Sometimes You Just Want a Nice Cup of Coffee
John is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I recently read a fairly interesting piece by fellow Fool blogger Greg Bartlett about the shift that he's seen in his South Carolina town from Dunkin Brands (NASDAQ: DNKN) Dunkin Donuts stores being on top of the coffee food chain to Starbucks (NASDAQ: SBUX) coming in to claim that throne. I like that it showed how the competition between these two companies worked on the local level, while taking into account the national stage. As things have progressed a bit different here in my little corner of Kentucky than they are in Greg's South Carolina hometown, though, I'd like to offer another viewpoint to the discussion.
To give you an idea of where I'm coming from, it's worth pointing out that I seem to live in one of the few parts of the country where Starbucks doesn't thrive. Last I checked there were a total of zero Starbucks stores within a 30 minute drive of where I live, and not for lack of trying; there have been at least two that have opened shop within the past several years but neither of the two was able to stay open for more than a few years. If you were to visit me and wanted a Starbucks fix you'd have a solid hour's drive ahead of you to get to the nearest store (and it's relatively new itself, having only opened a couple of years ago.)
There aren't many Dunkin Donuts stores in the area, either, though the ones that are here are fairly well entrenched. Within that same 30 minute drive where you can't find a Starbucks there are two Dunkin stores that I know of which have been in the same locations for years. There's a third store opening soon, though only time will tell how well it performs... the town where it's opening has seen its share of donut shops and coffee shops close down, and the Dunkin Donuts location will be across the street from an existing coffee shop and just down the road from a decades-old bakery.
Greg commented on the feeling you get when visiting a Starbucks in comparison to a Dunkin Donuts; oddly enough, that feeling may be part of why Starbucks has failed to thrive around here. A number of local businesses try to cultivate a "down home" feeling among their customers, with restaurants, drug stores and even car dealerships going out of their way to make you feel like the people who work there are just the same as you are. When Starbucks came it brought with it the Starbucks feeling, and it seemed so out of place among the general blue collar feel of this part of the country that people just didn't flock to it like they might have in other locales. As that down home feeling is already a part of the Dunkin Donuts atmosphere, they are able to fit in much easier.
When looking at national trends, it's obvious that Starbucks is a more profitable company than Dunkin Brands; shares of Starbucks currently go for around $20 more than Dunkin, which isn't surprising given that Starbucks has almost twice as many locations in the United States and worldwide as Dunkin Donuts has. Both companies suffered a bit of a tumble after a 52-week peak at the beginning of the summer, but given the fact that they both serve the same market it's not necessarily a huge surprise that the two companies might experience similar movements in the market. Considering that the drops occurred during the middle of a massive drought and that both companies are well on the way to recovery it's likely that these drops were at least in part inspired by people not wanting to drink as much coffee when the temperatures outside were hitting record highs.
I personally think that there's room in the coffee business for both Dunkin Donuts and Starbucks, and that's a good thing because I prefer the coffee of the former to that of the latter. Perhaps a bigger threat to the two comes in the form of an outsider that has made a lot of headway into the coffee market. At least locally, McDonald's (NYSE: MCD) has become quite popular among coffee drinkers and is drawing in new coffee customers with limited-time flavors just like they have been with food offerings like the Rolo McFlurry and Chicken McBites. With the brand recognition, menu options, lower cost for premium offerings and sheer number of locations, McDonald's has the ability to be a real threat to coffee-focused businesses by making lattes and other coffee drinks just another drink option for people who might already be stopping in for a Big Mac or Egg McMuffin.
Croaxleigh has no positions in the stocks mentioned above. The Motley Fool owns shares of McDonald's and Starbucks and has the following options: short JAN 2013 $47.00 puts on Starbucks. Motley Fool newsletter services recommend McDonald's and 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.