Starbucks and Dunkin' Brands: Should You Buy These Expansion Machines?

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In the growing global marketplace, expansion is a key to driving revenues and profits to all-time highs. One of the highest growth industries you will find today is the coffee industry, and the two large players within, Starbucks (NASDAQ: SBUX  ) and Dunkin' Brands (NASDAQ: DNKN  ) , are taking full advantage. Let's take a look at the expansion plan of each company and determine if we should be buying right now.

The worldwide powerhouses
Starbucks is home to the world's largest chain of specialty coffee shops. Its stores are more than just a place to get coffee, they are also a place to relax or have meetings, and where some people work all day; this is because the company offers free wi-fi  in all of its locations, along with an inviting atmosphere to draw people in. Starbucks also owns La Boulange cafe and bakery, and Teavana, a high-growth tea retailer.

Dunkin' Brands owns, operates, and franchises quick-service restaurants under the Dunkin' Donuts and Baskin Robbins brands. Dunkin' Donuts is one of the world's largest coffee and baked-goods restaurants and Baskin Robbins is the world's largest specialty ice cream chain. The company is nearly 100% franchised, giving it an advantage by being asset-light, while generating significant free cash flow. Being home to two of the world's leading brands gives Dunkin' an edge in this very competitive industry.

A glance at 2013
In fiscal 2013, Starbucks and Dunkin' Brands did not disappoint investors when it came to expansion. Take a look at what each accomplished:

Company Starbucks Dunkin' Brands
Store Count-End of Fiscal '12 18,066 17,459
Stores Added in Fiscal 2013 1,701 790
Current Store Count 19,767 18,249
Percentage Increase 9.42% 4.53%

Starbucks opened 680 stores in the Americas, 588 in China and the Asian Pacific, 100 in Europe, the Middle East, and Africa, and 333 in all other regions. The company now has over 13,400 of its nearly 20,000 locations in the Americas, so the more rapid expansion in other regions is smart. This expansion, paired with existing stores' comparable-store sales growth, pushed Starbucks to record earnings in 2013. 

Source: Wikipedia Commons

Dunkin' Brands added 371 Dunkin' Donuts locations in the United States and 138 outside of the United States, including the first stores in the United Kingdom and Vietnam. Only four Baskin-Robbins stores were added in the United States, but a strong 277 were opened internationally. This information shows that there is a strong demand for Dunkin' Donuts globally, but Baskin-Robbins is only going to experience growth outside of the United States. 

Keep on keepin' on
The growth and expansion of these global giants will likely continue for decades, but let's focus on 2014 for now; here are the current projections provided by each company:

Company Starbucks Dunkin' Brands
Store Count-End of Fiscal 2013 19,767 18,249
Projected Expansion in 2014 1,500 685-800
Projected Count-End of Fiscal 2014 21,267 18,934-19,049
Percentage Increase 7.59% 3.8%-4.4%

The current expectations call for Starbucks to open 1,500 locations during the year, but I think this is a very conservative estimate; I believe this because Starbucks had originally expected to open 1,300 locations in fiscal 2013, and ended up opening another 401 on top of that. I think 1,750 is a more accurate estimate for the year, but regardless, here's a breakdown of where Starbucks will open the "1,500" stores:

Region Expected Openings
Americas 600
China & the Asian Pacific 750
Europe, Middle East, & Africa 150

Source: Dunkin Donuts China

Dunkin' Brands' expectations of 685-800 new locations would be right around the number opened in 2013, but there is plenty to be excited about; at the end of 2013, Dunkin' Donuts signed a master franchise agreement to bring 100 locations to Eastern China, with the first locations being opened in Shanghai by mid-2014. China has been a high-growth region for Starbucks and I have no doubt that the Dunkin' Donuts brand will quickly gain market share. Here's a breakdown of the expected store openings by brand and region:

Brand & Region Expected Openings
Dunkin' Donuts U.S. 380-410
Baskin-Robbins U.S. 5-10
DD/BR International 300-400

Additionally, Dunkin' Brands reiterated its long-term plan to surpass 15,000 total Dunkin' Donuts locations in the United States, almost double the current count. This plan is possible because there are virtually no locations in the Western United States, but this will quickly change in 2014, as management believes California could easily hold over 1,000 locations itself. This could be thought of as deadly for Starbucks, but I believe both brands are strong enough to grow in harmony.

The Foolish bottom line
Starbucks and Dunkin' Brands are showing immense strength in today's global market. The expansion efforts are allowing the brands to reach more markets and turn the populations within into devoted customers. I believe investors should initiate a position in either one of these companies right now, because there is vast upside potential and both companies will provide additional returns via dividends and share repurchases.

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Joseph Solitro

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