I swear, I'm going to bang my head into the wall if I hear one more of my friends say, "I don't like Starbucks (SBUX +0.74%) coffee because it tastes burnt, and I don't like paying five bucks a cup." As a fellow coffee snob, I used to be guilty of making the same complaints, but then Starbucks woke up and smelled its own bitter-to-some-people coffee.
Source: Starbucks
After 80 different tested recipes, Starbucks answered the criticism a couple of years back with the cleverly named "Blonde Roast" which is milder tasting yet just as caffeinated. Try it and try denying how delicious it tastes. As a long time Dunkin' Donuts (DNKN +0.00%) brew devotee, Starbucks managed to win over my taste buds as well as my wallet.
But what about the expensive price?
The reality is few of the coffee items on the menu really even cost five bucks. The "regular" cup of Joe at Starbucks is around two bucks. This is slightly higher than Dunkin' Donuts at $1.60, but I have trouble believing those four extra dimes are really the deal killer some people make it out to be. And the growth numbers seem to suggest customers aren't balking at the price either.
Last quarter Starbucks reported global same-store sales gains of 6% including 7% in the U.S. The company chalked up its 18th quarter in a row of positive same-store sales greater than 5%. Starbucks credited the success with its "best-in-class mobile, social and digital technologies" as well as the power of its innovation. The blonde roast catching on is of course only part of the story and just an example of Starbucks figuring out how to appeal to guests in innovative ways whether its product, marketing, technology, or even just plain old-fashioned coffee.
Source: Dunkin' Donuts
Sulkin' Dunkin' blamin' everythin' under the sun (or lack of sun)
Meanwhile, Dunkin' Donuts hasn't been nearly as fortunate, at least lately. After a paltry 1.2% gain in same-store sales in the U.S. for the first quarter, which the company blamed on the concentration of restaurants in the winter-storm-hit northeast, the second quarter wasn't much better. Same-store sales gained a slightly better 1.8%.
At the time of the first quarter report, CEO Nigel Travis explained the weather interrupted the "ritualistic nature" of its customers when work and school got cancelled. It made sense at the time. But then investors were naturally expecting a big rebound for the second quarter that didn't come.
This time around executives blamed rain, cold, and macroeconomic factors for its lackluster growth. Dunkin' Donuts, as you probably know, sells more coffee than donuts. Given that Dunkin' Donuts is struggling a bit while Starbucks is flourishing, despite its slightly higher priced coffee, apparently the price points at Starbucks coffee aren't much of a problem. I don't think there were too many offices or schools closed due to rain or cold this spring. The economy is to blame too? Dunkin's coffee is cheaper but apparently that's not a strong selling point.
Starbucks wonders what weather?
Interestingly, nowhere in the Starbucks release or the conference call were there any complaints of bad weather or macroeconomic headwinds. The closest Starbucks came to any of that was when CEO Howard Schulz stated in the conference call (emphasis added):
"Particularly noteworthy is that our U.S. retail store business delivered comp growth of 7%, ahead of our own expectations and a stunning achievement on a base of over 6,800 stores against 9% comps in Q3 last year and in the face of continuing challenging U.S. economic and consumer environments."
It sounds to me like a bragging point; the bad economy is showing no signs of hurting Starbucks as the 7% same-store sales gain was on top of a challenging gain to beat of 9% in the year-ago period. It's always possible that a company is rising well above and beyond bad economic times and, if so, it's huge props either way for Starbucks and shame on Dunkin' Donuts. Opportunity is apparently possible and Starbucks continues to seize it while Dunkin' treads water.
This leads me to conclude either something is going on with Dunkin' Donuts to cause its disappointment and the company isn't sharing (or maybe isn't even aware), or Starbucks is simply doing something very right and bucking the overall industry trend in spades. Maybe it's a little of both.
Foolish takeaway
I own Dunkin' Donuts, and I'm bullish on Starbucks, but at this time I wish it were the other way around. Starbucks coffee and the stock both rock. On a valuation standpoint Schulz is targeting at least a $100 billion market cap and says the company is just getting started. If so, there is still significant long term upside in the stock on its way to that market cap target. In light of recent results, in conjunction with the ongoing trend and success, I would be hard pressed to doubt Schulz. As for Dunkin' Brands Group, figuring out a long-term valuation these days is starting to feel like an exercise in futility. It breaks my heart to say it, but my vote is Starbucks now has the better stock and the better coffee.
