Dunkin' Donuts, operated by parent Dunkin' Brands (DNKN - Get Report) , and Starbucks (SBUX - Get Report) are locked in bitter rivalry for supremacy in the coffee and "fast casual" food wars. Which stock is winning?
Despite the economic recovery, consumers still traumatized by the Great Recession of 2008-2009 are forsaking fancy restaurants for higher-quality fast food that's served in a pleasant sit-down environment. The average "fast casual" meal costs between $7 and $11 and generates higher profit margins than ordinary fast food.
Even a company better known for donuts is getting in on the action. Based in Canton, Mass., Dunkin' Brands operates 10,600 Dunkin' Donuts restaurants and 7,000 Baskin Robbins restaurants in 60 countries. (Dunkin' Brands is among a select group of stocks that offers a combination of growth and income right now.)DNKN data by YCharts
Dunkin' Donuts is directly attacking its rival Starbucks by remodeling its stores to make their ambiance more appealing for longer stays; Dunkin' Donuts also is sprucing up its menu with more sophisticated fare to attract the bigger-spending business-lunch crowd. Meanwhile, Starbucks continues to be hampered by limited fare and an assembly line feel.
It's all part of Dunkin' Donuts strategy of emphasizing fast casual, the latest craze in fast food consumption. Traditional fast food is getting supplanted by fast casual, which largely explains the precipitous decline in sales for the once-dominant McDonald's Corp (although the company had a good quarter, recently). Dunkin' Donuts foresaw the rise of fast casual and now has a firm foothold in this style of eatery.
With a market cap of $3.8 billion, Dunkin' Donuts is the world's largest operator of doughnut shops but it's number two in the overall coffee and snack-shop market, with 23% of global market share, according to industry research firm IBISWorld. Its biggest competitor, Starbucks, sports a market cap of $90.2 billion and is No. 1 with 32.6%.
Epitomizing the rivalry between the two companies, Dunkin' Donuts this week released a seasonal cup emblazoned with the word "Joy" decorated with a wreath and holly, as a way to capitalize on the controversy that continues to dog Starbucks for toning down its holiday cup to be less overtly about Christmas (it's still red and green).
Dunkin' Donuts dominates the heavily populated Boston-New York City-Philadelphia corridor, but it lags competitors in other major metropolitan markets. This concentration in the Northeast is a limitation but also an advantage -- it gives the company huge opportunities for growth in the rest of the U.S., especially the West Coast.
The company is now unfurling its flagship Dunkin' Donuts brand from coast to coast, with plans to increase the number of doughnut shops to about 15,000 over the next two decades.
Until recently, the company has operated no outlets in California, but that vast doughnut hole is getting filled. Dunkin' Donuts is now pursuing a deal with four franchise groups to open 45 restaurants in the Golden State.
Most of Dunkin' Donuts' customers visit for a quick stop in the morning, but the chain is altering those traffic patterns with the addition of new sandwiches and bakery items suitable for all times of the day.
Seattle-based Starbucks continues to pursue expansion in the U.S. and around the world, but the chain has saturated many regions and now faces less room for growth than Dunkin' Donuts. Starbucks also is saddled with higher labor costs.
Thus, Dunkin' Donuts appears to be a better value to investors than Starbucks.
Dunkin' Donuts sports a trailing 12-month price-to-earnings (P/E) ratio of 24.5, compared to the trailing P/E of 33.52 for Starbucks. In another indication that Dunkin' Donuts is undervalued given its earnings performance, the stock has a five year price/earnings to growth (PEG) ratio of 1.64, compared to 1.83 for Starbucks.
As the final kicker, Dunkin' Donuts offers a current dividend yield of 2.12%, compared to 1.25% for Starbucks.
If you're looking to tap the fast casual dining trend and also benefit from a robust holiday shopping season, Dunkin' Brands belongs on your menu.
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