Dunkin' Donuts Is On A Coffee Rush

The chain offers a dose of Starbucks style, and sales soar

Coffee buff Melissa LaBarre of Easthampton, Mass., appreciates a good cup of Starbucks brew. But recently, she says, the thrill began wearing thin. "Starbucks is kind of snobby," she says. "I don't need the attitude when I'm paying more for a cup."

That simple cost-benefit analysis has lead her to the latest hot choice among caffeine lovers: Dunkin' Donuts. There, far from the dated stereotype of hours-old brew, she finds the latest in coffee trendiness. She chooses from among four or more blends of fresh-brewed coffee, even hot and cold specialty drinks--all at a fraction of the Starbucks price. Value, together with no-nonsense service, she says, has made Dunkin' her No.1 coffee spot.

LaBarre has tapped a breakfast trend. Dunkin' Donuts Inc. may seem the antithesis of '90s hip. But the nation's largest doughnut chain is giving both sophisticated rivals such as Starbucks Corp. and larger competition such as McDonald's Corp. a serious battle for the breakfast buck. Over the past 18 months, the Randolph (Mass.)-based chain has adopted the latest in fast-food cool, from specialty coffee to oven-baked bagels and fat-free muffins. In redone stores, the tacky old pink decor is giving way to a more upscale "ripe raisin" hue. And not content to stop at morning munchies, CEO Robert M. Rosenberg has now set his sights on the lunch crowd. "We have very lofty aspirations," he says.

To the surprise of rivals, many customers are cheering the moves. In the past five months, Dunkin's same-store sales have been up 11.5%, following a 10% jump for the year ended last August. That easily beats the fast-food industry's 2% average. "They've done a terrific job in a very competitive business," says Ronald N. Paul, president of industry watcher Technomic Inc. Even normally tight-lipped McDonald's USA has noticed. Concedes CEO Jack M. Greenberg: "Dunkin' Donuts is doing well at breakfast."

And it's doing well with more than just doughnuts. This year, the company, owned since 1990 by British-based Allied Domecq PLC, predicts $200 million in bagel sales, six times what it sold in the year ended August, 1996. Dunkin's bagel biz is gaining on troubled industry leader Einstein/Noah Bagel Corp., which had total sales of $303 million last year. That's because the doughnut king has won over bagel lovers like Mark S. Thurber, a Boston attorney who sometimes buys Dunkin' bagels for the office. "I've been very surprised at the quality," he says. "They're as good as anyone's."

NO MORE FRED. Consumers weren't always as happy. Back in 1994, Dunkin's growth, steady for decades, had slowed to a crawl. After 30 years with virtually the same menu and the same tagline--"America's Number One Donut Chain"--Dunkin' badly needed an update. Rosenberg brought in William A. Kussell from Reebok to spice up Dunkin's menu, and its reputation. Kussell nixed the old motto and began a play to become the breakfast king.

That meant longtime pitchman Fred the Baker and his mantra "Time to make the donuts" had to go. Dunkin' retired Fred, replacing him with a $50 million campaign stressing how much things have changed. The tagline: "Dunkin' Donuts: Something Fresh is Always Brewin' Here."

In addition to bagels, new attention went to jazzing up the java. Last summer, Dunkin' introduced Coffee Coolatta, a frozen drink similar to Starbucks' popular Frappucino. It sold $75 million worth in four months. And though Dunkin' once made do with regular and decaf, it now proffers coffee flavors from French vanilla to chocolate raspberry and beans by the pound. Overall coffee sales have jumped 40% since 1995.

Rival brewmaker Starbucks won't talk about competitors. But Schroder & Co. analyst Wayne E. Daniels dismisses the comparison. "Dunkin' Donuts may pour a lot of coffee, but what does that matter? It's about class, not mass, at Starbucks," he says. Dunkin' execs say the numbers tell the tale. Starbucks' sales growth at stores open at least one year is about half of what Dunkin' is posting this year. The key, says Rosenberg, has been Dunkin's ability to hold prices down and keep its traditional value-driven customers, while at the same time adding snazzy new products to attract the upscale coffee crowd.

DOUGHNUT DERBY. Ironically, even as Dunkin' broadens its menu, the chain is also benefiting from a resurgence in the popularity of its core product: the lowly doughnut. Overall, doughnut sales rose 10% last year, according to Technomic. Southern sensation Krispy Kreme plans to expand to more than 300 outlets, up from 133 now. Meanwhile, Wendy's International Inc. is gradually rolling out Tim Horton's, a Canadian doughnut chain it bought for $450 million in 1995 to a handful of northern U.S. cities. But Dunkin', more than 10 times the size of its nearest rival, clearly controls the category. Indeed, it plans to add 300 new stores to its 3,700 this year alone.

For some of those stores, breakfast is just the start. Rosenberg is now planning to charge into the rest of the day with stores that combine Dunkin' with ice-cream giant Baskin-Robbins or Togo's Eateries, a trendy Campbell (Calif.)-based sandwich chain, also owned by Allied Domecq. Rosenberg, who oversees them all, thinks these combo stores can kick growth up to 20% a year, from 15% today. That would double his empire to $5 billion within five years.

Still, Rosenberg admits his plan to open thousands of combo stores over the next decade is risky. "A lot of [chains] have tried this before, and it has failed," he says. To win at this game, industry watchers say, Dunkin' will have to convince consumers that Togo's--now a relatively unknown 200-store chain--gives them something they can't get elsewhere. But having upped the ante in breakfast, Rosenberg is now hoping to eat the competition's lunch.