Dunkin' To Double U.s. Stores In Anti-starbucks Push

(Tuesday, September 09, 2008) - Dunkin' Donuts -- the East Coast coffee shop chain called by some the "anti-Starbucks", because of its core blue collar customer base, still plans to more than double its U.S. stores to 15,000 by 2020, as its bigger rival from Seattle retrenches.

At the same time, both Dunkin' and Starbucks Corp (SBUX.O: Quote, Profile, Research, Stock Buzz), which is retrenching, face competition from McDonald's Corp (MCD.N: Quote, Profile, Research, Stock Buzz), which like other fast-food restaurants is aggressively pushing into coffee.

"Coffee has become a very competitive segment. It requires us to be on top of our game," Will Kussell, president and chief brand officer of privately-held Dunkin' Donuts Worldwide told Reuters.

"It's fair to say that we expect to be a growth company and a growth brand for many years to come," said Kussell, who declined to give specific financial forecasts.

Dunkin's 8,000 global stores -- which include almost 6,000 U.S. outlets -- turned in 2007 sales of $5.3 billion and revenues and profits continue to grow, the company said.

Momentum has been tempered as higher fuel and grocery bills take a bite out of U.S. discretionary spending, Kussell said.

RBC Capital Markets analyst Larry Miller said Dunkin' is taking more money out of the overall coffee market as it expands, but that the biggest shift in consumer coffee buying patterns is toward making coffee at home.

"The only place that looks like it's gaining (competitive) share is McDonald's," Miller said.

Kussell said Dunkin' will roll out a new value promotion in October, as customers grapple with high heating oil prices.

"We are very much a middle-class brand. We will be a bit more aggressive as we move into fall and winter," he said.

Dunkin' Donuts parent Dunkin' Brands was bought by private equity firms Bain Capital Partners, the Carlyle Group and Thomas H. Lee Partners in December 2005.

The Canton, Massachusetts-based chain plans to add about 9,000 stores around the United States by 2020.

McDonald's currently has about 14,000 U.S. outlets. Starbucks will retain about 11,000 domestic stores after plans to shutter 600 outlets to contend with flagging profits and store traffic.

Kussell said the tough credit markets have not slowed its expansion -- even though lenders are demanding 10 percent to 30 percent down payments to get new franchise deals done.

Dunkin' is adding stores in three western markets: Las Vegas, Phoenix and the Dallas/San Antonio/Austin/Houston area, which Kussell said will get more than 100 new units in total over about the next three years.

A move into California -- the most penetrated market for Starbucks, which has roughly 1,700 stores in the state -- is still about three years out, he said.

"They have a lot of appeal to the anti-Starbucks crowd. It's not as chichi and it has a little more blue-collar appeal, which works to their advantage," said restaurant consultant Bob Goldin of Chicago's Technomic. Dunkin' has been a Technomic client, but Goldin has not done work for the company.

Goldin said Dunkin' made the right choice in expanding beyond breakfast, spiffing up units and pushing national advertising. Its biggest risk is making its menu too broad, he said.

Despite its name, 58-year-old Dunkin' is more about drinks than doughnuts.

The chain gets around 65 percent of sales from beverages. Over the last few years, it has added espressos, lattes and cappuccinos that cost roughly $1 less than at Starbucks, which built its business targeting upwardly mobile customers with fancy coffee drinks, music and a place to work or meet with friends.

While he doesn't see Dunkin' stealing customers from Starbucks' $3 to $5 fancy coffee drinks, Goldin still sees the growing chain as a threat: "They are a real thorn in Starbucks' side." Meanwhile, Starbucks has struck back. This year it came after Dunkin's core brewed coffee business.

"We've been fine," Kussell said when asked if Starbucks' new Pike Place Blend has dented drip coffee sales at Dunkin'. Kussell declined to break out the sales split between drip and specialty coffee drinks.

Goldin is less worried about the competitive threat from the coffee initiative at McDonald's than by the hamburger chain's low-priced morning fare: "McDonald's has a real moat around them, especially with regard to breakfast."

Dunkin' and Starbucks are pushing more health-conscious foods as alternatives to egg McMuffins and sausage biscuits.

Dunkin's health-oriented menu is called DDSmart and includes egg white flatbread sandwiches, multigrain bagels, a lower-calorie smoothie and coffee drinks made with skim milk.

Kussell, who is in the midst of pruning the company's overall menu, said Dunkin' also will add more cold drinks and DDSmart muffins.

While the overall doughnut market is flat or declining, Kussell said Dunkin' has been gaining share due to store additions and the decline of rival Krispy Kreme (KKD.N: Quote, Profile, Research, Stock Buzz).

New York City's new law requiring chains to post calorie counts has also not put a big dent in doughnuts: "We have not seen a significant impact on our bakery sales," Kussell said.

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