Which Coffee and Fast-Casual Restaurants Rank No. 1 for Customer Loyalty?

Customer loyalty leads to repeat business. This then drives the top line and leads to the likelihood of shareholder returns.

Apr 4, 2014 at 4:15PM

Dnkn Logo

dunkindonuts.com

The key to a successful business is repeat business. In order to attain repeat business, a company needs to establish customer loyalty. The simplest way for investors to determine customer loyalty is to look at the Consumer Loyalty Engagement Index.

Dunkin' Brands (NASDAQ: DNKN) ranks No.1 on the Consumer Loyalty Engagement Index for coffee restaurants. We'll examine why. We'll also learn which company scores best for fast casual/casual restaurants.

Dunkin' Donuts trumps Starbucks
It's not often that Dunkin' Donuts beats Starbucks (NASDAQ:SBUX). For instance, if you compare top-line growth for these two companies, you will see that Starbucks has been growing faster over the past five years despite its larger size:

SBUX Revenue (TTM) Chart

Starbucks revenue (trailing-12 months) data by YCharts

However, if you look at the last year, it's a much closer race:

SBUX Revenue (TTM) Chart

Starbucks revenue (trailing-12 months) data by YCharts

It's possible that Dunkin' Brands is closing the gap thanks to customer loyalty. Dunkin' Donuts has now ranked highest on the Customer Loyalty Engagement Index for three consecutive years, and Starbucks has ranked second in each of those years. The listed reasons for customer loyalty at Dunkin' Donuts are crafted beverages, quality and taste, menu selection, value, and location. 

Dunkin' Donuts is expanding in the United States. It will open between 380 to 410 net new stores this year, with 15%-20% of those locations opening in the West. There are currently franchisee agreements that will lead to 100 store openings in Southern California. CEO Nigel Travis is aiming for 15,000 locations in the U.S. If customer loyalty also proves to be high at these locations, then the future is bright for Dunkin' Donuts.

Dunkin' Donuts also ranks No. 1 in customer loyalty for packaged coffee. The reasons cited include reputation, value, taste, aroma, and variety. Once again, Starbucks ranks No. 2. However, this isn't meant to be a knock on Starbucks. The company is still growing faster than Dunkin' Brands, and it's trading at 23 times forward earnings. Dunkin' Brands is trading at 24 times forward earnings -- very similar. But when one company is trading at a lower multiple and growing faster than one of its peers, it's going to look attractive.

Let's not forget about the fast casual/casual category. 

Panera Sandwich

panerabread.com

Other customer-loyalty winners
Fast casual is outperforming every other restaurant category, primarily because it's seen as offering health, quality, value, and good customer service. With those factors in mind, it might not surprise you that Panera Bread (NASDAQ:PNRA) ranks No. 1.

Customer loyalty often leads to consistent top-line growth. Consider Panera Bread's top-line growth over the past five years:

PNRA Revenue (TTM) Chart

Panera revenue (trailing-12 months) data by YCharts

Panera Bread CEO, CEO Ronald Shaich, isn't your average CEO. He won't hesitate to visit individual Panera Bread restaurants to see how that location is performing in regards to customer service. Not only does this show how dedicated Shaich is to customer service, but it keeps store managers and employees on their toes. This, in turn, often leads to quality customer service for you.

The one 'negative' is that Panera Bread has had trouble keeping up with foot traffic recently, which makes it difficult for employees to deliver top-notch customer service all the time. But from an investment perspective, increased foot traffic for a restaurant chain is always a positive. 

The Foolish bottom line
All three aforementioned companies have strong customer loyalty. There is no reason to think this will change. Customer loyalty leads to reliable repeat business, which means continuous sales and the likelihood of long-term returns to shareholders. However, please do your own research prior to making any investment decisions. But before you go, there's one more important piece of information that must be shared.

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Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends Panera Bread and Starbucks. The Motley Fool owns shares of Panera Bread 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.

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