A big problem has percolated at Dunkin’ Donuts. Diners aren’t just running to the Massachusetts-based donut and coffee chain for breakfast anymore. They are increasingly visiting rivals like McDonald’s too.
Executives at Dunkin’ Donuts (DNKN) told analysts on Thursday that slow sales growth in the U.S. market – where sales dropped 0.8% at existing locations for the fourth quarter – were pressured by fierce competition for a part of the day that has given guests far more options to get their morning coffee and afternoon pick-me-ups.
“The competition is fierce and getting fiercer and promotional activities steadily increased in 2015, not only from our traditional competitors, but also from convenience chains,” said Chief Executive Nigel Travis.
He’s right. The sales drop in the fourth quarter missed Wall Street’s expectations, and also badly lagged the performance notched by two big rival chains. McDonald’s (MCD) reported a very impressive 5.7% same-store sales increase for the latest quarter as results were bolstered by the October launch of the all-day breakfast. At Starbucks (SBUX), same-store sales jumped 9% in the U.S.
Greater interest in breakfast among consumers is also luring other rival chains to target that part of the day with expanded menus, analysts say, noting efforts by Yum Brands’ (YUM) Taco Bell and Burger King (BKW) to court customers with their breakfast menus.
All of these competitive elements have squeezed Dunkin’ Donuts.
Dunkin’ Donuts attempted to downplay the pressure presented by McDonald’s more aggressive push into breakfast. “The impact of McDonald’s all-day breakfast was marginal,” said Travis.
Analysts didn’t exactly agree with that assessment.
“They said ‘marginal’ but it is clear there was some disruption because of McDonald’s all-day breakfast,” Morningstar analyst R.J. Hottovy told Fortune.
Another issue that percolated during the question-and-answer session was the issue of pricing. It appears that some Dunkin’ Donuts franchisees got too aggressive on pricing. In the Boston area, for example, chains were charging 10 cents more for a regular cup of coffee over rival Starbucks. While Dunkin’ can provide advice on pricing, franchisees have the final say and executives concede that in some cases, they raised prices more than recommended.
Dunkin’ Donuts said that they will more aggressively provide priding guidance to avoid the problematic pricing that occurred in the Boston market.
Hottovy says Dunkin’ Donuts pricing is too high because it moved to raise prices to counter wage increases before many rivals have done so, a misstep that could hurt sales over the next few quarters.
“They’ve had some self inflicted issues of late and it is not something they will dig out from until the middle of 2016 at the earliest,” he added.