In Hollywood, the Picture Blurs for Studio Profits, Merissa Marr, the Wall Street Journal

1.Demand Analysis: Tim Hortons vs. Dunkin’ Donuts

“A Canadian Icon Turns Its Glaze Southward,” Douglas Belkin, The Wall Street Journal, May 15, 2007, B1(B4).

Fall River, Mass.

When Tom Medeiros retired from the fire department here and bought a coffee-and-doughnut shop, he assumed his most intense battles were in his rearview mirror.

He was mistaken. By buying a Tim Hortons Inc. franchise in the heart of Dunkin' Donuts country, Mr. Medeiros dropped himself into one of the hottest coffee-and-doughnut wars on the continent.

"I'm eating, sleeping and drinking this right now," says Mr. Medeiros, a brawny 43-year-old with close-cropped graying hair and a chowder-thick New England accent. "I love it, but it never really stops."

In its home country of Canada, Tim Hortons claims a whopping 76% of the coffee-and-baked-goods market. Named for its late founder, who was an all-star defenseman for the Montreal Canadiens and Buffalo Sabres of the National Hockey League, the chain is so ingrained in Canada's culture that the term "double double" -- shorthand for a Hortons coffee with two creams and two sugars -- has its own entry in the Canadian Oxford dictionary.

But industry analysts say that, in about seven years, Hortons will have built as many stores as Canada can support. So, barely a year after the chain was spun off by Wendy's International Inc., Hortons is ratcheting up its U.S. expansion. Currently, most of its 340 U.S. stores are in strongholds near the U.S.-Canada border in Michigan, Ohio and upstate New York. But by the end of 2008, Hortons wants to have 500 U.S. stores -- and perhaps more, depending on if the company can make inroads in New England.

Last year, the Boston area counted at least 1,210 doughnut shops, or one for every 5,143 residents -- five times the national average, according to NPD Group, a Port Washington, N.Y., marketing-information company. Many of those shops are Dunkin' Donuts, a unit of Dunkin' Brands Inc. Among U.S. cities, only Providence, R.I., Boston's smaller neighbor, has more doughnut shops per capita, one for every 4,226 people.

With his square jaw and sturdy frame, Mr. Medeiros -- a recreational hockey player himself -- is reminiscent of the chain's namesake. He worked for 19 years in the fire department in Fall River, population 93,000, before retiring in 2004.

Around that time, Wendy's, which then owned Hortons, bought and renamed the area's Bess Eaton chain of 42 coffee-and-doughnut shops. It outbid Dunkin' by paying $41.6 million, prompting Dunkin' to sniff that Hortons "paid a premium" for "the pleasure of competing with Dunkin' Donuts in our heartland." Hortons CEO Paul House, then president and chief operating officer, declared it "a beachhead" in the company's efforts to build its U.S. business.

"As the number one retailer of hot and iced coffee in the United States, we believe Dunkin' Donuts is very well positioned for growth," said Margie Myers, Dunkin' Brands Senior Vice President, Communications in a statement. "Competition is always out there."

Hortons' U.S. per-store sales average only about two-thirds as much as their Canadian counterparts. So far, per-store sales in New England are roughly half what they are at other U.S. stores, estimates Steven Kron, an analyst for Goldman Sachs.

Earlier this month, the chain posted a first-quarter operating loss of $3.7 million in its U.S. segment, compared with an operating profit of $360,321 in the year-earlier period. Most of that loss was due to poor performance in New England, says Mr. Kron. A recent report by Credit Suisse Bank called the move into Dunkin' territory "brutal." Overall, though, Wall Street is high on Hortons; its stock has been on a gradual rise over the past year.

Mr. Medeiros wandered into a Hortons one day and grabbed a brochure advertising for franchisees. He had worked restaurant jobs before, liked Hortons' food and thought he saw an opportunity. After eight weeks of training in Connecticut, he managed three stores for a while, then bought his own in February. He declines to disclose the price.

The restaurant sits in a shopping area near a Subway sandwich shop, a Papa Gino's pizza joint and a Dunkin' Donuts. Mr. Medeiros admits it isn't easy winning customers. "People grow up with one thing, they get used to it," he says, referring to Dunkin'.

In style, Hortons is more like Dunkin' than Starbucks. As in its 2,711 Canadian stores, Hortons' New England shops strive to distinguish themselves from Dunkin' by offering a homey place with lots of comfortable seats, china mugs and cheap coffee -- a cup costs about 25 cents less than at Dunkin'.

Hortons' advertising also tries to make the case that its doughnuts are different from the ones offered by competitors. Hortons has long anchored their promotions with the slogan, "Always fresh," referring to the fact that they make smaller batches of doughnuts throughout the day to keep a fresh supply in their pastry cases.

"The coffee is better than Dunkin's," says Dick Hall, a retired mental health worker who lives in neighboring Tiverton, R.I., and visits Mr. Medeiros's restaurant most days. "It's a nice place to sit and relax."

Mr. Medeiros's restaurant is open 24 hours, and he shows up each day around 6 a.m. to greet the morning rush. He estimates he puts in 60 hours a week, and his wife, Deborah, and 17-year-old daughter, Kaitlin, also work in the store. While there, he tries to spend as much time as possible learning customers' names, greeting customers -- no matter their age -- with a pat on the shoulder and an easy, "Hey! How ah yah, kid?"

Meantime, Hortons is running television ads in the area and encouraging franchisees to get involved in the community. Mr. Medeiros sponsors and coaches a local youth hockey team and, like other stores in Canada and the U.S., his will pay for two local kids to attend a Hortons summer camp.

Hortons has proved itself adept at moving customers quickly through lines, a problem that has plagued Starbucks. And, unlike McDonald's, Hortons has a strong association with coffee, albeit with little recognition in the U.S. But the opportunity here is big: Coffee and specialty-coffee drinks in the U.S. are one of the fastest growing and most profitable segments of the fast-food industry, accounting for $15 billion in sales last year and growing at 15% a year, according to Technomic Inc., a research firm in Chicago.

Carlos Braga, who owns three Dunkin' stores in Fall River, says the New England-based giant is pushing back in the other direction by beefing up its sandwich menu and moving away from microwave preparation.

"When people think of coffee here, they think of Dunkin'. But [Hortons are] the Dunkin' of Canada, so we're watching them."

Ron Joyce, who became partners with Mr. Horton in 1967, eventually took the company over and sold it to Wendy's in 1996. He said one day he expects there will be 10,000 Tim Hortons across the U.S.

"America is a big country," he said. "There's a lot of room to expand."

But first they have to contend with New England, a market Mr. Joyce said he wouldn't have entered.

Last fall, Mr. House told investors, "we got our a -- kicked in New England" but nevertheless vowed a "good old street fight." Hortons executives note that it took the chain years to establish itself in Buffalo.

Mr. Medeiros says he is ready for a long-term battle. "I think in 10 years there's going to be a line for franchises around here," he says. "I'm getting in on the ground floor."

“Dunkin' Donuts Whips Up A Recipe for Expansion,” Janet Adamy, The Wall Street Journal, May 3, 2007, B1(B2).

Joe Rando has had no problem selling baked goods to residents of Nashville, Tenn., since he opened the first Dunkin' Donuts in the area in August. On opening day, he even sold out of doughnuts.

But getting locals to make Dunkin' their regular stop for coffee -- which has a higher profit margin than baked goods -- has been more challenging. "Dunkin' is truly entrenched as a ritual for Northeastern customers," says Mr. Rando. In Nashville, he says, "we haven't necessarily changed the behavior -- the coffee-buying behavior -- yet."

Mr. Rando is a pioneer of sorts -- a key part of a Dunkin' Donuts expansion plan that got under way a year ago. Among the goals: to give what has been essentially an Eastern chain of coffee and doughnut shops a stronger presence in the South, the West and overseas. The plan calls for Dunkin' to eventually increase the number of its U.S. outlets from the current 5,300-plus (out of a total of 7,000-plus) to 15,000, and move into more foreign countries, including China.

The plan involves more than geographical expansion. Last year, the chain designed more stores with coffeehouse touches and added savory afternoon sandwiches to appeal to those who no longer eat three meals.

Executives and franchisees say the overall plan has been a success so far. Over the course of the year, some things worked, others didn't. But in each case, the chain learned some lessons and is now fine-tuning its expansion strategy accordingly.

Feedback has been crucial. From its new sandwich line, Dunkin' scrapped a stuffed-melt variety after customers thought it sounded messy. The chain created a new logo -- a sleek, steaming cup of coffee -- but ditched it and went back to its old, chunky Styrofoam cup after patrons deemed the new one too stylized.

Dunkin', a unit of Dunkin' Brands Inc., Canton, Mass., faces stiffening competition from McDonald's Corp., which is moving toward selling lattes and cappuccinos to the same middle-class customer, and also is bolstering its snack line. At the same time, Dunkin's upgraded interiors, with shiny steel cases and espresso machines placed at customers' eye level, are aimed at attracting patrons who like a touch of the atmosphere that Starbucks and other cafés offer.

"When people say, "Geez, you're taking on Starbucks?' We like to say 'We were here first,'" Dunkin' Chief Executive Jon Luther says.

Figuring out just how much style to add to the brand has been tricky. New stores were painted in coffee-colored hues until longtime customers indicated they wanted a touch more of the old bright pink and orange. "It didn't feel enough like a Dunkin'," says Regina Lewis, vice president of consumer and brand insights for the chain.

In October, Dunkin' Brands, which is owned by Thomas H. Lee Partners, Bain Capital Partners and the Carlyle Group, said it had put its Togo's sandwich chain on the block. That's in part because executives decided they didn't need the brand in order to sell afternoon fare. Now Dunkin' is launching a new line of warm flatbread sandwiches filled with ham and swiss; turkey, bacon and cheddar; or three types of cheese. All the sandwiches are typically priced under $3.49.

The sandwiches are key to setting Dunkin' apart from competitors by playing up its bakery roots. "We've got bakery flexibility that none of them have," says Joe Scafido, Dunkin's chief creative and innovation officer. Ms. Lewis envisions Dunkin' carving out the same type of brand niche in food service as Target Corp. has in retailing.

Along with the new sandwiches, Dunkin' is trying to play up the fact that it sells hot breakfast offerings throughout the day, unlike McDonald's and most fast-food chains. At a remodeled Dunkin' in downtown Chicago, the menu advertises those items under the header "anytime breakfast."

On a recent Friday afternoon, 24-year-old financial planner May Lam walked into that Chicago location and ordered sausage, egg and cheese on a croissant, hash browns and coffee. Ms. Lam says she craves breakfast food at all hours and skipped lunch so she could plow through a stack of papers at work. She unwrapped her sandwich while sitting at a high bar along the window.

The store felt more relaxing to Ms. Lam than an older Dunkin' where she used to study on hard chairs. "I think they're playing music," she observed as Bon Jovi piped from the speaker system.

To determine the best cities to open new locations, Dunkin' has been conducting "psychographic" studies across the country to gauge whether people's values, attitudes and interests fit with its brand. Earlier research showed that Dunkin' customers had a distinctly unpretentious attitude and disliked more stylized chains like Starbucks. Because of that identity, Dunkin' began referring to its customers as members of the Dunkin' tribe.

In the surveys, Dunkin' asked people a series of questions to determine whether they had the down-to-earth attitude that characterizes the Dunkin' tribe. The questions asked whether the person sometimes had to use his or her looks to get ahead, or whether it was important to live an upscale lifestyle.

Dunkin' determined that one-third of the country is made up of people who are part of the Dunkin' tribe, even though they may not live near a store. That has reassured the chain it can move beyond the Eastern half of the country, where most of its U.S. stores are.

But getting those people to become regular coffee customers is still a big challenge. People "have their own little ritual," says William Kussell, Dunkin's chief operating officer. "In order to interrupt their ritual, you have to give them reason to switch." To do that, Dunkin' tries to pick the most convenient locations available, holds VIP nights with the local fire department chief and school officials and passes out lots of free samples.

In Nashville, the first new city that Dunkin' has entered since launching its plan, Mr. Rando, the franchisee, says sales at his two stores are two to three times his original projections. Baked goods account for more than 60% of his sales, with the rest coming from beverages. Mr. Rando wants coffee and other beverages to make up a bigger percentage of those sales not only because drinks have wider profit margins, but they also can be served more quickly.

To win customers from competitors, Mr. Rando asks workers to remember regular customers' names and drink orders. For established franchisees, the changes in menu and design haven't come without cost. Marvin Kaplan, who has 18 Dunkin' outlets in the Sarasota, Fla., area, opened one with the new design scheme in February. He says it was a gamble to invest at least $75,000 in cooking equipment to help him heat the new flatbreads and pizzas. But his more stylish interiors are enticing customers to bring their laptops and linger. "I don't want them hanging around for hours," Mr. Kaplan says. "But if they come for 45 minutes, that's a great thing."

1a.(10 points) The first article identifies numerous independent variables that should be included in the demand function for a specific Tim Hortons store. Consider the demand function faced by Tom Medeiros, owner of a Tim Hortons franchise in Massachusetts. List 5 independent variables discussed in the article that Mr. Medeiroswould likely include in the demand function for his store. Be as specific as possible. For each independent variable, indicate how it would be measured and the sign of the estimated coefficient (positive or negative).

1b.(10 points) The two articles identify numerous independent variables that should be included in the demand function for a specific Dunkin’ Donuts store as well. Consider the demand function faced by a typical Dunkin’ Donuts franchise owner, such as Joe Rando. List 5 independent variables discussed in the articles that Mr. Rando would likely include in the demand function for his store. Be as specific as possible. For each independent variable, indicate how it would be measured and the sign of the estimated coefficient (positive or negative).

1c.(4 points) According to the article, a cup of coffee at a Hortons New England store “costs about 25 cents less than at Dunkins’”. Explain why the pricing strategy used by Hortons makes sense using the concept of price elasticity of demand. Support your answer with information from the articles.

1d.(5points)Using your answersto (1a) and (1c), compare the demand function faced by a Hortons franchise owner and the demand function faced by a Dunkin’ Donuts franchise owner. Do both franchise owners seem to be targeting the same customer base? Why or why not? Be sure to clearly identify both the similarities and differences between the demand functions in (1a) and (1c) in your answer.

1e.(6 points) Compare and contrast the international expansion strategy of Hortons to that of Zara. Do you think Hortons will be as successful as Zara, particularly in the U.S. market? Why or why not? Be sure to explicitly include in your answers both similarities and differences between the two companies and their strategies. Support your answer with information from the articles as well as information from the Zara case and your class notes.