Scott Murphy, president of Dunkin’ Americas, said the company has been guided by four principles amid the pandemic—ensure safety, provide flexibility, support franchisees, and empower quick decision-making.
So far, all four have held strong despite immense pressure from the weight that is COVID-19, Murphy said.
“These four principles have served us well and will continue to guide our decision-making moving forward,” Murphy said during the company’s Q1 earnings call. “Although times have been tough, our model is strong. Great coffee fast in a high frequency, low-touch environment is what we're all about, even before COVID. Our franchisees are strong. They are eagerly serving their communities across the country and can't wait to do more.”
To add convenience, Dunkin’ added curbside pickup to 1,000 non-drive thru locations, expanded delivery options, and gave incentives to use contactless ordering through the app. Curbside represents about 2 percent of transactions at those non-drive-thru units. Delivery, which doubled from 2,000 to 4,000 stores, now mixes 1.4 percent, with three times the average check.
Around 70 percent of stores have drive-thru, which are performing about three times better than non-drive-thru locations. Drive-thru units are doing 94 to 95 percent of their business through that avenue.
As many as 1,200 U.S. units temporarily closed at one point. Franchisees were allowed to shrink hours to clean stores at night and nearly 2,000 locations closed their front lobby to focus on drive-thru. To improve speed and reduce complexity, the company formed a curated menu for franchisees with a limited staff.
New brand standards were instituted systemwide. Employees wear masks and gloves, counters are blocked by Plexiglas, and infrared thermometers will soon be at every domestic location. Dining room tables and chairs were removed to change a model “built for speed into one built for new social distancing protocols.”
“On the safety side we don't look at these as costs. We look at these as investments,” CEO Dave Hoffmann said. “… Those are investments that we made that we think is going to be critical. Do I feel safe as an employee? Do I feel safe as a customer? And [the customers are] going to be looking for trusted brands to deliver against that.”
To assist franchisees financially, Dunkin’ extended payment terms for royalties and advertising fees in the U.S. and Canada from 12 to 45 days. The brand waived up to one month of rent and allowed operators to defer two months of rent at the approximately 900 locations where it owns property. In addition, franchisees were given flexibility on timing of capital expenditures like purchase of equipment, NextGen remodels, and new restaurant builds.
The company has also called franchisees’ banks, encouraging their support. Hoffmann said many of the franchisees, which average 150 employees, have successfully applied for Paycheck Protection Program loans. Dunkin’ estimated that franchisees who receive assistance from the PPP will have 80 percent of its projected cash flow by the end of the year, even with lower sales volumes.
“We've got your back is more than just a saying around here,” Hoffmann said. “Being in the [quick-service restaurant] industry is first and foremost about serving others. Service runs in our blood whether that's behind the counter, at the drive-thru, or in the hospitals and school parking lots during times of crisis. That's why we're doing everything we can as a company to serve the needs of our franchisees, employees and communities during these challenging times. It's not just about preserving liquidity or our reputation. It's simply about doing the right thing.”
From the company’s perspective, furloughs have been avoided thus far. The brand created what Hoffmann called a gig program in which employees who’ve had their role impacted by COVD-19 have been shifted to other “critical functional areas.”
Hoffmann said Dunkin’ cut $45 million in G&A and capital expenditures to preserve cash. Operating expenses were reduced and matching 401(k) contributions were suspended. From May to August, Hoffmann will reduce his salary by 30 percent, while other senior management members will cut their salary by 20 percent. The board of directors decided to reduce their compensation by 50 percent. Those savings will be transferred to the Dunkin’ Brands Family Fund, which supports employees affected by crises.
In the first 10 weeks, comps at U.S. Dunkin’ stores grew by 3.5 percent, which was on pace to be the highest quarter since Q3 2013. The company also witnessed a growth in traffic for the first time in four years. Then the COVD-19 outbreak occurred and comps declined 19.4 percent in the final three weeks. The brand finished Q1 at negative 2 percent.
Hoffmann said that at the end of March and into early April, same-store sales were down 35 percent, but now they’re around negative 25 percent. Most of the sales are now captured between 10 a.m. and noon as opposed to early morning, the CEO said.
U.S. Baskin-Robbins units finished Q1 up 1.8 percent after positive traffic and growth of 11 percent in the first 10 weeks. Into April, same-store sales declined around 30 percent to 35 percent. For the week ending April 25, the drop shrunk to 10 percent.
Around 90 percent of the 9,637 domestic Dunkin’ locations remain open and more than 90 percent of the 2,518 U.S. Baskin-Robbins units are open.
Around 1,000 stores are still temporarily closed. There have been discussions around whether some may close permanently.
“Maybe some of those low-performing or marginal performing stores, maybe there is an opportunity to consolidate to reload to add a drive-thru in a better location,” Murphy said. “And we're having—we’re starting to have those conversations with the franchisees now. A little too early to put our arms around exactly how many, but we're having those conversations right now.”
International Dunkin’ stores grew comp sales 7 percent through February, but ended Q1 with a decline of 7.1 percent. For international Baskin-Robbins restaurants, same-store sales lifted 7 percent through February, and finished Q1 with a rise of 2.5 percent. Overall, around 50 percent of international stores are open. The company finished Q1 with 3,530 international Dunkin’ stores and 5,650 international Baskin-Robbins locations.
Systemwide, Q1 revenue increased 1.3 percent to $323.1 million, driven by an increase in ice cream sales and revenues from license fees related to retail packaged coffee.
Before the pandemic, Dunkin’ spent about $20 million to $25 million per month, but that’s been reduced to $15 million to $20 million. In March, the brand borrowed $116 million under its variable funding notes. At the end of the first quarter, the company had $381 million in unrestricted cash in the U.S.