RETAIL: Dunkin’ Donuts Takes Second Dip Into China
Bottom line: Dunkin’ Donuts’ second attempt to enter China stands a better chance of success due to a better choice of partners, and also will benefit if it tries to give its brand a more upscale image.
The small club of foreign fast food chains with more than 1,000 stores in China could soon gain a new member, with word that donut giant Dunkin’ Brands (Nasdaq: DNKN) is gearing up for a second try at the market. Before I go any further, I should disclose that I’m a big donut fan and was quite disappointed when Dunkin’ ended its first China foray more than a year ago. But that said, I’m a bit more optimistic that it will succeed this second time around for several reasons, including valuable lessons that it learned from the failure during its first time in the market.
Let’s start with a look the latest headlines that say Dunkin’ has signed a new master franchising agreement with a couple of Asia-based partners, who plan to open up to 1,400 stores in China over the next 20 years. (English article) One of the 2 partners, Jollibee Worldwide Pte Ltd, is based in the Philippines and has a strong record for this kind of localized franchising of Asian fast food chains. The other partner is a financial firm, Jasmine Asset Holding Ltd, a unit of RRJ Capital Master Fund II, LP.
There’s not much more detail in the reports, though they note that Dunkin’ may also be working with another franchise partner in China through a separate agreement announced a year ago. There are currently a modest 16 Dunkin’ Donuts locations in China, following the company’s termination of its previous franchise agreement in 2013.
Now that we’ve reviewed the news, let’s look at why I think Dunkin’s chances of success could be better this time than its last lukewarm attempt. One main factor working against the company is its main product, donuts, whose sweetness makes them unsuited to local Chinese tastes. Other chains have also discovered that fact, including US chain Krispy Kreme (NYSE: KKD), which shuttered most of its China and Hong Kong shops after its super-sweet offerings were too overpowering for local tastes.
But Starbucks (Nasdaq: SBUX) has become the textbook case that proves products don’t need to necessarily mesh with local tastes to succeed. Despite the foreignness of its core coffee products, Starbucks has been hugely successful in China by marketing itself as a trendy lifestyle brand that caters to white-collar, young urban professionals.
Dunkin’ is far more downscale in its home US market, where its donuts enjoy a blue-collar, working-man’s image as a cheap and tasty snack. But most Chinese are unfamiliar with Dunkin’s US image, and that lack of awareness could allow the chain to rebrand itself as a more upscale, yuppie-style choice with its new China foray. Starbucks used such a strategy in its China campaign, creating a more upscale brand than its more mainstream US image.
Branding aside, Dunkin’ has also learned an important lesson that finding the right partner for a China foray is often the deciding factor between success and failure. This time around it has jettisoned its previous less-experienced partner for Jollibee, which has a strong track record for running this kind of franchised business.
If Jollibee and Dunkin’ are smart, they will open their shops with higher priced donuts and coffee as their core products, replacing the cheaper fare that gave the previous stores a more downscale feel. As a donut lover I liked the cheaper prices from the past, but the Chinese certainly weren’t attracted by the combination of low-end image and overly sweet treats. If Jollibee and Dunkin’ can position the brand in a more upmarket way this time, I would give the chain a 50 percent or better chance of success in its second attempt to enter the market.
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