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Can Dunkin' Brands' Growth Strategy Compete with Starbucks?

By Bradley Seth McNew – Feb 11, 2014 at 9:45AM

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Boasting over 50 openings in “non-traditional” locations in 2013, Dunkin' looks to franchising, key placement, and mobile for growth in 2014. But is it enough?

Dunkin' Brands Group (DNKN), owner of Dunkin' Donuts and Baskin-Robbins ice cream stores, recently announced that it opened more than 50 new stores in "non-traditional locations" in 2013. These locations include places like casinos, universities, military bases, and theme parks. Unique store placement is one way that Dunkin' Brands seeks to expand its brand in 2014.

Photo Credit: Dunkin' Brands Website

Of the 18,250 locations in operation at the end of fiscal year 2013, 3.3%, or about 600 stores, were located in such "non-traditional" locations. As the brand continues to grow and seeks to be seen as offering more than just donuts and coffee on the walk to work, these kinds of locations should see a rise in 2014. In January of this year, the company announced that it expects to open as many as 800 new locations during 2014.

Dunkin' Group competes through franchising
The first Dunkin' Donuts opened in 1950, and the first franchise was operating by 1955. This strategy continues to drive Dunkin' Donuts' growth today. By the end of 2011, Dunkin' Donuts franchises operated in 32 different countries.

Dunkin' Donuts' franchising strategy will allow the company to increase its number of locations by nearly 5% in 2014. By allowing individuals or companies to buy the franchise rights, utilize Dunkin' Donuts' training, and then run the businesses themselves, Dunkin' Brands can reap the benefits of expansion without much of the downsides or liabilities that come with rapid growth.

Dunkin' Brand Group's largest competitor, Starbucks (SBUX -1.88%), usually does not franchise and only licenses the coffee brand on rare occasions. However, the company plans for another round of new expansion as well. Starbucks plans to open 3,000 new stores in North America alone by 2017, all of which will be owned and operated by the parent company directly. While Starbucks is continuing rapid expansion, the company certainly is aware of the downside of holding so many properties directly. When the global economy spiraled downward in 2008, Starbucks announced the closure of 600 stores as a result. During a time like that, the company probably would have been relieved if it could let a franchisee deal with closing its own store.

Photo: Dunkin'

Expansion of mobile app and customer service technology
Starbucks has been very successful in using its mobile app for customer service and targeted marketing over the last few years. The strategy has paid off with a record $1.4 billion being loaded onto gift cards and mobile apps (which can be synced) during the fourth quarter of last year. The main reasons the app has been so successful is that over 10 million people have the app, and the app is used on average over 5 million times per week.

Dunkin' Donuts is getting in on the mobile trend with updates to its own app. The brand has had a mobile app which offers information and promotions for a few years. However, with the strength of competitors' strategies turning mobile handsets into a another point of customer service through rewards and payments, Dunkin' Donuts doesn't want to miss out.

The company recently announced that new updates to its own DD app will allow for mobile payments and a customer loyalty rewards program. "DD Perks," as the company calls the program, allows customers to pay with the mobile app and get a free drink and other items after a certain number of purchases. This is the same strategy that Starbucks uses, which gives customers an incentive to pre-load money onto the app and guarantee those future sales.

Can Dunkin's growth strategy compete with Starbucks?
While Dunkin' Brands Group has had impressive growth in 2013 and it has big plans for 2014, its growth has not bested that of Starbucks. If current estimates for both companies are met, Starbucks will still grow at a faster rate. Additionally, Dunkin' Donuts is late to the mobile app game, meaning that it has already lost out on revenue like that which Starbucks has gained from its mobile operations in 2013. Because of this, the company will continue to play catch-up on mobile innovations such as allowing customers to pre-order, a service which Starbucks is preparing to offer to its customers.

However, both of these points may turn out to be positives for Dunkin' Donuts in the long run. Utilizing a franchising model and striving to get more locations in non-traditional places may become key revenue drivers for the company, while allowing it to take on less risk than Starbucks did before the market slowdown in 2008.

Additionally, the company will have the advantage of watching what is and is not working with Starbucks' mobile strategy and applying only the best to its own mobile app. As long as investors believe that there is room in the market for both major coffee chains to continue, Dunkin' Donuts just may be able to to make its competitive strategy work.

Bradley Seth McNew has no position in any stocks mentioned. The Motley Fool recommends Starbucks. The Motley Fool owns shares of Starbucks. 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.

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