Starbucks vs. Dunkin': An Overview

Starbucks Corp. (SBUX) and Dunkin' Brands (DNKN) are the two largest eatery chains in the U.S. that specialize in coffee. Both companies offer similar coffee options—although different food options—and both have similar overall strategies. Nonetheless, there are key differences in their business models related to scale, store ownership, and branding.

Despite being founded 20 years after Dunkin' Donuts, Starbucks grew aggressively and is a substantially larger company. Starbucks generates over $26 billion a year in revenue, while Dunkin' Brands' annual revenues are just under $1.5 billion.

Starbucks has a larger footprint, with over 30,000 locations worldwide, compared to Dunkin' Brands' 11,300 locations. In the U.S., Starbucks leads with about 15,000 locations compared to the nearly 8,500 Dunkin' Donuts locations. 

Starbucks has expanded beyond the U.S. more extensively. Dunkin' Brands has a substantial international presence, though many of its international locations are Baskin-Robbins ice cream stores rather than Dunkin' Donuts stores.

Dunkin' Donuts' international revenue contributes only a small part to total sales, while over 25% of Starbucks' revenues are generated outside the U.S. Dunkin' has announced aggressive international and domestic expansion plans with the hope of challenging its main competitor's footprint, but the difference in scale stems from variations in expansion strategy.

Key Takeaways

  • Starbucks and Dunkin' are the two biggest coffee-focused eatery chains in the U.S.
  • Starbucks is a bigger company in terms of market capitalization and the number of stores globally.
  • Starbucks has also built a more premium brand, has stores that look more like a comfortable coffee house, has a more extensive menu, and greater product customization.
  • Dunkin' stores resemble more traditional fast-food eateries and they offer more competitive pricing relative to Starbucks.
  • Most of Dunkin's stores are franchises, where it has greater exposure to franchise and rental income.

Starbucks

Starbucks brands itself primarily as a beverage provider that offers a more typical coffee house dining experience. Starbucks' locations are designed with the comfort of customers in mind. Free internet access and inviting decor are meant to offer a more enticing option for those looking for a place to read, relax, or chat with friends. This also makes going to Starbucks a potential social activity, turning the store into a destination rather than a simple distribution location. This appeals to customers seeking a premium experience.

Typically, such customers have higher disposable incomes and are more willing to pay extra for higher quality materials. In economic downturns, people with lower disposable incomes are more likely to alter their consumption habits than people with larger financial cushions. While Starbucks is undeniably impacted by the macroeconomic environment, it is firmly established with a more resilient and less price-sensitive customer base, which helps to dampen the blows brought on by economic cycles.

Like Dunkin' Donuts, Starbucks has also shifted focus to include more products aimed at afternoon and evening customers. These include small plates and sandwiches as well as wine and beer. Both companies have doubled down on strategic tech initiatives like mobile ordering and delivery, explaining Dunkin' Donuts' partnering with Alphabet Inc.'s (GOOG) navigation app Waze.

Just like Dunkin', in mid-2018, Starbucks reorganized management. Starbucks announced Howard Schultz's departure from the company in 2018. Myron E. Ullman was appointed the next chair of the Starbucks board of directors, and Mellody Hobson was appointed vicechair.

Dunkin'

Dunkin' Donuts markets itself primarily as a coffee seller that also offers donuts and food, a fact made apparent by a coffee cup prominently featured on the company's logo and executive management's explicit assertion that Dunkin' Donuts is a beverage company. Despite building an identity as a coffee seller, food is still an important element of Dunkin' Donuts' offering.

In recent years, Dunkin' Donuts has focused increasingly on nontraditional food options with the hopes of attracting customers outside of breakfast hours. The introduction of steak to its menu in 2014 was a step toward incorporating heartier food items alongside a growing number of sandwich options. Dunkin' Donuts' interiors are designed differently from Starbucks stores, with the former often resembling fast food stores in furnishings and decor.

David Hoffman was named CEO of Dunkin' Brands in 2018. In 2016, Hoffman joined Dunkin' Brands as president of Dunkin' Donuts U.S. He led the company's U.S. business and directed the coffee chain's new concept store. Hoffman will replace Nigel Travis, 68, who is retiring from his role. Travis began as CEO in 2009. He will serve as executive chairman of the board and focus on developing the international business.

Key Differences

Nearly all of Dunkin' Brands' locations are franchises. Licensed Starbucks stores are disproportionately located outside the U.S., as corporate-owned and operated stores account for roughly 60% of stores in the U.S and half of its locations overseas.

Dunkin' Donuts' higher exposure franchises leading to a fundamentally different business than Starbucks' largely owner-operator model, which has major implications for revenue streams, cost structure, and capital spending.

Company-operated stores have different operational and capital expense structures from franchised locations. Cost of goods sold (COGS) and store operating expenses are a much larger percentage of sales for Starbucks than Dunkin'. Because COGS is so much more prominent in Starbucks' expense structure, its profits are more severely impacted by changes in coffee bean prices. Starbucks also has a higher capital expense burden than Dunkin' Donuts, which is not obligated to purchase kitchen equipment for franchise locations.

Starbucks has built a more premium brand than Dunkin' Donuts. Starbucks offers a more extensive menu and more product customization, which is reinforced by writing each customer's name on the side of their cup. The company offers a comfortable and quiet environment with free wireless internet access, encouraging customers to stay to socialize, work, study, browse media, or listen to music while consuming their Starbucks product. Taken together, these factors form a more premium experience and command a higher price point.

Dunkin' Donuts has more competitive pricing, focusing on the middle class. In company filings and earnings conference calls, Dunkin' Donuts' management has described its intent to be the lowest cost provider in the market while maintaining quality above an acceptable minimum.

Because Starbucks operates its own stores, it has tighter margins than Dunkin' Donuts. Dunkin' Donuts has typically had a lower capital expense burden than Starbucks.