After I moved to New England, Dunkin' Brands' (Nasdaq: DNKN) Dunkin' Donuts became a near-daily stop on my way to work to give me the caffeine kick I needed. With its recent IPO, fans of Dunkin's coffee can now own a piece of the company. In order for Dunkin' Donuts to live up to its current advertising slogan of "America Runs on Dunkin'," it needs to compete with national and regional favorites to establish a truly national brand.
It's about the coffee
Even though Dunkin' Brands consists of both Dunkin' Donuts and Baskin-Robbins ice cream, the coffee is what gets me going. Dunkin' Donuts has more than 6,700 stores in 35 states, with most stores east of the Mississippi River. Dunkin' Donuts franchises its stores to owners, with franchise fees accounting for more than 62% of its recent quarterly revenue. This is different than Starbucks (Nasdaq: SBUX), which owns most of its stores and derives its revenues from actually selling its products.
With locations in all 50 states and the District of Columbia, Starbucks has more than 11,000 stores in the U.S. It managed to expand nationwide through much of the '90s by moving into areas and opening numerous stores in those areas. Dunkin' Brands tried the same thing, but has struggled because its franchise model of operation means it has to rely on franchisees to expand its footprint. Starbucks was able to better control growth because it retained store ownership.
Dunkin Brands could expand in the Midwest; its only real presence in the area is in Chicago. The Midwest is served primarily by Caribou Coffee (Nasdaq: CBOU) and even Starbucks has struggled to penetrate the area. Caribou's presence in 21 states is primarily along the Great Lakes, with nearly half of its locations in Minnesota.
Canada-based Tim Hortons (NYSE: THI) has a small presence in the United States and decided to close 36 restaurants in the northeast U.S. in 2010, specifically because they could not compete with Dunkin' Donuts' in the region. However, closing these not-profitable stores allowed Tim Hortons to focus on more profitable regions in its U.S. footprint, including more than 200 stores in New York.
A truly untapped market for Dunkin' Donuts is California, the most populous state in the country. With the majority of its stores east of the Mississippi River, there are many other places it can expand before the Golden State. In addition to the 2,000-plus Starbucks in California, the other large-scale competitor in the market is Peet's Coffee & Tea (Nasdaq: PEET), which currently has 168 stores in California.
Other coffee options
Other companies have tried to fill consumers' coffee needs. Krispy Kreme Doughnuts (NYSE: KKD), known more for its super-awesome doughnuts than its coffee, sells cups of joe and McDonald's has expanded its coffee offerings, moving it a step above the truck stop coffee that it used to sell. Green Mountain Coffee Roasters' (Nasdaq: GMCR) Keurig machine has made it very easy to brew your own coffee at home. These single-brew machines brew many varieties of coffee and tea, including a recent expansion into offering Dunkin' Donuts-branded K-Cups. This new relationship has potential to benefit both Green Mountain and Dunkin'. With all these choices available to consumers, Dunkin' Brands will need to offer something that consumers cannot find elsewhere.
Keep on runnin'
Dunkin' Brands has only been a public company for a couple of months, so it may be a good idea to keep an eye on it over the next few quarters. You can do so by adding Dunkin' Brands to My Watchlist.
Fool contributor Robert Eberhard "Runs on Dunkin" but does not own any shares in the companies mentioned here. Follow him on Twitter @GuruEbby. The Motley Fool owns shares of Starbucks. Motley Fool newsletter services have recommended buying shares of McDonald's, Green Mountain Coffee Roasters, Starbucks, and Tim Hortons. Motley Fool newsletter services have recommended creating a lurking gator position in Green Mountain Coffee Roasters. Motley Fool newsletter services have recommended shorting Peet's Coffee & Tea. We Fools may not 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.