National Chains Might Consider Sharing Locations in Response to Pandemic
Talks that could result in the parent of Arby’s and Buffalo Wild Wings buying doughnut and ice cream seller Dunkin’ Brands Group not only signals the pandemic is driving restaurant business consolidation. It may also lead to more jointly run restaurant properties.
Executives at Dunkin’ Brands and potential buyer Inspire Brands, an Atlanta-based company that also owns chains such as Sonic and Jimmy John’s, said this week preliminary discussions were held but they offered no further comment to CoStar News. “There is no certainty that any agreement will be reached,” Dunkin’ Brands said in a statement.
The discussions reflect a national restaurant industry looking to adapt to the coronavirus financial fallout. Most restaurants have limited or no indoor dining and are pushing alternatives such as more to-go and delivery. Even those options haven't stopped many companies from closing locations, which have steep overhead costs especially when a large portion of the real estate isn't generating income.
Restaurant consultants said Inspire, Dunkin’ and other chain companies could find that it makes financial sense to team up on leasing large retail spaces that become available as hard-hit independent restaurants and retailers close in the pandemic.
If a merger did happen, one scenario could find Dunkin’ and its acquirer setting up locations where several brands operate under one roof, according to restaurant development consultant Jerry Prendergast. For instance, a Jimmy John’s sandwich shop may also have dessert counters carrying Dunkin’ Donuts and Baskin-Robbins ice cream.
While Dunkin’ Brands itself has operated combination doughnut and ice cream shops, the dual-brand concept has remained relatively rare among chain restaurants, outside the numerous combo KFC-Taco Bell restaurants operated by Yum Brands and its franchisees.
Multiple brands in the same space could generate complementary foot traffic, especially for snacks such as doughnuts and ice cream that are not being bought heavily for takeout or delivery these days. Multiple franchisees could share costs for footprint buildouts and operating expenses.
“If you can put four or five brands under one roof, it’s going to save you money in setup costs and also in your supply costs,” said Prendergast, principal at Prendergast & Associates in Los Angeles. “Bigger operators in partnerships can demand better terms on rents, supplies and equipment.”
Executives of Canton, Massachusetts-based Dunkin’ took no questions during a third-quarter call with analysts Thursday, in which the company reported revenue of $361.5 million for its third quarter ended Sept. 26. That marked a 5.7% sales increase year over year for the company that operates more than 19,000 franchised locations, including 12,000 Dunkin’ Donuts coffee shops and 7,000 Baskin-Robbins ice cream stores, as net income rose 1.6% to $74 million.
The combined-storefront trend could follow in the footsteps of the increasing behind-the-scenes shift toward so-called ghost kitchens that make food for delivery only, with several concepts sharing the same production space in repurposed former retail and industrial properties.
A July report from financial services firm Morgan Stanley noted that a pandemic recovery for chain restaurants in coming months could include shrinking or combining real estate space to more efficiently reach a diminished customer base.
“As chains consider better brand access, questions about store footprints will likely come to the fore — namely, the number and locations of stores and multi-brand location strategies where two or more chain entities share one roof,” the report said.
The capital support and brand-variety strengths of Inspire Brands also could help Dunkin’ broaden its customer base and raise its profile in its battle with coffee king Starbucks.
“I would expect growth to slow for Dunkin’ Brands, but likely their coffee will be integrated into the current Inspire Brands portfolio and served at those restaurants,” said Darren Tristano, CEO of consulting firm FoodserviceResults in Chicago.
Combining with another brand operator could also give Dunkin’ a more feasible way to spread its flagship doughnut and coffee shop footprint in places where it has long been a relatively minor presence, especially California.
Dunkin’ executives for the past two decades have talked about rounding up new franchisees for a significant push into West Coast states, where Dunkin’ shops remain relatively scarce compared with the East Coast.
“I would expect growth opportunities to come through existing Inspire brand franchisees who will welcome the opportunity to continue the expansion on the West Coast and western part of the United States,” Tristano said.
Tristano said he anticipates that Dunkin’ may also move to establish more of its drive-thru locations, “which seem to be more operationally efficient versus Starbucks, which has a more complicated offering with their coffee and food and is still learning to efficiently prepare food for meal occasions.”
Prendergast said national chain operators such as Dunkin’ and Inspire could be selecting from many more spaces that become available as commercial eviction moratoriums expire in California and other states in early 2021. Outside of temperate areas like Southern California and South Florida, operators unable to locate their dining outdoors once winter hits could end up closing sites in many cities nationwide if capacity restrictions remain.
“When the eviction moratoriums end, it’s going to be a bloodbath, I’m sorry to say,” Prendergast said. “The first operators to be impacted are going to be those smaller independents with limited access to capital.”