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Dunkin' Brands Fires the First Shot in the Lunch Wars

By Nickey Friedman – Mar 13, 2014 at 8:00AM

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Dunkin' Brands, Tim Hortons, and Starbucks are all aiming for the lunch crowd.

Source: Dunkin' Donuts.

You've heard of the decades-old coffee wars among coffee chains such as Dunkin' Brands (DNKN), Tim Hortons (THI.DL), and Starbucks (SBUX -0.08%). You've probably heard of the more recent breakfast wars among the group as well. Now meet the lunch wars. While all three, and others in the industry, have voiced their desire to expand into the more-challenging lunch hour, Dunkin' Brands may have fired the first serious shot in this battle.

Why lunch?
Let's face it. Tempting groggy workers in the a.m. to purchase coffee and a bite to eat isn't exactly challenging. Your typical Dunkin' Donuts, Tim Hortons, and Starbucks have lines literally out the door in the early morning hours. How many times have you heard somebody say, "I need my coffee"? It's considered a necessity for many.

The further evidence is in the numbers. Last quarter, all three saw revenue, same-store sales, and adjusted net income rise to new levels even while many others in the restaurant biz are suffering from the bad economy and the weather.

The challenge becomes the afternoon onward. It's a time slot of often thin lines, but keep in mind that for these companies, the rent and most or all of the overhead has already been paid for with the morning's profits. This means most of any additional gross profits these guys can squeeze out of the afternoon would go straight to the bottom line.

Timmy and Mr. Bucks
Tim Hortons CEO Marc Caira mentioned on its Q3 earnings call, "Our thinking ... needs to shift to driving traffic and loyalty across dayparts beyond breakfast." The company plans to accomplish this goal through new menu introductions to get customers thinking about Tim Hortons for lunch.

Starbucks has a similar strategy. Starbucks CEO Howard Schultz and CFO Troy Alstead outlined some details in the latest conference call. Alstead mentioned that the lunch program is undergoing various testing and will begin its rollout later this year or early next year. Starbucks plans a "multi-year elevation of food" that it believes will act as a tailwind for same-store sales.

Schultz sees food in general as a "big, big, good opportunity" that includes warm items at lunch. His goal is not only to offer food with coffee but for food to be a driver of traffic: The coffee may even be the secondary item purchased to go with lunch.

Source: Dunkin' Donuts.

Dunkin' Brands dippin' into lunch
Dunkin' Donuts has already seen some success with "afternoon products including Chicken Sandwiches, Deluxe Grilled Cheese, and Wraps." One problem all of these coffee and pastry chains run into is a bit of customer apprehension regarding eating meals from a place your brain is programmed to only accept coffee and snacks from.

Many of us have finally adjusted and have welcomed the hot breakfast ideas at Dunkin' Donuts and others into lives. But lunch? That may take some more time. Many people are pickier about lunch than breakfast.

What a great idea from Dunkin' Brands, then, to be the first to introduce a brunch item to capitalize on the successful breakfast time while getting customers to slowly think about Dunkin' Donuts for lunch. On March 3, Dunkin' Brands announced it is "unveiling the Eggs Benedict Breakfast Sandwich." It describes the sandwich, which features "an egg, Black Forest ham and creamy Hollandaise-flavored spread on an oven-toasted English [m]uffin," as a "brunch classic served on-the-go."

Instead of just throwing the lunch menu up and hoping people will come, like Tim Hortons and Starbucks seem to be trying, the brunch idea is a perfect way to slowly introduce guests to the later hours. Baby steps. It's brilliant.

Nickey Friedman has no position in any stocks mentioned. The Motley Fool recommends and 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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