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Coffee Cup © Dunkin

Extra10/26/2009 12:01 AM ET

Who's winning the coffee wars?

A premium cup of joe has been available in a lot more places since Starbucks' market dominance has been under attack from McDonald's, Dunkin' Donuts and others.


Forays into instant beverages, front-office shakeups and forced emphasis on the last syllable in "latte" have turned the coffee wars into a strange brew.

Starbucks (SBUX, news, msgs), Dunkin' Donuts and McDonald's (MCD, news, msgs) spent more than a year pushing for a bigger share of a coffee market that has all the definition of an amoeba. The results of this very public jostling are similarly ambiguous.

A superficial glance shows Starbucks getting hammered over the past year. There have been store closures, layoffs, dabbling in low-end, low-priced Pike Place coffee, attempts at breakfast sandwiches and the launch of its Via instant product. Despite the hubbub, Starbucks' shares have doubled since November 2008.

"They're still the dominant, No. 1 coffee chain globally," says Nicole Miller Regan, an analyst at Piper Jaffray. "What's different today is the environment and the competitive nature, and I would suggest that its brand equity probably pays dividends in a recession."

Where Starbucks took an early hit and recovered, McDonald's had some early-morning coffee and crashed. The 800-pound gorilla of the coffee klatch spent much of last fall and a big chunk of its 2008 ad budget casting Starbucks' customers as poseurs who secretly hate heavy reading and jazz and yearn to wear more comfortable clothes.

As a result, the world's largest fast-food company saw U.S. sales at stores open at least a year rise 2.5% in the third quarter, with a boost from the third-pound Angus burgers that debuted in July as well as its espresso coffee drinks.

However, after overhauling some stores to look like cozy fireside cafes and offering any size of its Newman's Own coffee for a buck, McDonald's third-quarter revenue again fell shy of Wall Street forecasts.

McDonald's maintained the top spot in the 2009 QSR restaurant rankings, with more than $30 billion in sales, but coffee competitors Starbucks and Dunkin' Donuts each jumped up one spot. But any jolt McDonald's gets from coffee sales is somewhat decaffeinated by its lack of out-of-store offerings.

Citing figures from the National Coffee Association's 2009 study of drinking trends, NCA spokesman Alan Kaiser says only 5% of consumers drink their coffee at restaurants and just 10% take a cup with them during their commutes. More than 80% of coffee drinkers get their coffee at home, while 18% drink at work, making pound bags, K cups or even Starbucks' instant prime areas for expansion.

"Prepackaged, to-go coffee is really a growth space," Miller Regan says. "People are on the go more than ever and, while there is pound coffee that you can take home, (Starbucks') Via actually travels with you."

Some smaller competitors already have sweetened their earnings by stepping out of the stores. Coffeehouse sales by Caribou Coffee (CBOU, news, msgs)declined by $2 million in the second quarter, to $55.3 million, but commercial sales rose 28%, to $5.7 million in the period, as the Minneapolis company increased the number of retail and food-service outlets through which it sold its gourmet coffees. The stock has soared sevenfold since November 2008.

Meanwhile, Peet's Coffee and Tea (PEET, news, msgs), which inspired Starbucks and sold coffee beans when it first opened, lacks its protégé's thirst for rapid expansion. It has only about 100 stores.

Video: Inside the Canadian coffee-and-doughnut invasion

Not that expansion is always a coffee killer, mind you. Canadian coffee-and-doughnut chain Tim Hortons (THI, news, msgs) leaped to No. 50 in the QSR ratings on the back of its U.S. expansion. After opening the first of its 12 New York City franchises, Tim Hortons' total U.S. revenue percolated up 8.9% in the second quarter. Revenue and net income are up for the year, pushing the company's stock to a 52-week high of $30.39 on Oct. 19.

Dunkin' Brands, operator of the Dunkin' Donuts chain with more than 7,900 shops in 30 countries, seemed like a world-beater last year with its own expansion efforts and its ad campaign last year chiding Starbucks' "Fritalian" ordering system.

But the Massachusetts company is being sued by 350 of its franchisees, and its president and chief brand officer, William Kussell, recently said he will leave the company at the end of the year. With CEO Nigel Travis taking over, the privately held company's hot spot in the coffee wars may be going cold.

This article was reported by Jason Notte for

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