Last year, when Starbucks (NASDAQ:SBUX) announced its plans to expand into Vietnam by opening its first store in Ho Chi Minh City in February, it was part of its grander strategy to expand into emerging markets. In fact, Starbucks now predicts that within a couple of years, China will replace Canada as the company's second biggest market after the U.S. The Vietnam expansion was welcomed by analysts because, unlike India, Vietnam is already a coffee loving nation and is the world's second biggest coffee exporter - though mostly of Robusta which Starbucks does not normally serve. Yum Brands (NYSE:YUM) is already operating in the country and has made expansion in emerging markets a focus of its growth strategy. The country now has also gotten the attention of Dunkin' Donuts, owned by Dunkin' Brands (NASDAQ:DNKN), which has signed a franchise deal with Vietnam Food and Beverage Co. to open its first café in Ho Chi Minh City.
Dunkin' Donuts currently operates 13 Baskin-Robbins ice-cream restaurants in Vietnam as well. The terms of the new deal haven't been revealed but the plan is to expand into other cities as well by opening an unspecified number of new stores. All of the restaurants will focus on coffee, sandwiches, donuts to compete with Starbucks, particularly over the breakfast menu as well as the major local brands which have a loyal following here.
Like Starbucks, 2012 was the year when Dunkin' entered India. The company has more than 10,400 Dunkin' Donuts and just over 7,000 Baskin-Robbins restaurants in 32 countries out of which more than 1,450 are located in the emerging economies of Southeast Asia. Dunkin' recently released its quarterly results in which its income trebled from $11.6 million in 2011 to $34.3 million in 2012 despite the 4% decline in revenues to $161.7 million. The fall in revenues was attributed to one less week in Q4 2012 and one-off items such as the transfer of production to Dean Foods (NYSE:DF).
During the quarter, the company opened 256 new stores around the world. But most of them were in the U.S. 149 net new Dunkin' Donuts were opened while 29 net Baskin-Robbins were closed. Internationally, the picture is significantly different as both Dunkin' Donuts and Baskin-Robbins ended the year with positive store growth. Of the 136 total new stores opened 89 were Baskin-Robbins. International growth is coming from BRIC nations and Vietnam. The 2013 target is to open about 450 new restaurants. Within the U.S., Dunkin' has a small presence in California but is aiming for rapid expansion in the next five years; opening as many as 150 stores in the state.
The expansion of international coffee chains is coming on the back of falling coffee prices in the international market, which create more pricing leverage to the franchisees. I like Starbucks' strong presence in the Tier 1 cities in China as well as its efforts to build a local supply chain in the region more than Dunkin's at this point in time. Those efforts pay long dividends in the surging nationalism that is coming along with China's middle class growth.
However, the rising prices of wheat due to the drought is going to offset some of the benefits of falling coffee prices for Dunkin' Brands, but with the structural oversupply in India, Dunkin's expansion there should see good operating margins for 2013 if not into 2014.
Meanwhile Starbucks is planning "aggressive" growth by opening "hundreds" of new restaurants in the country. Foreign brands would normally serve local cuisine, besides their branded products, whenever they open a new restaurant. Starbucks' first Vietnamese restaurant is a two-story structure covering an area of 4,000 square feet and sells traditional food and drinks besides its standard cappuccino and lattes. Dunkin' Donuts has also said that it would offer "regional menu items" as well.
Vietnamese consumers are going to enjoy the new breakfast wars between Starbucks, Dunkin' Brands and other international players already present in the country such as Australia based Gloria Jean's Coffee and the Los Angeles based Coffee Bean & Tea Leaf. Moreover, there are dozens of local coffee houses spread all across the country in each metropolitan area who are gearing up to fend off the challenge from the U.S. brands invading the country.
Both Starbucks and Dunkin' are aggressive growth stocks that are trading at very rich multiples right now. I love the willingness to get dirty here in Vietnam as well as around Southeast Asia but I caution investors at this point thinking the stocks may have gotten ahead of the story, especially Starbucks which looks like it could be beginning a correction. Equities, in general, look expensive and those with good stories have been bid up too strongly for a value investor to consider.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.