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Chain evolves from no-frills to espresso, looks westward



Published: Sat, January 15, 2005 @ 12:00 a.m.



The company is accelerating its expansion by adding about 500 shops a year.

BOSTON (AP) -- With the addition of more espresso drinks to its menu, Dunkin' Donuts might look like it's trying to be another Starbucks Corp.

Well, it's true that Dunkin' Donuts is experimenting with WiFi access in a few Chicago shops and considering music in more of its stores -- two features of Starbucks outlets. But although its espresso launch has boosted its competitive position against Starbucks, Dunkin' Donuts says it is content to maintain its distance from the upscale Seattle coffee giant and stick to its workaday, on-the-go niche.

There's no broad campaign encouraging customers to linger awhile at Dunkin' Donuts' pink and orange-themed shops -- and there are no plans to switch from Dunkin Donuts' "small-medium-large" cup size hierarchy to something akin to Starbucks' oft-mocked sizes of tall, grande and venti.

"People say you're taking on Starbucks, but we're really not," CEO Jon Luther told The Associated Press in a recent interview. "All we want to do is share some space with the coffee consumer."

Concentration

What the franchise chain is planning is to share that space by expanding westward -- only 70 of its stores are currently located west of the Mississippi River. The company, a subsidiary of the British wine and spirits firm Allied Dome, has its heaviest concentration of locations in New England, where there are 1,700.

And it's changing its menu again, planning to add iced beverages to its year-old line of espresso drinks, and broadening its small line of sandwiches with a new sirloin steak, scrambled eggs and cheese on a bagel. The sandwich, to be offered through May at selected outlets, is an upscale version of the breakfast sandwich Dunkin' Donuts now offers with a choice of bacon, ham or sausage.

The move comes as both Dunkin' Donuts and Starbucks put greater emphasis on sandwiches to draw more afternoon customers and respond to moves by fast-food giants such as McDonald's Corp. that now sell more premium coffees.

Dunkin' Donuts customers interviewed outside a downtown Boston shop across the street from a Starbucks said they welcomed some of Dunkin' Donuts' recent changes -- as long as the chain doesn't abandon the basics.

"It's quite a bit cheaper than Starbucks, and it's convenient, and they're fast," said Sandra Jadotte, a 30-year-old downtown officer worker and three-times-a-week consumer of Dunkin' Donuts' no-frills coffee.

Brian Lam, 25, said he chooses Starbucks when he wants a strong blend of top-notch coffee, but opts for Dunkin' Donuts when he craves French Vanilla flavoring.

"I'm here for the caffeine strictly," Lam said.

While Dunkin's doughnuts cemented the company's name and reputation, they made up less than 15 percent of the chain's total $3.6 billion in fiscal 2004 sales. Espresso beverages accounted for 10 percent, nearly twice what the chain expected when the high-end drinks were introduced early last year, Luther said.

'Viable competitor'

Clearly, Starbucks and its huge sales of espresso are on the minds of Dunkin' Donuts executives. In a recent press release, Dunkin' Donuts said its new lattes and cappuccinos "helped the brand solidify its position as a viable competitor to premium coffee chains like Starbucks."

And next summer, Dunkin' Donuts will introduce the Turbo Ice: iced coffee with a shot of espresso.

Starbucks doesn't appear to be worried: "Starbucks believes there is room for many coffeehouses in the marketplace that can meet different customer needs," spokeswoman Valerie Hwang said.

And an industry analyst said it would be a stretch to suggest Dunkin' Donuts will pose a big challenge to Starbucks.

"Starbucks has spent more time working on the coffee shop experience, and when you compare that to Dunkin' Donuts they don't even seem to be in the same game together," said Carl Sibilski of Morningstar Inc. "The real product Starbucks is offering is more than just the coffee in a cup. The real product is the environment, and Dunkin' Donuts is lacking that environment."

Dunkin' Donuts' plan is to keep doing what it does now, but in more locations. Canton-based Dunkin' Donuts remains close to its Massachusetts roots, with the vast majority of its 4,400 domestic locations in the Northeast and Mid-Atlantic states.

The company is accelerating its expansion pace by adding about 500 new shops a year, with an eventual goal of growing to 15,000 shops -- a huge total, but still dwarfed by the 30,000 locations Starbucks envisioned when it announced in October it was increasing its previous long-term growth target.

Locations

Starbucks, which had $5.29 billion in 2004 sales, has 8,700 shops worldwide compared with Dunkin' Donuts' 6,100.

"I think the biggest challenge for Dunkin' Donuts is geography," said Sharon Zackfia, an analyst with William Blair & amp; Co. in Chicago. "They are strong in New England, but they're really haven't been strong anywhere else."

Starbucks typically selects prime real estate for its shop locations, which could hinder Dunkin' Donuts to compete in new markets from its more typical second-tier properties, Zackfia said.

"I think Dunkin' Donuts can grow very profitably, but I don't think they will do that necessarily at the expense of Starbucks," she said.

The chain expects much of its near-term growth in the upper Midwest, with eventual plans to reach the West Coast. The chain is now moving into Cleveland; Cincinnati; Charlotte, N.C.; and Tampa, Fla.

"We feel there is ample room for us to expand," CEO Luther said.

Copyright 2005 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.




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