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Starbucks Vs Dunkin’ Brands

By Jayson Derrick – Mar 27, 2014 at 4:10PM

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Starbucks remains the undisputed king of coffee, and even the expansion of Dunkin' Brands into the Western United States won't be enough to dethrone the company.

Shares of Starbucks (SBUX 0.41%) have pulled back from their 52-week high of $82.50 as investors had concerns about slower same-store sales growth in the first quarter and the month of December. Going into March, winter weather issues could challenge second-quarter sales and put additional pressure on the shares. But with multiple growth drivers ahead, investors should view any pullback in the shares as a buying opportunity.

Rise in coffee prices not an immediate concern
Starbucks has fully covered its coffee bean needs throughout all of fiscal 2014 and part of fiscal 2015, so investors should not view this as an immediate concern. Rather, Starbucks has ample time to review its pricing options over the next year. Higher coffee prices could dampen fiscal 2015 EPS growth, but it remains too early for investors to accept this as a foregone conclusion. Dunkin' Brands (DNKN) on the other hand has only secured its coffee prices for "most of 2014," according to management's comments on the fourth-quarter conference call on Feb. 6.

Starbucks could have a better position than Dunkin Brands in terms of coffee prices, especially in the grocery aisle.

Multiple drivers of growth as a hedge against coffee prices
If coffee prices remain high over the longer-term, Starbucks has several lines of business to fall back on such as Evolution Juice, La Boulange, or the company's recent decision to begin selling alcohol across thousands of locations.

Dunkin' Brands on the other hand has been heavily expanding its Dunkin Donuts brand across the Western U.S, which includes a planned expansion into California in 2015. While this could drive significant growth, unlike Starbucks Dunkin' Brands will have no fall back plan (besides Baskin-Robbins) if consumers are reluctant to pay higher prices for cups of coffee.

Green Mountain benefits from both Starbucks and Dunkin' Brands
Keurig Green Mountain (GMCR.DL) (formerly known as Green Mountain Coffee Roasters) benefits from every K-cup pod it sells and the company counts both Starbucks and Dunkin Brands as key partners.

On March 14, Keurig Green Mountain and Starbucks reworked the terms of their five-year agreement and Starbucks will receive improved business terms in exchange for giving up the exclusivity agreement which covers the term "super-premium" coffee.

Starbucks has come out a winner in this case as it leads in K-cups with sales of 2 billion packs since it entered the space in 2013.

Keurig Green Mountain may have opened up the door to competition in the higher-end premium segment (i.e the K-cups with higher average selling points) which doesn't necessarily mean good news for Dunkin Brands. Currently, Dunkin Brands only sells its K-cups at its own shops and the cups don't occupy any space in the grocery aisle.  However, the company does sell bagged ground coffee, such as its Bakery Series coffee, which includes flavors like blueberry muffin and chocolate doughnut.

Keurig Green Mountain's prospects for the foreseeable future remain healthy. For starters, the company's announcement that its new Keurig 2.0 platform will not be compatible with unlicensed portion packs should help the company form new relationships with partners instead of competing against them.

One such example is its recently announced partnership with Peet's Coffee & Tea.  Peet's began selling unlicensed coffee pods nearly a year ago, and it is new partnerships like this that will prevent un-licensed brands from taking market share.  

Bottom line
Starbucks is the king of coffee and it has done a great job of diversifying itself with other product offerings to maintain its growth. Dunkin' Brands has ambitious growth plans as well but investors may find Starbucks' portfolio more attractive with its multiple businesses and international exposure.

Keurig Green Mountain will win regardless of which company wins the Starbucks versus Dunkin' Brands battle so long as consumers continue to enjoy freshly brewed cups of coffee from Keurig machines at their homes or offices.

Jayson Derrick has no position in any stocks mentioned. The Motley Fool recommends Keurig Green Mountain and 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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