Dunkin Donuts' holy war
Chain reacts to new competitors with $40 million renovation, re-building campaign

With its niche in Canada's highly competitive quick service restaurant industry under attack, Dunkin' Donuts is revitalizing its management team and investing $40 million in a five-year renovation and branding campaign. Half will come from Dunkin' Donuts' parent company Allied Domecq International, and the balance from franchisees.

"Coffee is a growing sector, and everyone is getting into it," said Pierre Moreau, the Canadian division's new director of marketing and communications. "Our competitors are investing enormous sums to gain market share in Quebec and we have to act."

Those competitors are striking directly at the heart of Dunkin Donuts' Canadian subsidiary. Allied Domecq's fast-food division operates close to 10,000 restaurants in North America, but only 200 are in Canada, of which are 175 in Quebec.

Though Dunkin' Donuts, opened its first location here in 1962, and claims to be the province's first major fast food chain, after a quick period of initial expansion, the company rested on it laurels and contented itself with raking in the cash. This opened the door to a variety of threats.

On the coffee and desert fronts alone, several players jumped in: Second Cup, Starbucks, Van Houte and the recently McDonald's with its new McCafé units. All are cutting into Dunkin' Donuts' core client base.

In addition, earlier this year, Winston-Salem-based Krispy Kreme Doughnut Corporation announced plans to open 32 stores in Canada over the next five years. This may not seem like a lot, but these "super" stores averaging 4,000 square feet, are much larger than competitor doughnut outlets, and are operated as destination locations.

According to Judy Richardson vice-president (marketing) at KremeKo Inc., the company's Canadian operator, in the U.S., Krispy Kreme customers travel an average of 15 kilometers to get their fixes, which unlike conventional doughnuts are served hot.

But Dunkin' Donuts' biggest threat comes from Tim Hortons. The Ontario based giant has been on a massive building campaign, adding 500 stores in the last five years. The TDL Group Ltd., which franchises and operates Tim Hortons' 2,200 outlets, generated revenues of $1.9 billion in 2000 according to rankings estimates from Foodservice and Hospitality magazine. At that growth rate the group threatens to overtake McDonald's as the nation's largest quick service restaurant chain.

In Quebec alone Tim Hortons' already operates 200 outlets, and Paul House, TDL Group's president said recently that the group is close to being number one in the province.

In fact according to Denis Paquette, Dunkin' Donuts' Canadian division's recently named executive general manager, when its U.S. parent conducted research to deal with the emerging challenges, the competitive threats were so serious, a complete abandonment of operations north of the border was one of the options considered.

Dunkin Donuts' executives decided to focus strategy on its core product: doughnuts. "Our research showed that we had built a powerful brand identification over the years," said Paquette. "When Quebecers hear Dunkin' Donuts, they think doughnuts."

The chain will continue to offer non-core items. For example cappuccino machines are being installed in 130 restaurants across the province during the next six weeks, with a "Dunkaccino" launch expected before year-end, and an ad campaign early next year.

But the store renovations and rebuilding, the company's marketing strategy and its $3 to $5 million a year advertising budget, handled by PALM Publicité Marketing, will spotlight doughnuts.

It's the opposite tact from Tim Hortons, which has de-emphasized its doughnut connection over the years. The word "donuts" was removed from its signage and replaced with "always fresh," to reflect the chain's expansion to other products such as soups, sandwiches and chili.

Dunkin' Donuts store upgrade program will include some closings in declining areas, but these will be matched with new locations. And if all goes to plan, in two to three years expansion will follow.

"Our goal is to add 170 stores in the next five years," said Moreau.

Where, in Ontario?

"Have you been to Toronto lately?" asked Moreau. "In some places there's a Tim Hortons on every block. We'd rather look into areas where we can make money, such as growing neighborhoods here in Quebec."

Photo caption: As part of its five-year, $40 million rebuilding program, Dunkin Donuts is installing "Dunkaccino" machines in 130 of its restaurants during the next six weeks.

E-mail can be sent to Diekmeyer at: peter@peterdiekmeyer.com

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