Clash of the Coffee Stock Titans: Starbucks Vs. Dunkin’ Brands

In the ever-brewing coffee wars, Starbucks (NASDAQ: SBUX ) and Dunkin' Brands
(NASDAQ: DNKN ) often are pitted against each other. Higher-end vs. lower-end
customers. East Coast vs. West Coast. The debate heats up during the holidays,
when hostess gifts, last-minute stocking stuffers and enticing seasonal flavors
send caffeine-deprived shoppers through their doors in droves. As a consumer,
the choice is easy: Let your taste buds decide. For investors, however, the
choice can be a bit trickier when it comes to capitalizing on this end-of-year
retail push. Let's take a look at what each has to offer: Despite its
well-known brand name, DNKN still is the new kid on Wall Street after its IPO
debuted in July. It has seen slow growth ever since, as its debt mounts higher.
Dunkin' Donuts stores have an approximate 70% share of DNKN's gross
revenues, while frozen treats retailer Baskin-Robbins makes up the rest. With a
shifting focus in the United States toward healthier eating choices and a
shrinking ice cream industry, this is a big disadvantage and could become dead
weight for the stock. Especially since Starbucks has increased its low-cal menu
offerings, complemented by free Wi-Fi in an inviting environment. In fact, SBUX
has capitalized on meeting consumers' appetite demands, and food is now 20% of
its mix and accretive to net margins. Starbucks also is expanding into at-home
products. It celebrated its 40th anniversary in March by announcing a deal with
Green Mountain Coffee Roasters (NASDAQ: GMCR ) for Starbucks coffee to be the
exclusive super-premium brand produced by GMCR for its Keurig single-cup brewing
system. The SBUX K-Cup portion packs debuted earlier this month and just in time
for the holiday season. Coffee growth in 2010 was driven by single-cup sales of
about $2 billion. With only 6% of U.S. homes having single-serve machines, the
growth opportunity here is huge. Plus, the all-important international market
has a single-serve segment about seven times the size of the United States. DNKN
also has a deal with GMCR to make Dunkin Donuts coffee available in K-Cups, but
with a larger consumer base and the premium label attached to it, the advantage
here remains with SBUX. Plus, when Green Mountain's K-Cup technology patents
expire next year, SBUX is a greater contender to take over the marketplace.