In late 2007, Dunkin' Donuts made a surprising announcement: In a national taste test in 10 major U.S. cities, the chain had put its most popular brew up against Starbucks' -- and clobbered the coffee conglomerate, 58% to 42%.
The test was held even in two cities where Dunkin' Donuts had a distinct disadvantage: Los Angeles, where the company doesn't have a single store, and Starbucks' hometown of Seattle. "We wanted to show that nationwide, people prefer Dunkin' Donuts to the perceived leader," says Frances Allen, the company's brand-marketing officer.
Armed with the test results, Dunkin' Donuts immediately launched a national multimedia advertising campaign that essentially declared war on Starbucks. Its timing was perfect: The latte giant was overextended, battered and vulnerable. Its stock had slid from the mid-$30s to the mid-$20s over the previous year (it was below $10 this week); its on-every-corner strategy had left it overextended, with too many unprofitable locations; and the global economy was about to fall off a cliff.
Meanwhile, Starbucks was facing an attack on another front: McDonald's had joined the coffee fray as well, positioning itself as an alternative provider of premium coffee. The fast-food giant plans to outfit most of its 14,000-plus U.S. stores with a McCafé, a coffee bar that will sell espresso-based drinks such as cappuccinos and lattes.
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More than a year later, Starbucks' pain is obvious. The company reported a 97% drop in profit for the fourth quarter of 2008 -- partly due to a $105 million restructuring plan -- and is struggling to regroup. It has announced the shuttering of about 800 U.S. stores, restored visionary leader Howard Schultz to the CEO's seat and made wholesale changes to its menu. The company's latest round of layoffs, announced Wednesday, will eliminate 6,700 jobs.
It's not clear whether the one-time darling will be able to come back. Today's economic climate is tailor-made for a blue-collar brand like Dunkin' Donuts, already a $5.3 billion-a-year business.
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"Dunkin' is a cheaper way for consumers to get their high-end java fix," says longtime beverage industry analyst Bump Williams, the head of Bump Williams Consulting.
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The company, which is not publicly traded, is already more Dunkin' than Donuts: 63% of its U.S. sales are from beverages, with coffee topping the category, Allen says. (The chain says it sells 1.5 billion cups of coffee annually.) And Dunkin's plans are aggressive. The 58-year-old company has 5,769 stores in 34 states plus Washington, D.C., making it, essentially, a large regional player in the premium-coffee category.
How Dunkin's business has changed
But thanks to a nationwide distribution deal with Procter & Gamble, the brand has a thriving national presence, selling its premium coffee beans by the pound online or through supermarkets. "We want to expand the brand," says Allen.
By 2020, Dunkin' Donuts aims to nearly triple its number of U.S stores, to 15,000 -- essentially matching the number of Starbucks outlets -- with incursions into java-loving states such as Washington and the nation's largest market, California.
"Dunkin' Donuts has half of the U.S. land mass to go, including high-volume states that they haven't even hit yet," Williams says. "That's a lot of fertile ground for a premium-coffee brand to grow in."
And the company’s new CEO, Nigel Travis, who took the control of the company earlier this month, has already expressed his desire to expand the company’s brand 'across the world.'
The company's planned expansion is more than geographic: The chain is also updating the entire in-store experience with a retro look and trying to shed its unhealthful reputation with a menu that includes multigrain bagels, reduced-fat blueberry muffins and a flatbread egg sandwich. Such moves have strategically expanded its appeal beyond the company's traditional blue-collar customer base to snag as many of Starbucks' aspirational consumers as it can.
"In a sense, they're looking to move a little bit upmarket," says Carl Steidtmann, the chief economist of Deloitte Research in New York.
But there's upmarket, and then there's downright expensive -- and just like Wal-Mart, which has fared well amid the economic downturn, both Dunkin' and McDonald's are essentially selling affordability, Steidtmann notes. "What the consumer is really buying is their low price point," he says.
But while cost-conscious consumers aren't taking any budget items for granted, these days, a $4 latte is a daily ritual -- thanks largely to Starbucks -- that many people insist they can't do without.
"Four-dollar lattes are not dead," says Michael J. Silverstein, a Chicago-based senior partner in the Boston Consulting Group and the author of "Treasure Hunt: Inside the Mind of the New Consumer." "They remain an affordable luxury. Maybe not every day; maybe only at the end of the week when you are tired and sad and need something to pick up your spirits . . . but I expect most working Americans will find the money to buy a cup of coffee."
That is why Starbucks, once again led by Schultz, won't abdicate its throne without a fight. After all, it was Starbucks that helped introduce espresso-based drinks -- and the lifestyle that goes with them -- to most Americans in the first place.
Starbucks has been responsible for a nationwide shift in behavior, Silverstein notes -- persuading young consumers to trade in Cokes for cafe lattes, for instance, or elevating coffee standards to a point where even Maxwell House is now 100% Arabica bean.
Ironically, those higher standards may have paved the way for rivals such as Dunkin' and McDonald's to compete with Starbucks on taste as well as price. But don't count Starbucks out yet, Silverstein says.
"Starbucks is a great brand, and it has a core group of high-profit stores," he says. "It has many consumers who are habituated -- they live for their daily fix."
Produced by Peggy Collins, Graphics by Joe Farro
Published Jan. 29, 2009
High