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Can Starbucks Ever Beat Dunkin' Donuts in Boston?

Rich Duprey, The Motley Fool

Both Starbucks (NASDAQ: SBUX) and Dunkin' Brands (NASDAQ: DNKN) chain Dunkin' Donuts pride themselves on their coffee, but the upscale West Coast roastery is known for its coffee bar aesthetic, while the East Coast coffee shop prides itself on its unpretentious, blue-collar ethos.

While you'll find plenty of each company's stores all over the Boston area, they both have substantial growth plans, which leads you to wonder whether Seattle's finest could ever beat Boston's homegrown hero on its own turf.

Dunkin Donuts coffee and and doughnuts

Image source: Dunkin' Brands.

Brewing up a rivalry

On the national level, there's no contest. Starbucks is the biggest java seller in the country, with 13,930 locations in the U.S. compared to 9,141 Dunkin' shops. The green mermaid also comes out ahead when you zoom in on the companies' hometowns: Dunkin' Donuts has no stores in Seattle, while Starbucks has at least 45 coffee shops in Boston. Dunkin' maintains a small home field advantage with over 60 Boston locations, but it's not looking to build more stores (at least not many) in this region.

That said, Starbucks may have hit a saturation point in the Boston area, too. Its comparable-store sales for the second quarter rose 2% in the Americas, a region that's dominated by U.S. stores and accounts for about 70% of total company sales. That follows Starbucks' worst annual sales report in five years: It posted 3% growth in fiscal 2017, far lower than the 6% or so growth rates investors had become accustomed to.

Starbucks has growth plans, and though it still anticipates opening 3,400 stores in the U.S. by 2021, it sees far greater growth opportunities in China. In the Americas, it seems to have little room left to expand.

Awash in coffee

Of course, Dunkin' faces its own challenges, not least of which is famed short-seller Jim Chanos' bearish position on the coffee chain. While Dunkin' Brands reported much better first-quarter earnings than Wall street had expected, posting profits of $0.62 per share compared to analyst consensus forecasts of $0.53, revenues were light at $301 million.

Dunkin' plans to open 1,000 net new stores by the end of 2020, but they're not likely to be in Boston -- or anywhere in the Northeast, for that matter.

Throughout New England, Dunkin' has about 4,200 stores, and it only plans to remodel, relocate, and consolidate those existing locations. It's focusing on the Midwest and Western regions for its greatest growth potential, though Starbucks doesn't have to worry yet about Dunkin' encroaching on its territory: The Northwest is not on Dunkin's radar.

Princi bakery at Starbucks Roastery

Image source: Starbucks.

Beyond fresh roasted coffee

So it looks like the two coffee chains are mostly at a standstill in the Boston market and will instead try to steal each other's customers through their menus.

After the Unicorn Frappuccino, Starbucks thought it might be able to win over millennials and Gen Z consumers with more outrageous Instagrammable drinks, but follow-up promotions didn't generate as much buzz as the pink and purple concoction, so now it's betting heavily on upscale bakeries. Starbucks is introducing Princi boutique bakeries at its high-end Roastery stores, with a smaller subset going into its even more limited Reserve coffee bars.

Dunkin' has made changes, too, such as downplaying the doughnut part of its name and simplifying its menu, saying customers found it confusing. And Dunkin' isn't above gimmicks, either. In March it partnered with running-shoe maker Saucony to introduce a limited-edition sneaker featuring a sprinkled donut on each heel and a Dunkin' logo on the tongue. And in Worcester, Wormtown Brewery created a DDark Roasted Brew beer made with Dunkin' coffee beans.

Where Dunkin' may have an edge is in Boston's devotion to DD compared to Seattle's preference for Starbucks. While 34% of Seattle adults say they've had a Starbucks coffee in the past 30 days, according to Nielsen data, over 47% of Bostonians have grabbed a cup of joe at Dunkin' Donuts.

Sure, Starbucks' upscale coffee houses may hold some appeal for the Boston Brahmin, but the fiercely loyal "Dunkies" will likely be waving the pink and orange flag for many years to come.

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Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool recommends Dunkin' Brands Group. The Motley Fool has a disclosure policy.