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Does America’s Sweet Tooth Make Krispy Kreme Doughnuts (KKD) a Winner?

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It’s a battle similar to Pepsi versus Coke. In one corner is Krispy Kreme Doughnuts (NYSE:KKD), specializing in glazed, yeast-raised doughnuts. In the other, Dunkin Brands Group Inc (NASDAQ:DNKN)‘s Dunkin’ Donuts, featuring cake-based doughnuts and bagels. Unlike its northern competitor, Krispy Kreme first opened in the South in the 1930s, only expanding outside of the Southeast in the 1990s. The company’s expansion accelerated at a rapid pace, creating competition for Dunkin’ Donuts, which had previously dominated the Northeast.

Krispy Kreme Doughnuts (NYSE:KKD)

Just doughnuts

Krispy Kreme Doughnuts (NYSE:KKD)’s claim to fame is that it does one thing and does it well. Some locations feature drive-thrus with a flashing neon sign alerting people when hot doughnuts are available. To Dunkin Brands Group Inc (NASDAQ:DNKN)’s credit, the company tried that in the 1950s and found that morning customers look for coffee first and food second. As a result, the company was losing money to competitors McDonald’s Corporation (NYSE:MCD) and Starbucks Corporation (NASDAQ:SBUX).

The industry has been surprised to find that Krispy Kreme Doughnuts (NYSE:KKD), whose first quarter earnings leaped 33% to $8 million, is a serious contender in the seemingly unshakable coffee-shop market. That said, Starbucks still owns the morning commuter market, posting $3.56 billion in earnings for its most recent quarter.

Dunkin’ Donuts, meanwhile, is in the middle of its own expansion, adding 108 new restaurants around the world. The coffee-and-doughnut giant announced earnings of $23.8 million in its most recent quarter, down slightly from last year in the same quarter. Part of this drop was attributed to snowstorms in the Northeast, where many Dunkin’ Donuts franchises reside. Dunkin Brands Group Inc (NASDAQ:DNKN) also owns ice cream franchise Baskin Robbins, which brought in $9.6 million in the same quarter.

Starbucks competes

While Krispy Kreme Doughnuts (NYSE:KKD) poses little competition for Starbucks Corporation (NASDAQ:SBUX), Dunkin’ Donuts lures some of its morning business away. The company appears more concerned about Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR), which many consumers purchase for Keurig one-cup coffeemakers. When customers began making their own coffee at home instead of making a beeline for the Starbucks drive-thru on the way to work, Starbucks struck a partnership with Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR), having the company distribute its own K-Cups for Keurig brewers.

It’s a lesson Krispy Kreme Doughnuts (NYSE:KKD) could take seriously. With coffee being its weakness, the company could stand a partnership of its own, perhaps with one of the many gourmet coffee manufacturers out there. It’s obvious people aren’t crossing traffic to get to Krispy Kreme for the coffee, so it couldn’t hurt to improve the taste of the most popular morning beverage.

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