from operating leverage (in the past three years, Jubilant has seen large margin expansion). Employee retention, particularly at the managerial level, remains the single biggest challenge.
Jubilant is in a sweet spot, with a proven business model and seems well placed to capitalise on this rapidly expanding market. The basic investment story is thus on a strong footing – geographic expansion-led, higher penetration-led growth that’s more sustainable, continuing margin expansion, high earnings visibility, strong cash generation and rising RoE. Valuations are rich, but will likely sustain given the high growth visibility.
Dunkin’ Donuts – a global brand
A new growth driver has now been added in the form of Dunkin’ Donuts, a global brand brought to India by Jubilant. It is an international doughnut and coffee retailer founded in 1950 in Quincy, Massachusetts; it is now headquartered in Canton. While the company originally focused on doughnuts and other baked goods, over half of its business today is in coffee sales, making it more of a competitor to Starbucks than to more traditional competitors such as Krispy Kreme and Tim Hortons. Dunkin’ Donuts has more than 10,000 locations in 30 countries worldwide, which include more than 6,900 Dunkin’ Donuts locations throughout the United States and more than 5,000 international locations. This figure compares with the 17,009 stores of coffee chain Starbucks, whose baked goods are usually prepared out of shop. Nearly all of Dunkin' Donuts locations are franchisee-owned and operated.
Dunkin' Donuts, along with Baskin Robbins, is co-owned by Dunkin’ Brands Inc. (previously known as Allied Domecq Quick Service Restaurants, when it was a part of Allied Domecq). In the US, Dunkin' Donuts is sometimes paired with Baskin-Robbins ice cream shops. While such locations usually have two counters set up for each chain (much like the Wendy’s/Tim Hortons co-branded locations), depending on business that day, both products can be bought at the same counter (usually the Dunkin' counter), much like Yum! Brands stores. Dunkin's largest competitors include Krispy Kreme donuts and Starbucks, as well as small locally-owned donut shops. In Canada and parts of the northern the US, Tim Hortons is a major competitor. Mister Donut had been its largest competitor in the US before it was acquired by Dunkin' Donuts' parent company. The Mister Donut stores were rebranded as Dunkin' Donuts. Dunkin still controls the trademark rights to Mister Donut through various new and amended older trademark registrations.
Will India bite into doughnuts?
In a tie-up with Jubilant, Dunkin’ Donuts now sells the famous doughnuts with sandwiches, coffee and breakfast menu in India, and has named them "Dunkin’ Donuts & More". It will have 10 such stores, all 100% company-owned, by end FY13. This business will take a while to finalise as Jubilant experiments with various store formats. It has opened three stores until now, all in Delhi.
I visited the three outlets in Delhi, at Connaught Place (flagship store – 80 seats), Greater Kailash-1 (80 seats), and Saket (60 seats). The experience was positive — nice, bright interiors with loads of space for private conversations. The crowd cover was light at the CP outlet but heavy at Saket and pretty even at GK1. The average customer spends ~Rs200 per head on weekdays and ~Rs300 per head on weekends. They see footfalls of 300-400 on weekdays, and 600-700 on weekends. About 15% of revenue is from takeaways, but there are no "home deliveries" yet. Apparently, Jubilant cannot provide home deliveries at Dunkin’ as their agreement with Domino’s disallows such operations.
The Saket outlet
While competition is pretty heavy all round (with multiple brands and outlets vying for the same share of wallet), DD has not yet started to advertise. This is despite the fact that the doughnut culture exists on the fringes in India ("Mad Over Donuts" is a doughnut franchise that’s been opened up in India by a Singapore-based NRI and is doing well). And to cater to Indian tastes, there are eggless doughnuts on the menu too!
Menu – a wide variety to choose from (and localized too)
The extensive menu (24 varieties of doughnuts, 28 varieties of sandwiches, 24 different beverages) is a cross between what one gets at McDonald’s, coffee shops, Subway, etc. The menu has been tweaked around to cater to Indian tastes – hence, "& More" in the name, which is unique to India. As opposed to doughnuts and coffee in outlets across the globe, the outlets in India serve sandwiches, tea, smoothies and milkshakes.
Various menus at Dunkin’ Donuts
India is not the only country where Dunkin’ has localised its menu. Apparently it has done it in other parts of the world as well, including China, where it introduced doughnuts with ingredients like sea weed and shredded pork. Neither is Dunkin’ the first fast-food retailer to adapt its menu to local palates. McDonald’s has done it in the past by introducing a beef-free Big Mac for India – the Chicken Maharaja-Mac. Dunkin’ also had other dishes with paneer. Similarly, Pizza Hut and Domino’s have also tweaked their menus to suit Indian palates, tastes and sensibilities.
The menu is what makes Dunkin’ Donuts & More stand out. India-specific additions include Mango (India’s national fruit) doughnuts. Mango also finds its way into smoothies and milkshakes. This is bound to have its share of fans, particularly since Alphonso makes an entry there. Lychees are another Indian touch in Dunkin’s signature cold drink – Coolatta. In beverages, Dunkin’ Originals and Cold Coffee are very popular, although the cold coffee is bitter.
Sandwiches are another thing unique to India. DD&M has introduced a wide variety of sandwiches (including quick snacks) to the menu, more extensive than its doughnut menu! Why is this different? These are part of Dunkin’s worldwide menu, but in the breakfast menu, and it rarely has a different menu.
Sandwiches form a part of the overall menu for DD&M, keeping in mind lack of too many cafés in India that offer lunch and dinner options. Sandwiches vary from the croissant and bagel to the ciabatta and focaccia, and cute stuff like a cupwich and a bunwich. While the bread may be Western, the fillings are very much Indian. And there is a good crowd that builds up in the lunch hour.
Pricing – pretty reasonable
The sandwiches may be a tad heavy on spices, but overall pricing is reasonable – doughnuts are priced at Rs45 each, while the breakfast is priced at Rs90. Sandwiches range from Rs80 (vegetarian) to Rs110 (non-vegetarian), with the cupwich and bunwich costs half of that. Beverages start at Rs45 for a Coolatta. A large clientele (70-75%) is in the 18-25 year bracket. The top selling doughnuts are Chocolate Temptation, Boston Crêpe, Death by Chocolates, Irish Mocha, Triple Chocolate, Cookie Cartwheel, and Chocolate Éclair. Party packs are in demand with 6 for the price of 5, and 12 for the price of 9 being popular.
While Dunkin’ is trying to build a doughnut culture in India, the problem is that, doughnuts are not made in your presence. They are shipped from Noida, and served to the customer. That somehow kills the experience and joy of seeing a doughnut being prepared in your presence, even though the doughnuts are soft and fluffy. Further, apart from not knowing the hygiene factor at the place where the doughnut was made, there is no facility for heating the doughnut. The doughnuts just come very quickly to you – almost as soon as you place the order, and are served at room temperature. But apparently, this is the way Dunkin’ serves its doughnuts globally - not only is it not made in front of you, it is also served at room temperature. The sandwiches and beverages are made in front of you. For the doughnuts, each DD&M outlet keeps some backup, but manage JIT inventory.
Bright interiors; Takeaway boxes
Good start, but breakeven may be longer
As of now, DD&M is only opening outlets in New Delhi. Besides the three stores there, it plans to open 7-8 more over 2013. It will consider expanding to Mumbai and other parts of India only after it completes its Delhi expansion. Globally there are 7,000+ Domino’s outlets, and 10,000+ Dunkin’ Donuts outlets. If Jubilant gets its model right, they can achieve ~2,500 Domino’s, and 5,000 Dunkin’ Donuts in India (although the company maintains that they are targeting only 1,000 outlets).
From an investor’s perspective, the Domino’s model is an asset-light one due to smaller premises that are rented, minimal seating (55%+ takeaways), and higher average ticket size. On the other hand, Dunkin’ Donuts is more of an opex-heavy model, with more dine-ins (hence large-sized restaurants) and far lower average ticket sizes. But initial capex at DD is lighter due to a smaller kitchen and less equipment as opposed to Domino’s. The opex and lower ticket size at DD&M would make breakeven a little longer to achieve as revenue per square feet will be lower. But if Jubilant gets the locations and format right, there is no reason why DD&M will not receive the same warm reception that other American fast food companies did.
What are doughnuts?
A doughnut (or donut) is a type of fried dough confectionery or dessert food. Doughnuts are popular in many countries and prepared in various forms as a sweet snack that can be homemade or purchased in bakeries, supermarkets, food stalls, and franchised specialty outlets. They are usually deep-fried from flour dough, and shaped in rings or flattened spheres that sometimes contain fillings. Other types of batters can also be used, and various toppings and flavourings are used for different types. The two most common types are the toroidal ring doughnut and the filled doughnut, a flattened sphere injected with fruit preserves, cream, custard, or other sweet fillings. A small spherical piece of dough may be cooked as a doughnut hole. Doughnut varieties are also divided into cake and risen type doughnuts. Other shapes include rings, balls, and flattened spheres, as well as ear shapes, twists and other forms.
Traditionally, doughnut holes are made by frying the dough removed from the center portion of the doughnut. Consequently, they are considerably smaller than a standard doughnut and tend to be spherical. Commercially made ring doughnuts are not made by cutting out the central portion of the cake but by dropping a small ball of dough into hot oil from a specially shaped nozzle. Doughnut sellers saw the opportunity to market "holes" as a novelty, as if they were the portions cut out to make the ring. Similar to standard doughnuts, doughnut holes may be topped with confections, such as glaze or powdered sugar.
At present, doughnut and the shortened form donut are both pervasive in American English. According to the Oxford Dictionary while "doughnut" is used internationally, the spelling "donut" is American.