America Still Runs on Dunkin', but It Rests at Starbucks

It's been cold and snowy -- the perfect weather for hot coffee and a pastry. Starbucks (NASDAQ: SBUX  ) saw its overall revenue and same-store sales pop to new heights for the first quarter so why did Dunkin' Brands Group (NASDAQ: DNKN  ) report lackluster results? The answers may be simpler than you think.


Source:  Dunkin' Brands Group

Making so much "dough" it is "nuts"
Make no mistake about it. Both companies are doing phenomenally well with what appears to be a bright and profitable future ahead of them. In the quarter ending in December, Starbucks showed domestic same-store sales growth of 5% while Dunkin' Donuts grew at 3.5%. The 15% drop in mall traffic this holiday season didn't make either one of them flinch.

In the most recent quarter, however, this gap widened while both remained solidly profitable. Starbucks this time reported a 6% climb in same-store sales while Dunkin' Donuts saw this metric only inch up by 1.2%. Whoa! What's going on?

Geography
Starbucks' largest domestic market by far is California, a place with little to no snow and also a place where Dunkin' Donuts hasn't even landed yet. Starbucks has over 2,000 locations in the left-coast state while Dunkin' Donuts is concentrated waist-deep in the blizzard-pummeled Northeast with 55% of its stores there. Make no mistake about it -- cold sells coffee. It's snow, however, that can hurt them both when the roads close. Sort of. It hurts one more than the other, however.

Nigel Travis, CEO of Dunkin' Brands Group, stated on CNBC:

We had a quarter where we had continued bad storms seemingly every week ... they find out that school's cancelled, work's cancelled, they don't come in. It's not like say going out with your wife on Friday night for dinner where if there's bad weather you come back on a Saturday. You actually lose [the sale] for that day. This disrupts the very ritualistic element of our business.

Similarly, Cliff Burrows, Group President of Starbucks, stated on the company's conference call, "Not only did it disrupt our lives in our operations, the extreme weather, but it also disrupted the lives of our customers. And they changed their routines, they changed their habits."

Ritualistic routines and habits
There are three major kinds of regulars at Starbucks and Dunkin' Donuts. There is the "I must have my Starbucks/Dunkin" crowd. There is the "I want to treat myself to a Starbucks/Dunkin" crowd. Then there is the "I want to kick back and relax" crowd for which the coffee and/or pastry may actually be a secondary reason for being there.

Within the same region, both restaurants probably saw similar weather-related effects on the "must have" crowd who makes Starbucks and/or Dunkin' Donuts part of their ritualistic daily routines. These are the ones who are typically on the way to work. With work closed, they don't stop and refuel at Starbucks or Dunkin' Donuts. These are the people who Dunkin' Brand Group targeted with its "America runs on Dunkin" campaign.

Then there is the "treat myself" crowd. Again, both restaurants probably saw similar effects on this group. People in this group are more likely to pop into either restaurant when they have, perhaps, a day off from work due to the weather. For those who leave the house, they may stop by either one and enjoy a specialty hot beverage.

As for the "kick back and relax" crowd, the advantage goes to Starbucks.


Source:  Starbucks

Sit down, stay awhile
Starbucks has been trying to market itself as a "third place" between home and the office or other job site. Peak into just about any Starbucks and you'll see people on their laptops, reading books, or chatting and enjoying coffee for hours. It's a destination for this crowd which is something Dunkin' Donuts isn't for most people.

More often a Dunkin' Donuts won't even have much room to sit if it has any at all. So when you have half the town off from work due to the weather, some of them still have the means to get to a Starbucks and they have time on their hands. Starbucks is a destination where a customer can kill an hour or so.

Don't get me wrong. The snow hurt Starbucks too. Scott Maw, Starbucks CFO, stated on the conference call, "Our metrics were affected by unprecedented store closures and other disruption from severe weather in the U.S."

Still, Starbucks had a leg up in growth over Dunkin' Donuts due to some recovery in sales from the "kick back and relax" Starbucks fans. It was able to capture those few people who were off of work yet still able to travel who wanted somewhere to go. Starbucks is available as a "third place." Dunkin' Donuts isn't really.

Foolish final thoughts
Both Dunkin' Brands Group and Starbucks see significant upside for their U.S. businesses. Since both of them were able to grow despite the weak holiday mall traffic and disruptive storms, expect to see both of them show amazing growth this summer when everybody has a ride. As Troy Alstead, COO of Starbucks, stated, "Everybody else out there is experiencing is flat to negative growth as a result of weather ... it's allowed to deliver 6% comp growth."

In the end, America still refuels or runs on both Dunkin' and Starbucks, but Starbucks has the edge when the weather is bad because, put simply, it's more inviting inside for customers to stay there and warm up. Look for the gap between these restaurants to narrow this summer when staying warm and inside somewhere away from home on a forced day off of work is no longer a factor. 

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9/19/2014 3:59 PM
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Starbucks CAPS Rating: ****

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