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Dunkin Brands Group Inc (DNKN) – Forget Starbucks Corporation (SBUX): This Coffee Stock Is Better

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“One dollar for a cup of coffee — they are out of their minds!” my frugal, land-speculating grandfather said when we stopped at the local corner gas station on the way to visit one of his properties.

Having lived through the Great Depression, he was convinced that coffee shouldn’t cost more than a quarter a cup. A book could be filled with his assorted old-timer economic beliefs — such as the $5 union-rate haircut — but I’ll never forget his reaction to the $1 cup of coffee.

I wish he would have lived to see the rise of Starbucks Corporation (NASDAQ:SBUX) and its $6 cups of coffee. He would have certainly had a few choice words for people like myself who patronize the wildly popular high-end coffee emporium.

Not only did Starbucks Corporation (NASDAQ:SBUX) change the way coffee is viewed, but the company has made its investors wealthy. Shares have tripled in value to around $75 over the past three years. This success has spawned a variety of copycat operations. Some of these are established companies that have added gourmet coffee products to their existing lines; others are regional startups.

One Starbucks Corporation (NASDAQ:SBUX)-influenced company that morphed into a gourmet coffee profit-making machine is none other than the once humble Dunkin Brands Group Inc (NASDAQ:DNKN).

Flickr/Paul Downey
Although the Dunkin’ Donuts brand has been around since 1950, Dunkin’ Brands is relatively young as a public company.

I was pleasantly surprised that a Dunkin’ Donuts I recently visited in South Carolina offered free Wi-Fi, a lounge area full of leather chairs, a variety of coffee flavors, sandwiches and, of course, donuts that are vastly superior to Starbucks Corporation (NASDAQ:SBUX)’ offerings. During my travels recently, I have noticed Dunkin’ Donuts sprouting up in the same general areas as established Starbucks Corporation (NASDAQ:SBUX) locations. This strategy resembles Burger King Worldwide Inc (NYSE:BKW) pursuit of McDonald’s Corporation (NYSE:MCD) locations.

I think my grandfather would still believe the prices at Dunkin’ Donuts are too high, but Dunkin Brands Group Inc (NASDAQ:DNKN)’s prices are lower than Starbucks. This lower price point, combined with the wide variety of quality products and coffees, provides a strong incentive for many consumers to favor Dunkin’ Donuts over Starbucks Corporation (NASDAQ:SBUX). This is particularly true when the stores are as comfortable as the newly opened location I recently visited.

I like how Dunkin’ Donuts is operated, its business ideas, and the quality of the products — not to mention the fact that its stock is up nearly 30% this year.

Dunkin’ Brands is close to being a 100% franchised business. This means the owners of the 10,400 Dunkin’ Donuts restaurants in more than 60 nations (and almost 7,000 Baskin-Robbins ice cream parlors, which Dunkin Brands Group Inc (NASDAQ:DNKN) also franchises) provide the capital for the brand’s expansion.

Dunkin’ Donuts has morphed into a gourmet coffee profit-making machine.

This transferring of the expansion costs to the individual franchise owner is a brilliant and powerful means of growth. When compared to Starbucks company-owned and -financed store concept, the expansion potential is clearly on Dunkin’ Brands’ side. While Starbucks’ market cap of more than $53 billion dwarfs Dunkin’ Brands’ less than $5 billion, the innovative nature of Dunkin Brands Group Inc (NASDAQ:DNKN) should close this gap over time.

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