Starbucks, Krispy Kreme, or Dunkin' Donuts: Which Will Win in California?


Source:  Dunkin' Brands Group

The largest market in the United States for Starbucks (NASDAQ: SBUX  ) is California where it has over 2,000 locations. Dunkin' Brands Group (NASDAQ: DNKN  ) is in the process of expanding its footprint out West. Bulls argue that Dunkin' Donuts is popular in the East so this will also be true in the West. Bears argue that consumers have different preferences out West and the Starbucks culture is there to stay. Few seem to have noticed a solid clue that came from Krispy Kreme Doughnuts (NYSE: KKD  ) .

America runs on coffee
No doubt you've heard the slogan "America runs on Dunkin'." This obviously refers to its coffee rather than its donuts. Dunkin' Donuts, like Starbucks, relies on coffee for the majority of its sales with America's addiction, desire, and dependence on high-quality and flavorful caffeinated drinks.

Starbucks illustrated an example of this during a presentation in June of last year. Troy Alstead, CFO of Starbucks, noted that in California between Los Angeles and Bakersfield, there is a whole lot of nothing. There are farms, desert, and long stretches of empty road there, and not much else. Smack in the middle of nowhere there is a Starbucks with a drive-thru. It just so happens that this location is one of the top five stores by volume in the entire U.S. for Starbucks. It seems like Californians "need" their coffee and the location is an oasis for passers-by.

What about Dunkin' Donuts and Krispy Kreme Doughnuts?
Bears will acknowledge that Dunkin' Donuts does well in the Northeast where much of the chain is concentrated. It's popular and it has a legacy, and that extends all the way down to Florida. Some will point out that many people from up north move down there and help keep the brand strong. California, though, is completely new territory, and the chain is basically starting from scratch there. Most Californians haven't even seen a Dunkin' Donuts location before, let alone tried one.


Source:  Starbucks

Enter Krispy Kreme Doughnuts
Krispy Kreme Doughnuts has long been considered an immensely popular chain in the Northeast just like Dunkin' Donuts. However, unlike Dunkin' Donuts, Krispy Kreme Doughnuts has been in California for years. It's not nearly as successful as Starbucks there, but there are some interesting hints to consider.

First, Krispy Kreme Doughnuts started out with oversized large factory-style restaurants out West. The model was never like that of Starbucks, which has a location seemingly on every corner. Second, Krispy Kreme Doughnuts has finally figured out that the "small-factory design" is the way to go for many of its new locations and this is similar to the model for most Dunkin' Donuts shops.

Back in January, Krispy Kreme Doughnuts announced that one of its franchisees will triple its store count in Southern California. This franchisee, which is Krispy Kreme Doughnuts' third largest, had rather dormant growth for years before this announcement even though it has been a franchisee since 1998.


Source:  Krispy Kreme Doughnuts 

Krispy Kreme Doughnuts is expanding -- so what?
During Krispy Kreme Doughnuts' conference call in March of this year, there was something interesting revealed during the Q&A session that many people seemed to have missed. Alton Stump of Longbow Research asked if the reason for the expansion into California was due to "very good trends." Otherwise, as his questioning implied, it could have just been a move based on pure speculation or hope.

Douglas Muir, Treasurer and CFO of Krispy Kreme Doughnuts, responded, "Comps are stellar on the West Coast, yes."

Stellar?

Stellar is interesting. Krispy Kreme Doughnuts has arguably been seeing "stellar" same-store sales increases across its entire chain. Last year, company-owned stores saw their sales jump 6.7% and it was the fifth year and 21st quarter in a row of positive same-store sales growth. Domestic franchisees saw an even better result at 9.9%.

Since the California locations were "stellar" in comparison to the rest, this means that the franchisees likely saw growth significantly north of 9.9% in California. Domestic systemwide sales for Starbucks grew by 8% in fiscal 2013. Starbucks is working from a bigger base to start, however.

Final thoughts
Though Krispy Kreme Doughnuts' growing success in California doesn't automatically mean that Dunkin' Donuts will also be a success, it is a data point in Dunkin' Donuts' favor and proves that Californians are willing to enjoy products from a Starbucks competitor. It's hard to imagine a domestic region in the United States where Krispy Kreme Doughnuts is a smash hit but Dunkin' Donuts is a failure.

The reality is that all three can probably thrive together just about anywhere as they appeal to different tastes and, if you're like me, to people who like a little variety. The bottom line is that Dunkin' Donuts will face plenty of competition in California but it has a vast opportunity for system sales and profits to expand anyway and this will probably come at the expense of Starbucks to some extent.


Read/Post Comments (7) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 27, 2014, at 10:18 AM, lagunagreg wrote:

    I can't imagine Dunkin' doing well in CA. The food's not very good. Starbuck's has good coffee, and good food. Californians are quite picky that way. And Krispy is a high-end specialty food item, unlike anything sold at Dunkin'. The comparison is inapt.

    I guess analysts don't bother to understand their markets very well.

  • Report this Comment On May 27, 2014, at 11:04 AM, Jayman wrote:

    The high-volume Starbucks mentioned in this story is in Lebec, just a few feet off heavily traveled Interstate 5. I can attest from personal experience that it's an incredibly high-volume store ... and a Godsend for highway travelers.

  • Report this Comment On May 27, 2014, at 12:04 PM, DoctorLewis4 wrote:

    Dunkin' is a great idea on the East coast. Many are located next to public transportation making it easy for commuters to get a quick cup of coffee. That won't work in L.A. which is car centric. S.F. does have public transportation but also has some of the most discriminating coffee drinkers in the world.

  • Report this Comment On May 27, 2014, at 2:54 PM, nickeyfriedman wrote:

    @ lagunagreg,

    I don't think Californians are picky when it comes to doughnuts (donuts). Case in point -- Winchell Donuts and Yum-Yum Donuts are two Southern California chains that are doing well.

    The donuts for each are horrible. The "dough" tastes more like bread. I don't think Californians are more particular to "high end" donuts considering these two chains, which I believe are the biggest there, and they are horrible.

    Back East, Dunkin' Donuts tends to outperform Krispy Kreme in most markets especially for coffee. By the way, not everybody in California is a food snob. Low quality fast food is extremely popular in California once you get outside of Malibu. :)

  • Report this Comment On May 27, 2014, at 3:35 PM, adrianangel wrote:

    None of these guys will win. There is an independent donut shop on every corner in SoCal.

  • Report this Comment On May 27, 2014, at 4:46 PM, tippyy55 wrote:

    I hate krispy krud doughnuts they taste like your eating pure lard only fried.

  • Report this Comment On May 27, 2014, at 8:43 PM, bostontrip wrote:

    Dunkin' will win all the way! Starbucks Coffee is Bitter! and overpriced. Dunkin's coffee is awesome. When people out west get a chance to try it, They will soon realize the Tar they've been paying 7 bucks for at Starbucks was a bad idea.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2969408, ~/Articles/ArticleHandler.aspx, 10/24/2014 7:41:31 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement