Adding to an already tough economy, commodity prices are expected to eat into profits for Dunkin’ Donuts franchise owners in 2011. According to the National DCP, commodity prices are especially turbulent, owing not only to bad weather in coffee producing countries; but also to growing speculation of commodities among hedge fund managers and other investors.
“Our number one goal, in a time of turbulent commodities, is continuity of supply,” said Ed O’Rourke, Chief Procurement Officer for Dunkin’ Donuts National DCP. “We want to make sure there is no disruption to our product flow—that is paramount. We will focus on remaining below market on commodity positions relative to a given trading range.”
Coffee prices began to rise last summer and coffee futures ended 2010 up 77 percent. Because the DCP had locked in lower prices on the commodities markets, there was minimal impact to franchise owners relative to other foodservice companies. O’Rourke says in 2011 the DCP is shortening the length of its positions on coffee until the market stabilizes, but franchise owners can expect coffee prices to spike 14-20 percent overall.
Many franchise owners we talked with say they have already raised prices on coffee. “There is a need for us to pass on some cost because we have to recoup some of the additional expenses that are being incurred. At the same time we have to be careful how much we raise prices given the economy and time of the year,” said Vishal Shah, a Chicago franchise owner and member of the Board of the Midwest DCP. He admits few customers have complained about the additional dime his stores now charge for coffee.
In response to the concern franchise owners have over commodity prices, late last year the National DCP prepared a detailed commodity outlook for members in all regions. Armed with the data, franchise owners are left to decide how much they can increase prices without losing too many customers.
Because of the lagging recession, some customers have already cut back on discretionary expenses, like coffee and a snack. Franchise owners are hoping die-hard customers won’t be turned away by an additional five or ten cents for a cup of coffee.
Starbucks has responded to commodity increases by raising its prices; so far McDonald’s has kept prices fairly steady. Experts believe because coffee is not a core business for McDonald’s, the company can use coffee as a loss leader as a way to increase market share.
While not as dramatic as coffee, the sugar market has also experienced some recent turbulence. At the end of 2010, sugar prices had surged 19 percent although prices have come down a bit in January. The National DCP is projecting sugar to increase 8-10 percent for 2011 with some price easing in the third quarter.
David Patel, another Chicago franchise owner and Midwest DCP Board member, believes the National DCP’s projections are on target and, he says, franchise owners were sheltered from losses by the DCP’s commodity positions in 2010. Still, the situation is unnerving.
“I haven’t seen prices go up this much before. It’s definitely going to impact franchisee profits in 2011,” Patel said.