What Does America Run on Now?
Greg is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I moved to northern South Carolina in 2005. Over the past seven years, I’ve watched a fascinating, almost Darwinian event take place in that region. That event seems to be over now, although it probably holds important lessons for those of us that are keeping an eye out for the next such event. There were a whole lot of different factors that played critical parts in this drama, and alert investors will see those factors in foresight rather than just hindsight. Here’s what happened:
1. The Old Standby
Dunkin’ Donuts (NASDAQ: DNKN) has an established name. Usually that counts for a lot when it comes to future success.
2. The Invasion
Starbucks (NASDAQ: SBUX) did not have an established name, at least in South Carolina. But all of a sudden I started seeing these classy, upscale shops sprouting up around town, accompanied by a green sign with a strange figure on it. Intriguing…and, as it turned out, those shops sold really good coffee. It cost more than Dunkin’ Donuts, but it tasted better, and there was just something different about the whole experience. More about that later.
3. The Response
Remember that established name that Dunkin’ Donuts has? Suddenly that wasn’t enough to keep business going at a healthy clip; America seemed to be running toward Starbucks instead of on Dunkin’. Those of us that grab a little something on the way to work in the morning were intrigued by the unique character of Starbucks, and the folks at Dunkin’ seemed to have decided they needed a unique character of their own to compete with it. Just as I had seen Starbucks shops sprouting up, new Dunkin’ Donuts locations were now opening in storefronts all over the place, emblazoned with a curvy, pink and orange “DD” logo.
As an interested customer comparing the characters of the two now-fierce competitors, here is what Dunkin’ Donuts seemed to be saying to me: “Our coffee is just as good as Starbucks, but we’re much more sporty, fun, middle-class, and everyman. If you drink Starbucks, you look like you think you’re really something, but if you drink Dunkin’ Donuts, you’re part of the popular crowd.”
4. The Fallout
The short version of my story is that I can now drive around town and see long lines in the Starbucks drive-through while most of the former Dunkin’ Donuts stores are boarded up after just a couple of years. Why? It seems that the people planning their response to the Starbucks threat made a fatal error in judgment.
5. The Analysis
Maybe the most immediate way to analyze Dunkin’s failure in my area is to look inside myself. Why did I only try Dunkin’ a couple of times, but always feel myself drawn to Starbucks? As always, simply better coffee (my personal opinion, of course) is reason number one. But there’s also the feel, the atmosphere, the experience that Starbucks offers. You see, my admission is that I like the high-class feeling I get when my coworkers see me carry a Starbucks cup into work. I like hearing the art-house soundtrack and seeing the artistic lighting when I walk into the store. It lifts my spirits when the clerk behind the counter makes a joke and knows what I want after just a few visits. It feels like I have access to a standard of living that I don’t possess in real life. Okay, fine: it does make me think I’m really something!
But Dunkin’ didn’t seem to count on people liking that feeling, and if they can afford it they will often choose it over a more everyday kind of option.
6. The Qualifiers
Okay, I realize that northern South Carolina doesn’t represent the rest of the country’s demographic. So, departing from my personal experience, I reviewed the stock activity of both companies over the last few years. Dunkin’ Donuts seems to have been doing just fine, so they must be popular in other parts of the country. But Starbucks? Nothing but great news there. Even its lowest price in the last year and a half is higher than Dunkin’s highest in the same period (it’s only been publicly traded since July 2011), and its price has been on a surprisingly steady upward path since early in 2009. Apparently, while Dunkin’s performance must not be as dismal around the nation as it is in my neighborhood, Starbucks’ performance must be just as successful.
7. The Lessons
Here’s an easy one: Starbucks has a record of consistent success, pulling far ahead of even long-established competitors. That’s a company worth putting stock in.
The more helpful lesson? Keep a lookout for companies that promise to make life a little more special. Starbucks reeled me in because it gives me a unique little boost in my ego. If another company can do the same and put yet a little more sunshine into my day, I just might stop there on my way to work too. And buy a few shares while I’m at it.
copyhubwriters has no positions in the stocks mentioned above. The Motley Fool owns shares of Starbucks. Motley Fool newsletter services recommend 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.If you have questions about this post or the Fool’s blog network, click here for information.