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.
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.
However, a partnership is likely nowhere in Krispy Kreme Doughnuts (NYSE:KKD)’s future. The company’s CEO made it clear: Krispy Kreme is not interested in competing with Dunkin’ Donuts, Starbucks, McDonald’s, or any other popular coffee venue. The company makes doughnuts and it makes them well, CEO Jim Morgan insists. As Dunkin’ Donuts and Starbucks expand their menus, Morgan believes it’s important to note that those companies emphasize coffee and other items while, for Krispy Kreme, it’s all about the doughnuts. Apparently, it’s a bet that’s paying off, since the company is expected to experience a 7% increase in earnings overall this year.
Starbucks still the winner
While it’s easy to say that Krispy Kreme’s differentiating factor is a focus on one product, Starbucks Corporation (NASDAQ:SBUX) also has a similar overarching priority: coffee. Just as coffee is an afterthought to Krispy Kreme, food is a secondary item at every Starbucks location. Most customers come in for the coffee.
Despite Krispy Kreme Doughnuts (NYSE:KKD)’s considerable gains, it can’t come close to competing with Starbucks $3.56 billion in earnings for the same quarter. Compared to Krispy Kreme’s $8 million, even Dunkin’ Donuts is a higher-earner, with $23.8 million. While Krispy Kreme may satisfy your early-morning sugar cravings, it looks like coffee is still the champion when it comes to America’s breakfast addictions. As an investor, you may want to ignore your sweet tooth and put your money into coffee.
The article Does America’s Sweet Tooth Make Krispy Kreme a Winner? originally appeared on Fool.com and is written by Stephanie Faris.
Stephanie Faris has no position in any stocks mentioned. The Motley Fool recommends Starbucks. The Motley Fool owns shares of Starbucks. Stephanie is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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