It is fun to match up Dunkin' Brands Group (NASDAQ:DNKN) with Starbucks (NASDAQ:SBUX) as both have recently been steady winners in the coffee and pastry wars. Last quarter Dunkin' Brands Group hit a bit of a speed bump because of the winter while Starbucks continued to shine. But if you look just below the surface, Starbucks actually struggled more than the raw numbers tell you.
Geography and atmosphere
In a previous article of mine, I attempted to analyze why Starbucks grew at a faster pace than Dunkin' Brands Group when they have similar business models. For the December quarter, domestic same-store sales jumped 5% at Starbucks and 3.5% at Dunkin' Brands Group. For the first quarter of 2014, the gap widened. I stated, "Starbucks this time reported a 6% climb in same-store sales while Dunkin' Donuts saw this metric only inch up by 1.2%. Whoa! What's going on?"
To quickly recap, I had two theories. First was geography. Starbucks' largest market is California where it has over 2,000 locations while Dunkin' Brands Group has a higher concentration of restaurants in the snow-covered Northeast with 55% of its stores there. Nigel Travis, CEO of Dunkin' Brands Group, stated in an interview on CNBC that the bad weather hurt the company's sales because it disturbed the morning ritual of grabbing coffee and a doughnut on the way to work or school.
The second theory is that Dunkin' Brands Group targets the "to-go" crowd while Starbucks targets guests who stay and soak up the atmosphere. With work cancelled fewer people grabbed doughnuts at Dunkin' Brands Group on the way to work but more people used their days off to pop into a Starbucks.
Perhaps I was wrong, at least on the impact of these factors. After Starbucks gave a presentation at the William Blair Growth Stock Conference on June 11, a third key and bigger reason became clear.
Starbucks has enjoyed 17 quarters in a row of domestic same-store sales growth of over 5%. If you are an avid retail and restaurant stock follower like I am, it's hard not to be impressed by that track record. However, Starbucks came awfully close to blowing it last quarter.
The 6% same-store sales increase that Starbucks got did not just come from the usual increased traffic and coffee sales. No. Scott Maw, CFO of Starbucks, stated that food made the biggest contribution to the same-store sales increase. Starbucks' La Boulange chain now has food offerings in over 8,500 Starbucks locations. In fact, the rollout has been so successful that, in March, Starbucks launched new breakfast sandwiches inspired by La Boulange which resulted in an eye-popping 50% increase in sales.
Since 20% of Starbucks' revenue comes from food, a 50% increase is no small amount. If not for the new food line launch, Starbucks' 5%+ same-store sales winning streak would have ended. Maw pointed out that although the chain saw same-store sales growth in every two-hour increment of the day, the highest spikes occurred from 11 am to 3 pm. Lunch hours.
The gap between Starbucks and Dunkin' Brands Group in terms of growth would have been more similar to that of the previous quarter if not for the new food offerings. Maybe Dunkin' Brands Group needs to upgrade its food offerings beyond the microwave.
Apparently the Starbucks locations that didn't get the new food offerings actually performed worse on average than the 5% same-store sales benchmark. When both companies reported, you would have thought Starbucks had some sort of magical immunity to the bad weather that Dunkin' Brands Group lacked. The reality was that new product offerings in thousands of restaurants offset and hid the harsh winter headwinds. The lesson here is to always look beyond the numbers to the why.
That being said, the more important thing to remember here is Starbucks is really good at continually growing its business no matter what. The very fact that food led the charge this past quarter, and Starbucks was actually affected by the weather, bodes very well going forward. The more successful Starbucks can get at convincing you to try its goodies, the more it can possibly generate sales during the slower times later in the day.
Nickey Friedman has no position in any stocks mentioned. The Motley Fool recommends Starbucks. The Motley Fool owns shares of Starbucks. Try any of our Foolish newsletter services free for 30 days. 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.