Dunkin’ Donuts and McDonalds vs. Starbucks….Changing RVP?

By: Justin Hartnett

In class we have talked a lot about a company’s retail value proposition in terms of how it wants to position itself on the metrics of selection, price, convenience and experience. It seems that with a lot of companies, once they set and establish their retail value proposition, they more or less continue conducting business that way indefinitely. After all, wouldn’t constantly changing this cause confusion and possible backlash from your customers? For example, Costco, as a mass-quantity retailer, isn’t likely to start offering a better “experience” for customers at the expense of the price and convenience metrics it is renowned for. However, I recently read an article which suggests that in some industries, such as food and beverages, RVP’s are not always set in stone.

Dunkin’ Donuts, essentially the equivalent of Tim Hortons in the United States, is a coffee and doughnut retailer with about 5,769 stores in 34 states and has been primarily known as a lower-quality fast food retailer that generally appeals to price-sensitive consumers. About 63% of their sales come from beverages, with most of this coming from coffee. And with over 1.5 billion cups sold yearly, they are certainly among the leaders in the price-sensitive coffee market. At this point their RVP seems focused mostly on convenience and price. But surprisingly, the company has already created a separate premium coffee line to compete head-to-head with Starbucks, a company losing market share and profitability from product and store over-expansion.

One would think that it would be very hard for a fast food retailer appealing to price-sensitive consumers to also target premium coffee drinkers who might otherwise go to Starbucks. Does this strategy even stand a chance?

Recent results from a taste test suggest that of premium coffee drinkers in 10 U.S. cities, roughly 58% of consumers preferred Dunkin’ Donuts’ coffee versus only 42% for Starbucks! This seems incomprehensible for Starbucks, which had more or less created the premium coffee-drinking market when it was established. Two of the test markets, Los Angeles, where no Dunkin’ Donuts stores exist and Seattle, the headquarters of Starbucks were not considered advantageous originally yet the results suggest otherwise.

The bad news only gets worse with McDonalds also entering the premium coffee market by introducing its McCafe line, complete with cappuccinos and espressos. Now, two fast food retailers which previously would never be confused with higher-quality premium coffee have essentially modified their value proposition to steal market share from the struggling market leader. Both Dunkin’ Donuts and McDonalds have also modified their food product lines to be of higher quality, especially among breakfast foods to compete with Starbucks. These two fast food retailers have essentially placed more emphasis on the selection and experience metrics instead of the price and convenience ones that they are more known for.

If Americans can get premium coffee that tastes as good as Starbucks but at a cheaper price, what becomes of Starbucks? For the premium coffee drinkers who do not have a loyalty to any one particular brand and are slightly more price-sensitive, they may switch over to Dunkin’ Donuts or McDonald’s for their coffee fix, causing Starbucks to lose market share and sales. However, it’s fair to say that there will always be fiercely loyal Starbucks drinkers who are willing to pay higher prices for coffee that they believe tastes the best. Given the number of profitable locations across North America, this is definitely a sizable group.

Nonetheless, this is just an example of how retail value propositions are never really indefinite and can easily change in response to consumer preferences and trends. Starbucks now has two more competitors in the American premium coffee market that it probably never expected.

In terms of Starbucks locations in Canada, I wonder if Tim Hortons has any new plans up their sleeves.

The article can be found at this link: “Dunkin’ Donuts War on Starbucks”: http://articles.moneycentral.msn.com/Investing/StockInvestingTrading/dunkin-donuts-war-on-starbucks.aspx