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Can This Company Knock Starbucks Off Its Throne?

By MyWallSt Staff - Updated Oct 14, 2019 at 3:28PM

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While Starbucks remains the king of the coffee space, Dunkin' has had a hell of a year so far, and might just catch up.

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There have been few success stories in recent decades to match the extraordinary growth of Starbucks (SBUX 2.53%). Founded in 1971, the company steadily rose over time from a small Seattle chain to the coffee giant we all know and love (or love to hate). From 1987 onward, Starbucks has been opening roughly two stores around the world each day, and a new store in China about every 15 hours.

In the past two months, however, the company has seen an unusual 15% decline in its share price. We can attribute this partly to concerns among investors about a potential oncoming recession. With its premium prices and reputation as a minor daily luxury, Starbucks is particularly sensitive to shifts in consumer spending. Some of these fears should be allayed by the company's continued growth in China, but investors will get a better indicator of its overall financial health when the next earnings report comes out at the end of October.

Meanwhile, another household name in the breakfast department has been rising through the ranks. Dunkin' Brands Group (DNKN) has long been associated with its donut offering, but the Massachusetts-based company is making a big push on coffee, with plans to open between 200 and 250 new stores per year for the next three years.

A hand holding a Starbucks paper cup.

Image source: Unsplash.

The push for growth is part of a broader strategy for Dunkin'. Last year, the company made a whopping $100 million investment in its U.S. business, mostly for renovations and upgrades to its stores. CEO David Hoffmann said the money was spent on "strengthening the areas of the business that will produce sustainable long-term results." This included improving machinery, adding drive-thru lanes to a variety of locations, and making its premium baked goods offering more prominent. It also contributed to a major shake-up of the Dunkin' menu, which has since further emphasized its espresso-based beverages, including lattes and cappuccinos -- a clear step in Starbucks' territory. Significantly, the move came soon after the brand dropped the word "donuts" from its name.

The strategy seems to be working. Dunkin' revealed back in January that it sells "approximately 1.7 billion servings of ... hot and iced coffee annually," while sales of its espresso-based products jumped 40% in the second quarter of 2019. Even with this impressive growth, there's little doubt about who's on top. Last year, Starbucks saw its revenue climb 10% to almost $25 billion. Dunkin' reported revenue of $1.32 billion, a 3.6% rise.

The gap is far less extreme in the context of the companies' respective footprints: more than 28,000 Starbucks stores compared to about 20,500 Dunkin' stores. However, with its huge push to expand its presence throughout the U.S., Dunkin' could conceivably match its larger rival in terms of brand ubiquity. The company has a long way to go before it can pose a credible threat to Starbucks' share in the already-crowded coffee market, but as Hoffmann has said, Dunkin' is in it for the long term.

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Image source: MyWallSt.

MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in Dunkin' and Starbucks. Read the full disclosure policy here.

The Motley Fool owns shares of and recommends Starbucks. The Motley Fool recommends Dunkin' Brands Group. The Motley Fool has a disclosure policy.

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