Making Money Sipping Coffee and Dunking Krispy Kreme Doughnuts (KKD)

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America’s love for doughnuts is no breaking news. Add coffee to that and you get the perfect romance. So it makes sense to own companies that serve Americans their beloved coffee to dunk their sweet doughnuts.

Krispy Kreme Doughnuts (NYSE:KKD)

Selling coffee before doughnuts…

Dunkin Brands Group Inc (NASDAQ:DNKN) offers customers the perfect breakfast: a cup of coffee with their favorite doughnuts and some delicious sandwiches under its brand Dunkin Brands Group Inc (NASDAQ:DNKN)’ Donuts. Don’t go by the name, the company is more of a coffee house selling doughnuts, rather than the other way round.

In 2012, 58% of the sales among U.S. franchisees came from coffee and other drinks. This smart strategy is reflected in the company’s operating margin of 39.23% which is way higher than its competitor Krispy Kreme Doughnuts (NYSE:KKD)’ 9.46%.

Krispy Kreme Doughnuts (NYSE:KKD) on the other hand is primarily a doughnuts company which sells coffee on the side. The first strategic advantage of selling coffee to attract customers is that the first thing people want to start their day is coffee not doughnuts. So Dunkin Brands Group Inc (NASDAQ:DNKN)’ Donuts becomes their first choice. And after having your favorite coffee in your hand, the tempting doughnuts and sandwiches are hard to resist!

Secondly, beverages are higher margin products which explains the wide gap between the operating margins of the two companies.

Dunkin Brands expanding west

It’s surprising to know that the successful doughnut and coffee retailer has no stores in California! Yeah…you heard me right. 98% of the stores in America are located in the northern and north eastern region, having a penetration ratio of 1:810,000 in western America compared to 1:9,300 in its core regions in the north eastern parts of the country, which means the company still has almost the entire American market left to capitalize upon!

So management now has aggressive expansion plans in western parts of the country, and states that by 2015, about two-thirds of the chain’s new U.S. stores will be in the western part of the country.

With the company already the largest retailer of coffee in the U.S., it will be exciting to see where its revenue will land when the western part of the country falls in love with the doughnuts and coffee retailer.

Starbucks Corporation (NASDAQ:SBUX), the giant of the coffee retail industry with over 18,000 stores worldwide, and probably another one opening as you read this article, has over 2,000 stores in California. Unlike Dunkin’ Brands, Starbucks Corporation (NASDAQ:SBUX) operates almost everywhere in America, literally. So the company has lesser room for expansion in American than overseas, as over 75% of the revenues come from America setting the tone for overseas expansion.

Even after such a long track record of success, Starbucks Corporation (NASDAQ:SBUX) is still going strong, sitting at an all time high. In their latest quarter revenue and earnings increased 11.3% and 26% respectively, while same store sales increased an impressive 6%. Analysts expect earnings to be around $2.18 for fiscal 2013 and $2.63 for 2014 putting it at a superb growth rate of 20%.

Dunkin Brands new product offerings

It is important to keep surprising the customers with exciting new products in order to keep them loyal to your brand and also to attract new footfall. Dunkin’ Brands launched more than 30 new products during 2012, and its new sandwich offerings (ham and cheese, grilled cheese on Texas toast and turkey and cheddar, tuna wraps, and chicken wraps) should increase footfall at the afternoon hours which currently just account for 40% of the sales.

Aiming at the rapidly growing health conscious customers, Dunkin’ Brands is planning on selling gluten-free doughnuts and muffins starting later this year, further improving its revenue base.

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