Dunkin' Does Asia: Donut and Ice Cream Brands Rush to Meet Demand - Health Impact to Follow

The news that yet another western fast-food retailer has discovered the Asian consumer is hardly revolutionary. What is interesting is what it says about economic prospects and longer term health issues.

Dunkin' Donuts and its sibling brand, Baskin-Robbin Ice Cream, are not staples. They are inexpensive 'luxuries' now affordable to a rising middle class looking for branded rewards that reaffirm their changing status. That these brands perceive significant growth opportunities speaks volumes about the longer-term prospects for Asian economic advances. The even more intriguing prospect has to do with health care. Asian diets have been famously ascetic and healthful; ingredients are often natural and low in the sort of harmful weight-enhancing stimulants that have helped drive up western health care costs. Now that Asians are eating more artery-clogging fats (in addition to more meat and other proteins), their weight will increase and the health care impact will inevitably follow. Brazil has experienced this sort of impact and India will begin to see it within a generation. Those looking for the investment angle should note that pharmaceutical and medical equipment manufacturers can not be far behind.

Patrick Barta dips into the subject in the Wall Street Journal:

"The parent company of Dunkin' Donuts and Baskin-Robbins ice cream shops plans to expand further in Asia, with thousands of new outlets in China in coming years and ambitions to open its first stores in Vietnam within 18 months.

The moves come as the company, Dunkin' Brands Inc., sees a steady economic recovery in markets where it operates and amid further appreciation in Asia's currencies, which should boost the spending power of the region's consumers.

"You'd have to think it's natural for some of these fast-growing economies to have appreciating currencies" as more companies invest their money in Asia, said Dunkin' Brands Chief Executive Nigel Travis in an interview.

The Canton, Mass.-based company—owned by a consortium of private-equity firms including Bain Capital, Carlyle Group and Thomas H. Lee Partners—has long had an international footprint. About 3,000 of its 9,700 Dunkin' Donuts restaurants, for example, are outside of the U.S. All its stores are franchised.

But a large percentage of its Asian stores are located in a handful of countries—including South Korea, the Philippines, Indonesia and Japan—with minimal presence in some of the region's fastest-growing markets like China and India. That's in part because the company focused some of its earlier growth on markets with closer ties to American culture, including places with a sizeable U.S. military presence. Dunkin' Donuts had about three-dozen locations in mainland China at the end of 2010, while many other Western restaurant chains are aggressively ramping up expansion there.

Despite the opportunities for growth in Asia, retail-food operations face significant risks, in large part because of the rising commodity costs squeezing profit margins. The costs of wheat and other grains, for instance, are at their highest levels since 2008, while prices for coffee—another Dunkin' staple—have also soared over the past year.

Mr. Travis said he sees a continuation of those trends. He said some of the company's locations have had to raise ice cream and coffee prices over the past year, but not always enough to offset the rise in commodity costs. Dunkin' Donuts and Baskin-Robbins have tried to minimize price increases by streamlining operations, including looking for more efficiencies in ice-cream production facilities, he added.

In addition to rising commodity prices, there are other global issues to watch, said Mr. Travis, who became CEO at Dunkin' Brands in early 2009 after leading the Papa John's pizza chain.

"You have to be concerned about what's happening in the Middle East," he said. Although the unrest hasn't seriously derailed its business yet—the company has outlets in Egypt and Bahrain but not Libya—a greater spread of unrest could have a more serious impact, he said, which is something he is watching.

Outside of those risks, he said he sees a generally positive outlook going forward, as the world economy achieves a steadier footing after the global financial crisis—including in relatively weaker economies such as the U.S.

"The world is slowly coming back. We're very pleased with where the U.S. is going," he said.

China remains the company's top international target in the long run, with ambitions to eventually open thousands of stores there. But it may take a while to fully ramp up, Mr. Travis said, because the company is trying to focus on a few cities, including Shanghai, before expanding more aggressively elsewhere. It has followed a similar strategy as in the U.S., where Dunkin' Donuts has a large presence in certain places such as the Northeast, but little or no presence in some major markets like California.

"I'm nervous about going all over China and then finding out we have issues," he said. "I'm quite content to build it as we are and get real knowledge" through a more "disciplined" expansion, he said. He didn't provide a detailed timeline for when the company hoped to achieve a full roll-out of its stores.

In India, the company recently reached a deal with Jubilant FoodWorks Ltd.—a New Delhi-based food-services company that also is a major franchisee for U.S.-based Domino's Pizza Inc.—to develop and operate more than 500 Dunkin' Donuts outlets over the next 15 years. Jubilant FoodWorks Chief Executive Ajay Kaul said in late February that the aim is to open 25 to 30 Dunkin' Donuts locations over the next three years.

Other markets with room for growth include Indonesia and Thailand, the latter Mr. Travis said could probably sustain 50% more locations. It had 197 Dunkin' Donuts stores and 10 Baskin-Robbins outlets at the end of 2010.

Vietnam is one of the most attractive markets in which the company doesn't currently operate, Mr. Travis said. The company is looking for partners there and hopes to begin adding outlets within 18 months. "It's a mini-China," he said of Vietnam.

The moves also come as other companies are looking to expand their own presence in Asia, intensifying the competition at a time when some economists fear higher inflation will curb consumer spending, at least in the short run.

Earlier this year, for instance, Starbucks Corp. unveiled an alliance with India's Tata Coffee Ltd. to source and roast coffee beans in a step aimed at paving the way for the U.S. chain to expand outlets there, while Krispy Kreme Doughnuts recently opened a popular branch in Thailand.

But in many markets, local street vendors and other smaller outlets continue to play a dominant role, and consumers don't yet earn enough to pay for drinks and snacks from air-conditioned restaurants, where prices are often higher. Mr. Travis said he expects that to change over time as incomes rise.