For a long time, investing in tobacco was a no-brainer. Tobacco is highly addictive and led to consistent and unhindered growth for tobacco companies. Fortunately for consumer health, and unfortunately for investors, regulators stepped in and tied a 10-ton weight to the back of the tobacco growth train. This left some investors lost, wishing and hoping they could find another highly addictive product to invest in.
While caffeine can't be classified as highly addictive, it's known to be mildly addictive. And you will likely never have to worry about regulation, at least when it comes to coffee. This might present an edge for Dunkin' Brands (NASDAQ: DNKN) in regards to sustainable growth.
Back in the day, Dunkin' Donuts was best known for its donuts. Then it became better known for its coffee, which is still the case today. However, Dunkin' Donuts has also muscled its way into the breakfast-sandwich market, stealing some customers from McDonald's (NYSE MCD).
McDonald's offers several popular breakfast sandwiches, including the Egg White Delight McMuffin, Egg McMuffin, Sausage Egg and Cheese McGriddles, and Sausage McMuffin with Egg.
Dunkin' Donuts now offers its own breakfast sandwiches, including Egg White Flatbreads, Sausage Egg and Cheese, Bacon Egg and Cheese, and Turkey Sausage Breakfast Sandwich.
According to Dunkin' Brands CEO Nigel Travis, breakfast sandwiches have been a big hit over the past two years. Travis also recently stated that Dunkin' Donuts has approximately 40 new products in store for 2014 after launching 40 new products in 2013. One of the most recent innovations was a cookie-dough, heart-shaped donut for Valentine's Day.
Dunkin' Donuts doesn't stop there. It also just launched a rewards program.
Everybody loves perks. Fortunately, Dunkin' Donuts now offers DD Perks. With DD Perks, you can earn five points for every $1 spent at qualifying locations. After you earn 200 points, you will receive a coupon for a free medium beverage of your choice. You will also receive exclusive and personalized offers to earn bonus points for food and beverages. You can use DD Perks with an app that's available at Google Play or the App Store.
Starbucks (NASDAQ: SBUX) also offers a loyalty program. You can earn stars by paying with a registered Starbucks card or a mobile app. If you earn five stars, you will reach the green level. This will give you 15% off at StarbucksStore.com, a free birthday food or drink item, and free refills. If you earn 30 stars in 12 months, then you will reach the gold level. With this status, you will have an opportunity to receive a free drink or food for every 12 stars earned. This is in addition to green-level privileges.
McDonald's lags in this area. McDonald's is offering a loyalty program via Front Flip (a solutions marketer). Through this loyalty program, customers can win prizes, such as free cheeseburgers and buy-one, get-one free Big Macs by using QR codes. This is an attempt to attract more young consumers through technology. It might be effective over the long haul, but let's put this simply: Have you ever heard anything about a loyalty program at McDonald's?
Putting it all together
Dunkin' Brands has been the highly innovative recently, and its loyalty program seems to be at least as enticing as Starbucks' loyalty program, which should lead to increased customer loyalty. Dunkin' Brands is somewhat expensive at 24 times forward earnings, but with revenue growth of 23.69% over the past five years, and 6.92% over the past year, this valuation might be justifiable. Dunkin' Brands offers a dividend yield of 1.9%.
The Foolish bottom line
Dunkin' Brands' consistent innovations, new loyalty program, and geographical expansion should help fuel growth. Selling a mildly addictive product doesn't hurt, either. However, please do your own research prior to making any investment decisions.
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Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends McDonald's and Starbucks. The Motley Fool owns shares of McDonald's and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.