Coffee's Weird War Yields No Winners

• ByJason Notte, Staff Reporter
• On 4:59 am EDT, Thursday October 22, 2009

OAK BROOK, Ill. (TheStreet) -- Forays into instant beverages, front-office shakeups and forced emphasis on the last syllable in "latte" have turned the coffee wars into a strange brew.

Starbucks, Dunkin' Donuts and McDonald's spent more than a year pushing for a bigger share of a coffee market that has all the definition of an amoeba. The results of this very public jostling are similarly ambiguous.

A superficial glance shows Starbucks getting hammered over the past year. There have been store closures; layoffs; dabbling in low-end, low-priced Pike Place coffee; attempts at breakfast sandwiches and combos; and the launch of its Via instant product. Despite the hubbub, Starbucks' shares have more than doubled since last November.

"They're still the dominant, No. 1 coffee chain globally," says Nicole Miller Regan, an analyst at Piper Jaffray. "What's different today is the environment and the competitive nature, and I would suggest that its brand equity probably pays dividends in a recession."

Where Starbucks took a hit early and recovered, McDonald's had some early-morning coffee and crashed. The 800-pound gorilla of the coffee klatch spent much of last fall and a big chunk of its 2008 ad budget comparing Starbucks customers to knuckle-dragging poseurs who hated reading, jazz and countries with multiple vowels in their names. As a result, it saw its sales rise 3.5% in the second quarter with a boost from coffee. However, after overhauling some stores to look like cozy fireside cafes and giving any size of its Newman's Own coffee away for a buck, McDonald's has missed revenue estimates for three quarters.

McDonald's held its top spot in the 2009 QSR restaurant rankings with more than $30 billion in sales, but coffee competitors Starbucks and Dunkin' Donuts each jumped a spot. As McDonald's releases its earnings today, any jolt it gets from coffee sales is somewhat decaffeinated by its lack of out-of-store offerings.

Citing figures from the National Coffee Association's 2009 study of drinking trends, NCA spokesman Alan Kaiser says only 5% of respondents drink their coffee at restaurants and just 10% take a cup with them during their commute. More than 80% of coffee drinkers get their coffee at home, while 18% drink at work, making pound bags, Keurig-style K-cups or even Starbucks's instant a prime area for expansion.

"Pre-packaged, to-go coffee is really a growth space," Miller Regan says. "People are on the go more than ever and, while there is pound coffee that you can take home, the Via actually travels with you."

Smaller competitors already have sweetened their earnings by stepping out of the stores. Midwest-based Caribou Coffee's sales were down nearly $2 million at coffeehouses in the first half of 2009, but its commercial sales were up by nearly the same amount on food service, grocery and office sales. The stock has soared seven-fold since November. Meanwhile, Peet's, which inspired Starbucks and sold coffee beans when it first opened, lacks its protege's thirst for rapid expansion. It has only about 100 stores.

Not that expansion is always a coffee killer, mind you. Canadian coffee-and-doughnut chain Tim Hortons leaped to the No. 50 spot in the QSR ratings on the back of its U.S. expansion. After opening the first of its 12 New York City franchises, Tim Hortons' total U.S. revenue percolated 8.9% in the second quarter. Revenue and net income are up for the year, pushing Tim Hortons' stock to over $30 a share earlier this week, a 52-week high.

Dunkin' Donuts, which seemed like a world-beater with its own expansion efforts and its ad campaign last year chiding Starbucks' "fritalian" ordering system, is being sued by 350 franchises. President, chief brand officer and man-behind-the-coffee-push William Kussell stepped down earlier this month. As Dunkin' Brands Chief Executive Nigel Travis takes over, the privately held company's hot spot in the coffee wars may be going cold.

-- Reported by Jason Notte in Boston.

Buzz up!