While both Starbucks (SBUX -0.26%) and Dunkin' Brands (DNKN) have sold coffee for decades, their primary target clientele differed up until late last year. Dunkin's primary focus since its inception in 1950 was customers looking for a cheap cup of drip coffee, while Starbucks, younger by two decades, was laser-focused on the premium caffeinated beverage market. This all changed in November of 2018, though, when Dunkin' rolled out an initiative to stake a claim on the premium beverage market.
With the turf war now just over a year old, investors and those looking to invest must decide which stock is the better buy. Let's look at Dunkin' vs. Starbucks stock now.
Image source: Getty Images.
Dunkin' is moving in on Starbucks' territory
As I covered in-depth in a recent article about Dunkin' Brands stock, Dunkin' shifted some of its focus to the espresso and premium beverage market, crossing over into Starbucks' comfort zone. On the company's first-quarter 2019 earnings call, Dunkin' Brands CEO Dave Hoffman sent a message, which is hard not to believe was directed at Starbucks: "High-quality espresso beverages sold at a fair price and served at the speed of Dunkin' is something only we can do. It's why we believe we are the brand that could democratize espresso, and why we're committed to the category for the long term."
And in the 12 months since the rollout, Dunkin' has had success. Second-quarter growth in espresso sales was 30% year over year; last quarter, espresso sales were up 40% year over year. During the company's earnings call, Hoffman credited the company's 5.8% revenue growth, and comparable-sales increase of 1.5% in the U.S., to the growth of premium beverages.
Is this having an effect on Starbucks? It doesn't appear so just yet. Starbucks' beverage revenue for last quarter was $15.92 billion, an increase of 10.1% from the previous year. Comparable-store sales growth was up 6% in the U.S. and 3% internationally.
Who can deliver the speed, pricing, and quality customers want?
It's clear that Dunkin's big push is to offer comparable-quality espresso drinks that are more affordable and made quicker than Starbucks. Assessing quality is up to the drinker, but Dunkin's rising sales numbers are a good indicator the company is on the right track. Regarding price, Dunkin' is delivering: The current price of a medium Americano at Dunkin' is around $2.29, while at Starbucks, it's about double that. On speed, a 2018 study in QSR magazine found the average drive-thru time at Dunkin' was 2 minutes and 54 seconds, and the average drive-thru speed at Starbucks was 4 minutes and 26 seconds -- around a minute and a half slower.
Starbucks is reacting, though. On its recent earnings call, the company announced a rollout of improved Mastrena espresso machines, to be completed over the next 12 months. These machines allow baristas to pull three shots of espresso at one time, instead of the maximum of two shots they can do with the brand's current espresso machines. Additionally, the machines will be equipped with Internet of Things sensors, allowing the company to pull telemetry data off-site and prescribe preventive maintenance for more consistent machine uptime. Both of these benefits should help with speed, as well as the quality of the espresso experience.
Don't forget international markets
It can be easy at times to forget about the international markets when looking at companies, but that would be a mistake here. Dunkin's international footprint in the coffee market is relatively small compared to Starbucks. International revenue for Dunkin' Brands last quarter was $5.8 million, which was good for a 7.9% increase year over year, comparable-sales growth of 7.3%, and systemwide sales growth of 8.2% at its 3,481 international stores. Those are great numbers, but they're quickly dwarfed by Starbucks' 13,189 international locations and $6.2 billion in revenue last quarter -- good for a year-over-year increase of 11.5%.
Is either company looking to continue international expansion? Starbucks is eyeing significant expansion into the international market, especially in China, with 600 new locations planned for the fiscal year 2020. While we do expect some international expansion from Dunkin', no specific numbers were mentioned on the recent quarter's earnings call, or in the three-year plan for growth released by the company in 2018.
Is Dunkin' or Starbucks the better buy?
Dunkin's efforts to penetrate the premium caffeinated-beverage market are proving successful, but appear not to have grown large enough to affect Starbucks' bottom line -- yet. In the U.S. market, Dunkin's potential for growth, while simultaneously taking from Starbucks, is promising.
Internationally, Starbucks currently has the leg up in size, and is showing a real drive to capture more of the market, specifically in China. However, China's slowing economy should be a concern.
Arguments can be made for owning both stocks, due to international expansion, but Starbucks should watch out if Dunkin' continues to gain in the U.S. For me, Dunkin' Brands is the better buy.
