1. How to use GuruFocus - Tutorials
  2. What Is in the GuruFocus Premium Membership?
  3. A DIY Guide on How to Invest Using Guru Strategies
Articles (28) 

Dunkin' Donuts and Its Belief in No Frills

March 11, 2014 | About:

They are relatively new in the multifaceted U.S. coffee industry. Yet, they have been able to maintain their No. 2 position behind Starbucks (NASDAQ:SBUX). Canton-based Dunkin' Donuts (NASDAQ:DNKN) is now a global brand with 10,000 stores in 32 countries and sales of $9 billion.

How charging as much as $6 for a cup of coffee could have worked for Starbucks is a case study in itself. However, competing with a company like that, yet maintaining its cheap and affordable brand image, has certainly earned a lot of brownie points for Dunkin'. The strategy has been simple: Keeping the frills out!

The No-Frills Offering

Unlike at Starbucks which has many products on its menu like gourmet coffee and whole bean coffee, the offering list from Dunkin' is precise and short. While at Starbucks, you are paying more for the experience than the coffee; at Dunkin' you pay for the coffee and have a good experience too. So instead of fancy names like tall, grande and venti, you have more conventional small, medium and large at Dunkin' Donuts.

The No-Frills Strategy

Among other things, the main strategy for Dunkin' has been to copy Starbucks. This is most relevant in terms of location selection. Across the U.S., wherever there are Starbucks outlets you are likely to find a Dunkin' Donuts close by. This has really worked well for Dunkin' as the aggressive expansion strategy of Starbucks has at times forced Dunkin' to expand as well just to keep up.

Starbuck was the first coffee shop to offer an upscale atmosphere to its customers with complimentary services like Wi-Fi. While Dunkin' attracts a more middle-class, less tech-savvy crowd, adopting the “me too” strategy here seems to have worked well for Dunkin', whose customers now spend more time at the store. This has increased the number of orders and pushed up the average bill value per customer.

Competition Heating Up

The dynamics of the industry are seeing a sea of change with new players posing a challenge to the established players.

McDonald’s (NYSE:MCD) is beginning to take the coffee business seriously. Instead of coffee being just another offering, the fast food giants are now positioning their coffee as premium roasted coffee.

More than anyone else though, Canada-based Tim Hortons (THI) is going to pose the biggest challenge for Dunkin'. The biggest coffee operator of Canada, Tim Horton’s, also like Dunkin' stands for the same values of affordability and no-frills coffee. With 900 stores already up and running in the U.S., it is going to give Dunkin' a good run for its money.

So Which Coffee Stock Would You Keep?

The market cap of Dunkin' is around $5 billion. Starbucks enjoys a market cap of well over 10 times that amount. So while Starbucks is the safer bet in terms of revenues, Dunkin' is catching up with every passing quarter.

In terms of valuation, however, Tim Hortons is more attractive with a price/earnings-to-growth (PEG) ratio of 1.63, compared to Dunkin' Donuts' PEG ratio of 1.75.

So in the short run I would probably go for Starbucks and in the long run, Tim Hortons.

About the author:

The author holds a Management Degree in Finance and provides deep insights primarily in the fields of Telecom,Automobile,Technology and retail

Rating: 5.0/5 (1 vote)



Please leave your comment:

More than 500,000 people have already joined GuruFocus to track the stocks they follow and exchange investment ideas.

Performances of the stocks mentioned by Ravagadus

User Generated Screeners

alexbernal0martin base
patelmhshort screener 1
pbarker46F Score and P/TBV
star1907Good company's
star1907Best dividends charlie
cspunarSpunar Div
patelmhMY VALUE
Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)

GF Chat