- Dunkin’ is in talks to be acquired by Inspire Brands, the parent company of Arby’s, Buffalo Wild Wings, and Sonic, in what could be an $8.8 billion deal.
- The coffee chain fits many of the qualifications Inspire Brands CEO Paul Brown told Business Insider he looks for in an acquisition target.
- Dunkin’ offers Inspire Brands a chance to enter the coffee market, which it has not yet touched.
- “There are not that many large coffee-centric quick-service brands out there to go around,” analyst Mark Kalinowski said. “So if you want to play heavily in the coffee category, your options are limited.”
Why would Arby’s parent company, Inspire Brands, consider spending nearly $9 billion to buy Dunkin’ and Baskin-Robbins?
According to analysts, experts, and interviews with top Inspire executives, the deal — first reported by The New York Times on Sunday — is perfectly in line with CEO Paul Brown’s mission to build a fast-food empire.
“Inspire Brands owns a lot of other restaurant concepts,” Mark Kalinowski, the CEO of Kalinowski Equity Research, told Business Insider on Monday. “They have become experts over the years in acquiring and integrating other concepts — and making the sum of the parts greater than the individual concepts involved.”
Dunkin’ is an attractive acquisition target because it has a solid cash flow and is well-positioned to weather the bizarre state of the restaurant industry in 2020. Both Dunkin’ and Baskin-Robbins are in different categories than any of Inspire Brands’ other chains — one of Brown’s top criteria when looking to buy a restaurant chain. Inspire owns Arby’s, Buffalo Wild Wings, Sonic Drive-In, Jimmy John’s, and Rusty Taco.
“There are not that many large coffee-centric quick-service brands out there to go around,” Kalinowski said. “So if you want to play heavily in the coffee category, your options are limited.”
Here is why Inspire and Dunkin’ could be an $8.8 billion match made in heaven.
Dunkin’ has been evolving, beyond dropping the ‘Donuts’
The prospective deal comes as Dunkin’ is in an enviably solid financial position, bolstered by recent changes at the coffee giant.
Over the past few years, Dunkin’ has cashed in on Americans’ coffee obsession by emphasizing beverages over doughnuts. The chain added more upscale options to the menu, including nitro cold brew, matcha, and — most recently — oat milk. The focus on beverages even convinced Dunkin’ to drop the “Donuts” from its name in 2018.
“This isn’t a change for the sake of change,” Dunkin’ Brands CEO David Hoffmann said in September 2018. “For two years, we have been focused on evolving Dunkin’ into the premier beverage-led on-the-go brand and have been implementing what we call our blueprint for growth.”
Dunkin’ has been aggressively expanding, especially outside its home base of New England. In 2018, the chain announced plans to open 1,000 locations in the US by the end of 2020, with roughly 90% of new stores opening west of the Mississippi. The chain plans to eventually double its location count, reaching 17,000 stores across the US.
The chain’s tech investments have paid off during the pandemic, with UBS highlighting “notable digital gains” tied to its app and loyalty program. Dunkin’ is also winning over Generation Z on social media as one of the top brands on TikTok, according to a recent UBS report.
“We like DD US focus on digital, value, and beverage innovation as we believe it utilizes the best strategies among quick-service restaurants as well as borrowing the most successful parts of the Starbucks’ playbook,” Cowen’s Andrew Charles wrote in a research note on Sunday.
Some of the features that make Dunkin’ an attractive acquisition target are the same things that allowed the chain to build its “America runs on Dunkin'” reputation for decades. Dunkin’ continues to outperform competitors on value, even as it adds more expensive options. And it benefits from being a restaurant that can be part of customers’ daily routine.
“Two-thirds of Americans drink coffee every day,” Dunkin’ Chief Marketing Officer Tony Weisman said in 2019. “So other than toilet paper and toothpaste, I have yet to find anybody who can tell me something else that two-thirds of Americans use every day.” Weisman has since left Dunkin’.
Inspire Brands has a particular set of qualifications it wants in acquisitions
Inspire Brands, which is owned by the private-equity group Roark Capital, has been steadily growing its portfolio, buying four brands over the past four years. Inspire has a certain set of qualifications it wants in an acquisition, Brown told Business Insider.
A few common themes:
- Big but still has room to grow. Brown told Business Insider that the chain’s acquisition of the Rusty Taco, which was part of the Buffalo Wild Wings deal and has only about 30 locations, was not one that the company planned to replicate. Instead, he wants brands that are “not anywhere close to capping out on their ability to grow,” he said — chains with hundreds or thousands of locations and the ability to open thousands more restaurants.
- In need of a turnaround. Brown said that part of the reason Inspire was attracted to chains like Buffalo Wild Wings and Sonic was that the brands — while popular in some ways — had struggled in recent years. Brown made his name in the restaurant industry by turning around Arby’s after becoming CEO in 2013, and he has used a similar blueprint on other acquisitions.
- Could clearly benefit from joining Inspire. Brown said Inspire was on the lookout for brands that could benefit from the company’s massive size and resources. “If we don’t believe that we can make the brand a better brand from the guest’s perspective, not just from the financial perspective, we won’t do it,” Brown said in 2019.
Perhaps the most important factor is not what an acquisition has in common with other chains in Inspire’s portfolio but what sets it apart. Instead of focusing on one category, Inspire aims to buy up chains that are distinct and consistently add new types of businesses to the company’s portfolio.
“We want to put together a company unlike any other in this space, which is a portfolio of brands that are in different stages in their development, different experiences that they tap into, different customers that they tap into, or at least different customer occasions that they tap into,” Brown said in 2019.
Dunkin’ mostly fits the bill
If the deal goes through, Dunkin’ will bring reliable sales, coffee, and a massive number of stores to Inspire Brands. While the deal doesn’t fit Inspire’s typical turnaround narrative, Dunkin’ does offer a chance for Inspire to enter a key new category: coffee.
“Coffee is a complementary category for Inspire, while Baskin-Robbins’ ice cream offering is similar to Sonic’s core offering, though geographically the brands have different footprints,” Cowen’s Charles wrote on Sunday.
UBS analyst Dennis Geiger wrote in a note on Sunday that Dunkin’ would bring consistent sales to Inspire Brands, while still showing the potential for even more growth because of the deal.
“Roark’s operational experience & scale could potentially further enable solid/consistent performance, improved economics, and accelerated unit development,” Geiger wrote.
Dunkin’ also offers Inspire control over 13,000 Dunkin’ locations and 8,000 Baskin-Robbins stores in 60 countries, a far more international business than Buffalo Wild Wings, Sonic, or Arby’s.
“While Dunkin has a domestic-focused story, the brand has presence in over 60 countries, far surpassing that of Inspire’s other brands,” Charles wrote. “Inspire could benefit from some of Dunkin’s well-capitalized international franchisees signing development agreements for Inspire’s other brands.”
While Dunkin’ confirmed talks on Sunday, the company’s future is still up in the air.
“There is no certainty that any agreement will be reached,” Dunkin’ said in a statement. “The Company will not comment further unless and until a transaction is agreed or discussions are terminated.”