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StarbucksVs.Dunkin'Donuts:ComparingBusinessModels(SBUX,DNKN)|Investopedia

Starbucks Vs. Dunkin' Donuts: Comparing

Business Models (SBUX, DNKN)
By Ryan Downie | December 02, 2015

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Starbucks Corporation (NASDAQ: SBUX

SBUX)) and Dunkin' Brands Group, Inc. (NASDAQ: DNKN
DNKN))
are the two largest eatery chains in the United States that specialize in coffee. While both
companies maintain similar menus and overall strategies, 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. In 2014, Starbucks generated $16.4 billion in revenue while
Dunkin' Brands reported sales of $749 million. Starbucks has a larger footprint, with 22,519
stores to Dunkin' Donuts' 11,460 points of distribution. Starbucks has also expanded beyond
the U.S. more extensively, opening roughly 10,000 international stores in 65 different
countries. Dunkin' Brands has a substantial international presence, though many of its
international locations are Baskin Robbins ice cream stores rather than Dunkin' Donuts stores.
In 2014, 75% of Dunkin's consolidated revenue was generated by Dunkin' Donuts locations in
the U.S., while international revenue contributed less than 5% to Dunkin' Donuts' branded
stores revenue. More than 20% of Starbucks' consolidated revenues were attributed to markets
outside of the Americas in 2014. Dunkin' has announced aggressive international and
domestic expansion plans with the hope to challenge its main competitor's footprint, but the
difference in scale stems from variations in expansion strategy.

Franchising
Nearly all of Dunkin' Brands' locations are franchises
franchises,, while over 99% of Starbucks locations
are company operated. In the quarter ending June 2015, 62% of Dunkin' Donuts' revenue
came from franchise fees and royalties. Starbucks does not offer franchise opportunities in the
U.S.; 10% of Starbucks' global revenues were attributed to licensed stores in the quarter, most
of which are located outside of the U.S. This has major implications for revenue streams, cost
structure and capital spending. Dunkin' Donuts generates most of its revenue from franchise
fees and rental of property to franchises, while Starbucks' revenue reflects the actual sale of
beverages, food and other items.
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' Donuts. 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.

Focus and Branding

Dunkin' Donuts markets itself primarily as a coffee seller that also offers donuts and foods, 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.

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15/3/2016

StarbucksVs.Dunkin'Donuts:ComparingBusinessModels(SBUX,DNKN)|Investopedia

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 their
customers in mind. Free Internet access and inviting decor offer a more enticing option for
those looking for a place to read, relax or speak with friends. This also makes going to
Starbucks a potential social activity, turning the stores into a destination rather than a simple
distribution location. This appeals to customers seeking a premium experience. Typically,
these customers have higher disposable incomes and are more willing to pay extra for higher
quality materials. In economic downturns,
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.

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Quality
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 his 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.

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COMPANIES IN THIS ARTICLE

Symbol

Last

Change

SBUX

59.08

+0.43

DNKN

46.01

0.55

Because Starbucks operates its own stores, it has tighter margins than Dunkin' Donuts. Profit
after cost of sales, which includes product
and occupancy
costs, was 83% for
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Dunkin' Brands during the quarter ending June 2015. Starbucks only had 60% gross margin
during this period. There is a similar divergence in operating margin with Starbucks posting
17.5% operating margin, which is more than 26 percentage points below that of Dunkin'
Trading Center
Brands.
As mentioned earlier, Dunkin' Donuts has a lower capital expense burden than Starbucks.
Dunkin' Donuts' $14.4 million in capital expense in the second quarter of 2015 was 31% of net
cash flow from operations and 7% of revenue. Starbucks' $944 million of capital expenses was
34% of net cash flow from operations and 19% of revenue. This discrepancy is a consequence
of the different store ownership structures for the two companies, and it has material
consequences for the fundamentals available to investors.

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Investors should also note the difference in capital structure between the two companies.
Dunkin' Donuts carries $2.5 billion of long-term debt, which is 74% of total assets. Starbucks'
$2.4 billion of debt is only 18% of total assets.

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