Although serving different clientele, Starbucks (NASDAQ:SBUX) and Dunkin Donuts are probably more alike than different.
Beyond just superficial similarities that both serve coffee loved by millions and each serves up baked goods to go with their brew, Morningstar calculates Dunkin Brands (Nasdaq: DNKN) has generated total returns for investors of 19.7% of the past three years, an impressive number very close to Starbucks own 23% returns. And where the latter has over 19,000 stores, Dunkin has 11,000, but sees its footprint growing to as many as 17,000, significantly beyond the 15,000 it originally forecasted when it went public three years ago.
More alike than not
Moreover, Dunkin Brands reported third quarter earnings last week that showed more customers visited its coffee and doughnut chain, pushing profits up 36% over the year ago period, but also saying it would be difficult to achieve even the low end of the guidance it previously gave for same store sales.
And that wasn't vastly different from Starbucks fiscal fourth quarter earnings release last Thursday where its outlook for the coming year missed Wall Street expectations despite showing a reversal in the current period compared to a year-ago loss as sales jumped 10% to $4.18 billion.
Why Dunkin Brands is cold as day-old joe
Despite all their similarities, Starbucks stock remains a better buy than its rival, but the reasoning behind it just might surprise you.
Following its earnings release, Dunkin Brands blamed a hard-pressed consumer laboring under an uncertain economy as one reason for its malaise, but more important was the rise in competitive pressure it's feeling.
Breakfast, which is as key to Dunkin Brands' operations as it is to McDonald's (NYSE: MCD), is under attack by rivals like Taco Bell and White Castle who suddenly view the daypart as a lucrative and profitable space to exploit. With new takes on how to serve up waffles, both the burger joint and the donut shop saw their business eaten up by the competition.
The only way McDonald's was able to keep customers from defecting to Yum! Brands (NYSE: YUM) Taco Bell was to give away its vaunted line of McCafe coffee for free. It was the second time this year it had to pull the stunt and all it was able to achieve was flat same store sales for the quarter.
Dunkin Brands, which didn't follow suit and offer its own free coffee give-away (but also wasn't facing freefall conditions like McDonald's), was only able to generate 2% comps growth in the quarter. That was enough to cause management to say it will be a "challenge" to meet its full-year guidance of 2% to 3% comps growth -- a forecast that was already revised downward from 3% to 4%.
Where Starbucks can start off strong
This is where Dunkin Brands and Starbucks diverge. Where breakfast comprises about 60% of Dunkin Brands business, it only amounts to about 45% of Starbucks traffic. Indeed, it was the chance to steal market share from its rivals that was behind Starbucks adding more food items to its menu. In the most recent quarter, it was breakfast items that drove the majority of the increase in its food comp.
Whatever gains Starbucks makes in breakfast will come at the expense of those who live and die by the meal, namely McDonald's and Dunkin Brands. Whatever they gain by broadening their appeal beyond the 6 a.m. to 11 a.m. crowd -- Dunkin's Baskin-Robbins ice cream chain, for example, is in the midst of a turnaround effort -- they may lose in the all-important breakfast daypart.
America's no longer running on Dunkin
With Dunkin embarking on a costly campaign to ramp up its store openings, just as its sales are under pressure from all sides, we can expect it's stock to falter.
For the House of the Mermaid, where it's more of a steady-as-she-goes situation, one where it can opportunistically reach out to grab market share and throw its rivals off balance as it sees fit, it becomes a no-brainer in a matchup between the two coffee houses. Starbucks wins hands down.
Follow Rich Duprey's coverage of all the restaurant industry's most important news and developments. He has no position in any stocks mentioned. The Motley Fool recommends McDonald's and 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.