Dunkin’ Donuts (DNKN) may have neglected the western U.S—it’s preparing to open its first outlet in southern California on Sept. 2—but it has franchises in more than 30 countries. Now the company faces new competition overseas from Canadian coffee and doughnut chain Tim Hortons (THI), which plans to expand through its $11.4 billion merger with Burger King (BKW).
“We plan to take the beloved Tim Hortons brand that has such a rich heritage here in Canada to the rest of the world,” Alex Behring, Burger King’s executive chairman, told investors on Aug. 26.
The chains have similar menus that focus on coffee, pastries, and sandwiches. And both brands rely on a franchise model. This means they must compete for franchisees who will invest and open new restaurants before they can compete for customers.
Dunkin’ thinks this won’t happen for a while. “It takes a great deal of time to recognize the potential synergies of mergers like this, and it is often distracting for the companies involved,” Karen Raskopf, chief communications officer for Dunkin’ Brands, wrote in an e-mail.
In the U.S., Dunkin’ is the second-largest coffee chain after Starbucks (SBUX), with 7,821 outlets, putting it far ahead of Tim Hortons’ 859. Dunkin’ plans to add from 380 to 410 restaurants in the U.S. this year, vs. the 40 to 60 restaurants Tim Hortons plans to add. Both chains require U.S. franchisees to have a minimum net worth of $500,000, according to information from their websites. In 2013, average U.S. sales at each Dunkin’ Donut outlet were $872,700; at Tim Hortons, average U.S. sales per store were $1.1 million, according to QSR magazine.
But the battle may not be in America. “I wouldn’t view it as a big threat to Dunkin’ in the U.S., but they will try to grow Tim Hortons internationally where Dunkin’ is also trying to gain footholds,” says Jefferies analyst Andy Barish.
For the moment, the threat to Dunkin’ is small. It’s far larger, with 10,993 locations globally vs. Tim Hortons’ 4,485, of which 80 percent are in Canada.