Is Krispy Kreme the Next Starbucks?

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From scorching hot showers to five-mile gorilla runs, people will do whatever it takes to wake up on the right side of the bed. Hook me up with a Caff� Latte from Starbucks (Nasdaq: SBUX) and Hot Original Glazed from Krispy Kreme (Nasdaq: KREM) and I'll beat the crap out of Joe Piscopo. The same can be said for our other Rule Breaker Managers, except Paul Commins (TMF Buster), who's still searching for an effective morning wakeup recipe. 

Rule Breaker junkies are familiar with the world's largest chain of coffee shops, but Krispy Kreme might be something of a mystery. A quick review: The company has 178 locations in 29 states and is best known for its Hot Original Glazed doughnuts, made hot enough to melt in your mouth. The organization includes support operations, company owned stores, and franchise operations.

Krispy Kreme's value has increased more than 400% since the company's IPO in April 2000. That success has compelled some investors to crown it "The Next Starbucks." There are many similarities between the two businesses that might lead to such a conclusion. Both companies have dominant brands, for example, in the specialty food retailing market. Each business also has a huge competitive advantage: consistent and superior products that customers love.

In addition, both companies have tremendous pricing power, though Bill Mann said otherwise in the Fool's Halloween Special last October. Mann argued that Krispy Kreme doesn't have pricing power because it sells doughnuts, but companies like Campbell Soup (NYSE: CPB) and Starbucks have had success increasing prices on soup and coffee over the years. Krispy Kreme has done the same with doughnuts.

The biggest difference between Krispy Kreme and Starbucks is doughnuts and coffee.  That sounds simple, but coffee is an essential part of our everyday lives -- nearly two-thirds of adults drink it. Whether entrenched in our culture as a habit or a symbol of sophistication, Starbucks has a huge addressable market. Meanwhile, Krispy Kreme is selling doughnuts to a much smaller audience -- mainly cops and movie stars.

I'm (partially) serious. Coffee is the world's most popular drink, which gives Starbucks all kinds of opportunities for expansion. The company has already opened operations in the U.K., Japan, Singapore, the Philippines, and Taiwan. Krispy Kreme might be able to grow its business abroad, but it won't be easy to cater to global tastes. McDonald's (NYSE: MCD) has had success with its fast food concept, for instance, serving lamb in India and Teriyaki Burgers in Japan. Krispy Kreme doesn't have the same type of flexibility with its doughnuts. 

Starbucks also has the first mover advantage in its industry, leaving it with no direct competition. True, it competes with Diedrich Coffee, which has more than 360 stores, and "mom and pop" coffee shops in every city, but no coffee vendor comes close to its brand recognition, sales, and customers. Alternatively, Krispy Kreme is forced to contend with Dunkin' Donuts, which has more than 5,000 stores worldwide.

I said earlier that both companies have awesome brands, but there's an important distinction to make: Starbucks has built its brand by putting its name on anything related to coffee. It has businesses called "specialty sales," which offer products outside its coffee shops. It has coffee shops in Barnes & Noble (NYSE: BKS), makes bottled Frappucino drinks with PepsiCo (NYSE: PEP), and has developed ice cream with Dreyer's (Nasdaq: DRYR). These partnerships cost the company nothing. It simply licenses its name for the products and gets a cut of the profits.

Krispy Kreme doesn't have the same opportunities to build its brand nor will it in the future. Maybe I'm wrong, but doughnut-flavored ice cream doesn't sound very appealing. Krispy Kreme does have relationships with grocery stores, such as Kroger (NYSE: KR), a partnership with Disney's (NYSE: DIS) IMAX Theater in Los Angeles, and a co-branding deal with -- of all people -- Starbucks in New York. But those deals only represent different channels to sell its doughnuts.  

Is Krispy Kreme the Next Starbucks? Even before my coffee and doughnut in the morning, I can tell you the answer is no. But the biggest reason Krispy Kreme doesn't have a prayer at becoming "The Next Starbucks" is because there's nothing addictive in its doughnuts. People are so addicted to caffeine in this country that a trip to Starbucks is a morning ritual. Improved motor performance, decreased fatigue, and enhanced sensory activity are just a few of the positive effects that coffee has on people. The company needs to consider adding an addictive compound to its secret recipe.

Mike Trigg loves coffee and doughnuts. At the time of this writing, there's a good chance he's either at Starbucks or Krispy Kreme.  To see his holdings, view his profile. The Motley Fool is investors writing for investors.