As a resident in the far suburbs of Seattle, I can tell you that two things are a certainty around here: People will complain that the weather is too hot or too cold year round, and there will be a Starbucks (NASDAQ:SBUX) on practically every corner.
Coffee is a way of life around here in the Northwest, and it's where Starbucks got its start more than four decades ago. Similarly, every time I head to New York on vacation I find a Dunkin' Donuts, owned by Dunkin Brands (NASDAQ:DNKN), everywhere I turn.
A primary descriptor of the coffee industry is that it's highly competitive, but fast-paced and fast-growing. It may seem as if we have an oversaturation of Starbucks in Washington state, but you'll find just as many independently run mom-and-pop stores, as well as branded goods within chain stores and grocery stores, such as Keurig Green Mountain (NASDAQ:GMCR) products.
The battle for customer engagement and loyalty
This fight for your dollar between coffee stores and packaged coffee makers is a multibillion-dollar industry, and it all starts with engaging customers, drawing them into the brand, and keeping them loyal to the brand.
Sometimes it's not easy figuring out which companies have the biggest edge when it comes to customer engagement and loyalty. Thankfully, we have Brand Keys, a research firm kind enough to do the hard work for us each year. It recently came out with its 2014 rankings for 555 brands over 64 different categories. Today, we're going to squeeze the coffee and packaged coffee sectors together and see what brand really stands atop the heap with regard to customer engagement and loyalty.
Why customer engagement and loyalty are important
But before we even get into the individual companies, let's talk about why customer engagement and loyalty matter in the first place.
Customer engagement is paramount to a brand's well-being, as it's the trigger that draws new consumers to a brand. This means a brand has to be relatable, viewed well by consumers, family, and friends, and often priced competitively to its peers, just to name a few factors.
In addition, once companies drive consumers to try their product, they have to fight tooth-and-nail to keep them. The way that happens is through consistently meeting or exceeding consumer expectations with a superior product or superior service (or a combination of both). As you can see, combining the two can give a business a steady inflow of new customers while retaining the steady cash flow of existing consumers.
Now that we have a better bead on why this matters, let's highlight the two top performers as it relates to the Brand Keys Customer Loyalty Engagement Index for coffee and packaged coffee.
The battle of two behemoths
As shouldn't come as a surprise, the two industry behemoths, Dunkin' Donuts and Starbucks, lead the group. For you fans of Keurig Green Mountain coffee, don't feel too disappointed. While the brand does offer a number of unique flavors and a moat of convenience with at-home coffee brewing, it doesn't yet have the in-store physical presence of Dunkin' Donuts or Starbucks. As that improves it could easily move up the list.
Before I unveil which of the coffee chains took the top spot in Brand Keys' Customer Loyalty Engagement Index, I want you to take a guess which one you believe garnered the top spot.
Got your answer?
If you answered Starbucks you would be wrong! In spite of the almost cult-like following of Starbucks, Dunkin Brands' Dunkin' Donuts took the top honor for the eighth consecutive year among coffee products and the second straight year among packaged coffee, with Starbucks coming in second in both categories.
Why Dunkin' Donuts has the edge
There are a number of key factors that I suspect have given Dunkin' Donuts the edge over its national rival Starbucks.
I believe one factor that often goes unnoticed is that Dunkin' Brands is predominantly an East Coast company while Starbucks can be found throughout the United States. By focusing on that core East Coast customer and saturating this geographic region, Dunkin' has been able to hone in on the wants and needs of consumers. Starbucks, on the other hand, can have a completely different vibe and feel based on the part of the country you're in, making it a little less flexible, literally and perceptually, to changing consumer habits.
Dunkin' Brands has also been able to match Starbucks with reward programs for its customers. Starbucks offers its customers loyalty card points, which they can then choose to trade in for drinks or food. Similarly, Dunkin' Donuts' DD Perks Reward Program gives consumers the opportunity to build up points with purchases in order to receive a free beverage. Offering loyalty rewards is a smart maneuver to keep customers coming back to a brand, but businesses still have to be careful that these rewards don't eat into margins too much.
Dunkin' was also the first of the coffee makers to extend its hand to Keurig Green Mountain, which has been a disruptive force in the single-serve business for years. In February 2011, the two companies reached a deal to allow Dunkin' Donuts' coffee to be sold in K-Cup versions for Keurig's single-serve brewing system, while 14-count boxes were to be sold within Dunkin's stores. Just weeks later, Starbucks had no choice but to concede and form its own partnership with Keurig Green Mountain.
Dunkin' Brands' challenges ahead
Of course, investors should keep in mind that Dunkin' Brands is going to have to deal with two major challenges if it's to repeat for a ninth straight year in 2015.
First, everyone is seemingly holding its breath as Dunkin' Donuts once again dips its toes into the water on the West Coast. Dunkin' tried to enter California in the late 1990s but failed, with the brand simply not exuding the same pizazz as you see on the East Coast. With a new menu and better branding, Dunkin' believes it can now succeed in California and on the West Coast. Although I believe Dunkin' is better positioned than it was more than 15 years ago, I'm still not convinced it can infiltrate California with ease.
Secondly, Dunkin' Brands has a tall order to contend with when going up against Starbucks with regard to healthier eating. Let's be clear: Dunkin' has done a really good job of creating and expanding on its DDSMART menu, which features a number of breakfast sandwiches and drinks designed to invite consumers looking to eat more nutritious foods into its stores. Still, Starbucks was the progenitor of coffee chains when it comes to introducing organic and natural food products. Dunkin' will have quite the challenge on its hands growing its food business on the West Coast when up against Starbucks.
They're both winners
Ultimately, I believe both companies are doing what needs to be done to succeed over the long run, and that's good news for investors. Starbucks has incredible branding power and Dunkin' understands its customers very well. That's a combination that, with steady growth in the coffee business coupled with addicted customers like me, should translate into solid long-term gains.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
The Motley Fool owns shares of, and recommends Starbucks. It also recommends Keurig Green Mountain. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.