Starbucks v. Dunkin' A Caffine Conundrum

You can get coffee black, with crème or milk, iced, sugar, honey or in alternative forms such as cappuccino, latte, espresso and even cold brew. We drink it for school, work, social outings, or just to give us that extra boost for whatever tasks we have throughout the day. What makes coffee so appealing to the masses is its ability to be consumed in a variety of ways, offering some sort of appeal to most everyone who happens upon a cafe. What is interesting though, is how little variety we seem to have in terms of mainstream coffee choices. In fast food, we have burger joints such as McDonald's, Burger King, Wendy's, Hardee's, White Castle, etc. that all serve a variation of the same type of food. The same can be said about fried chicken, subs/sandwiches, and even chicken wings. If you want consistency in your coffee in America, you need not look further than the two American staples: Dunkin' Donuts and Starbucks.

In terms of 2016 financials, the numbers favor Starbucks to say the least. The competition between Starbucks and Dunkin' is just as bad as the first time Rocky fights Clubber Lang in Rocky III. In 2016 Starbucks grossed revenue twenty times that of Dunkin', $16.8 billion to only $828.9 million.

Like many Americans, I've consumed beverages from both of these establishments. Starbucks is more of a pricier and luxury-focused coffee brand. Their stores offer caffeinated beverages that can sometimes cost up to $6, along with a variety of baked goods. Dunkin' Donuts is a cheaper alternative, that boasts a wide selection of donuts and muffins. Their slogan "America Runs on Dunkin'" is an ode to a more working class coffee drinker, one who is more likely to spend $2-3 on coffee.

Starbucks was founded in Seattle, Washington in 1971, roughly 20 years after Dunkin' was founded in Quincy, Massachusetts. But despite the 20-year head start, Starbucks has nearly doubled the number of storefronts that Dunkin' Donuts has, 22,519 to 11,500. A key difference is the Starbucks has an international presence, with 20% of their revenue generated internationally, while Dunkin' falls behind with just 4% generated overseas.

These two companies fascinate me because of how different they are. It's the classic West-Coast flash, vs. East-Coast grit that these two companies seem to embrace. Furthermore, they do business in such different ways that analyzing and seeing where these two are heading is quite fascinating. Therefore, it is prudent to look at the business models of both of these establishments to understand how these two operate.

A large contributor to this difference is the overarching business models that each company operates under. The vast majority of Dunkin' Donuts' are locally owned and operated franchises that generate a different type of revenue stream compared to the corporate owned Starbucks. In fact, over 75% of Dunkin's revenue was generated via franchising fees and rental income, compared to only 10% at Starbucks.

What's interesting about the difference in their business models is that Starbucks is more corporate owned, thus making their business more dependent on coffee sales and operating expenses in the stores. For Dunkin', that burden falls on the owners who are required to purchase kitchen equipment and other coffee making necessities. And while Starbucks may have made an astronomical amount more than Dunkin' last year, their profit after cost of sales was only 60% compared to Dunkin's 83%.

Recently, the trend of mobile apps has played a large role in sales for each company. Both offer a mobile app meant to streamline the process and get the customer in and out in a matter of seconds. In ordering via the app, the customer will be able to skip the line, and they offer a large number of perks that incentivize the use of the app.

Both of these perks plans offer free drinks once a certain level of "stars" or "points" are met. A criticism for many Starbucks users is that you must first become a Gold Member to receive a free purchase based beverage. To reach that esteemed position, one must earn 300 stars which is equivalent to spending $150 on their coffee. Dunkin' uses a much more casual system that offers the same rewards to all who download the app.

Starbucks app users get a two stars for every dollar spent, while Dunkin' users get 5 points for every dollar spent. 125 stars and 200 points are needed to earn a free beverage, essentially adding up to $62.5 needing to be spent at Starbucks for a free beverage while Dunkin's threshold is only $40. Again, Dunkin' wins in accommodating the casual coffee drinker.

While this app sounds like the ideal manner in which to consume coffee, the opposite has been the case at many busy Starbucks locations. There has been a bottlenecking effect created by an influx of too many orders, leaving baristas overwhelmed at peak hours. This has led to great distrust amongst Starbucks faithful who aren't willing to let their coffee craving get in the way of their commute.

Social issues and political correctness are also another avenue where Starbucks and Dunkin' veer in completely different directions. In December 2015 Starbucks stirred up (no pun intended) a great deal of controversy when they released a blank red cup, while in previous years releasing an explicitly Christmas theme cup. Dunkin's response? A white cup with red and green type that gave nod to the season with the word "Joy." Petty coffee beef? I hope so, but Dunkin denied any connotation of the sorts.

A much more prudent (and relevant if you ask me) stance was Starbucks' intent to hire 10,000 Muslim refugees over the next five years after President Trump's January travel ban. While meant in good spirit to those struggling to find their way in a country in turmoil, this may not be helping their bottom line. According to a YouGov survey, Starbucks brand name fell two-thirds since they announced this plan. This survey asked consumers if they'd heard anything about Starbucks through advertising or word of mouth in the past two weeks, either positive or negative.

Starbucks may also be a victim of their own success. In 2008, they announced that they were shutting down 600 stores that were underperforming. This lead founder Howard Schultz to say "Stores no longer have the soul of the past that reflect a chain of stores vs. the warm feeling of a neighborhood store." In doing so they may have learned a lesson: consumers wouldn't pay for premium prices for coffee if that store felt like a chain.

These recent controversies may be affecting their stock, which is losing ground to Dunkin's. Could being apolitical in today's turbulent times be helping Dunkin'? According to Dunkin's chief digital officer Scott Hudler, "America runs on Dunkin', not Republicans run on Dunkin', Democrats run on Dunkin', it’s America runs on Dunkin'."

This controversy and staying apolitical may in fact be helping Dunkin', with their stock up 25% in the past year, while Starbuck's stock has remained stagnant. Only time will tell if Starbucks can regain their footing with the mobile app and the surrounding controversies, as they definitely have the assets necessary to dominate the coffee market. Sources:

Close, Kerry. 2017. “Dunkin’ Donuts Upstages Starbucks with Quick, Easy Free Coffee Rewards.” Time. Accessed May 23. http://time.com/money/4290470/dunkin-donuts-starbucks-rewards-program/.

Downie, Ryan. 2015. “Starbucks Vs. Dunkin’ Donuts: Comparing Business Models (SBUX, DNKN).” Investopedia. December 2. http://www.investopedia.com/articles/markets/120215/starbucks-vs-dunkin-donuts-comparing-business-models.asp.

Monica, Paul R. La. 2017. “Coffee Wars! Wall Street Runs on Dunkin’, Not Starbucks.” CNNMoney. March 23. http://money.cnn.com/2017/03/23/investing/dunkin-brands-starbucks-coffee-trump/index.html.

Quelch, John. 2008. “How Starbucks’ Growth Destroyed Brand Value.” Harvard Business Review. July 2. https://hbr.org/2008/07/how-starbucks-growth-destroyed.

“Starbucks® Membership | Starbucks RewardsTM | Starbucks® Coffee Company.” 2017. Starbucks RewardsTM Members. Accessed May 23. https://members.starbucks.com.

Taylor, Kate. 2017. “One of Starbucks’ Biggest Strengths Is Becoming a Huge Problem for the Chain.” Business Insider. Accessed May 23. http://www.businessinsider.com/starbucks-mobile-ordering-problems-2017-1.

Walters, Natalie. 2016. “Starbucks (SBUX) Stock Is ‘Undervalued,’ Outgoing CEO Schultz Claims.” TheStreet. December 29. https://www.thestreet.com/story/13912358/1/starbucks-sbux-stock-is-undervalued-outgoing-ceo-schultz-claims.html.

Warner Todd Huston24 Feb, and 836. 2017. “Starbucks Brand Crashes After Announcement of Plan to Hire 10,000 Muslim ‘Refugees.’” Breitbart. February 24. http://www.breitbart.com/big-government/2017/02/24/starbucks-brand-crashes-after-announcement-of-plan-to-hire-10000-muslim-refugees/.

Whitten, Sarah. 2015–500. “Brands Take Advantage of SBUX Red Cup Controversy.” CNBC. November 13. http://www.cnbc.com/2015/11/09/starbucks-holiday-red-cup-brews-controversy-on-social-media.html.

“YouGov | Brands and Politics: Spotlight on Starbucks.” 2017. YouGov: What the World Thinks. Accessed May 23. //today.yougov.com/news/2017/02/22/brands-and-politics-spotlight-starbucks/.

 

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