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Coffee's Class War

As economy slows, Dunkin' Donuts ramps up the battle against Starbucks.
Dunkin Donuts
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"As I sit down to write this note (6:30 Sunday morning)," begins a recent missive to employees from Howard Schultz, Starbucks' newly reinstated chief executive, "I am enjoying a spectacular cup of Sumatra, brewed my favorite way—in a French press."

The president of Dunkin' Donuts, Will Kussell, is, in contrast, an original-blend kind of guy. His morning standard is Dunkin Donuts' classic brew, with milk. And at 8:30 a.m. on a rainy Wednesday, he's standing cup in hand in a small midtown Manhattan Dunkin' Donuts, blending in with the steady flow of commuters stopping by for the their morning fix.

"We are mainstream America," says Kussell, leaning forward in a molded-plastic chair. "Mainstream is an attitude. It's people who are unpretentious, down to earth, they have a work ethic, and they want to get things done."

Kussell and Schultz are the two faces of a battle that is being waged for the $50 billion coffee market.

The competition—between Dunkin' and Starbucks, as well as with chains like McDonald's—is heating up just as the economy is slowing down. And that could very well tilt the advantage to Dunkin' Donuts.

Michael J. Silverstein, senior partner with the Boston Consulting Group and author of Treasure Hunt and Trading Up, divides the coffee market into three segments: Starbucks loyalists, fuel seekers, and switchers: people who make coffee-buying decisions based on their current financial situation.  

"The whole battle is over switchers, who buy Starbucks when they feel they have money and just seek fuel when money is tight," Silverstein says.

According to a survey run last month by market research group BIGresearch, a whopping 50 percent of consumers report that they have found themselves focusing more in the last 6 months on what they need, rather than what they want.

Dunkin' Donuts' no-frills approach plays well to that sense of need. "No-nonsense" is a recurring theme in how Kussell describes "Dunkin' Tribe Members," the company's moniker for its core consumer base.

"Really it's an attitude. Hardworking people, busy people with busy lives," Kussell continues. "We're about people who get things done."

Harry Balzer, vice president of the NPD Group and national expert on food trends, sees such "fuel seeking" behavior as becoming more and more prominent as people increasingly value speed and convenience when making food decisions.

"There is a structural change in how we're feeding ourselves at breakfast—we're pressed for time," Balzer says.  

Dunkin has become a more aggressive national competitor, introducing espresso beverages in 2003. Since then, it has been fueled by a $2.4 billion buyout of Dunkin Brands in 2006 by a consortium of Bain Capital, Thomas H. Lee Partners, and the Carlyle Group.

The franchiser has been expanding beyond its longtime core in the Northeast, and now has more than 5,700 stores in the United States, with plans for three times that number by 2020. Dunkin' is taking advantage of its cash infusion from its new owners not only to expand the number of stores, but also to push franchisees to refurbish existing locations, and continue to innovate the menu. On Wednesday, it introduced a line of oven-warmed snacks aimed at increasing afternoon traffic.

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