Morning Coffee Changes It Up

Includes: DNKN, MCD, SBUX
by: Mary Daniel

Dunkin' Brands Group (NASDAQ: DNKN) recently announced that certain stockholders will sell about 21 million shares in a secondary offering, with those investors receiving the proceeds. The chain also stated that it plans to buy back 15 million shares from certain stockholders. That is not the only good news tied to this company. The company's second quarter earnings rose 7.6%. Sales rose much faster than expected leading the company to raise its profit expectations for the year. Since the company went public in July 2011, Dunkin' Brands has been busy opening new doughnut shops and improving its U.S. Baskin Robbins business. The company has also been expanding internationally and paying down its debt. This year Dunkin' will be expanding its business both in the U.S. and abroad, making this a high growth stock.

Competitor Starbucks (NASDAQ: SBUX) has some news of its own. The coffee hot spot recently announced a deal with Square, the mobile payments company. Starting this fall, Square will be processing all debit and credit card transactions at Starbucks stores in the U.S. Customers will be able to order using their cell phones and, eventually, charge the order to their credit cards simply by saying their names. In addition, Starbucks will be investing $25 million into Square and Howard Schultz, Starbucks' chief executive, will be joining Square's board. Starbucks already processes more than a million mobile payments weekly with its own mobile payment app. The addition of Square is expected to increase that number. While this is certainly great news for Square, it remains to be seen whether or not this deal will add any real value to the Starbucks brand. Only time will tell if this brings an influx of customers or decreases Starbucks' costs dramatically.

Changes are good for Dunkin' Brands and Starbucks, as competitors such as McDonald's (NYSE: MCD) are trying to steal away the coffee crowd. McDonald's McCafe has been widely successful, backing up their drive-throughs as commuters grab their morning coffee on their way to the office. The chain's revenue is becoming increasingly dependent on higher-margin coffee and blended drinks. The margin contribution from these products is extremely high. At the same time these products are boosting sales for the fast food giant. These products are now accounting for 10% of their revenue according to estimates, with coffee alone making up 4%. This is double the percentage from 5 years ago. Drinks sold from the McCafe brand add over $125,000 in annual sales per restaurant. McDonald's is taking its queues from now-rival Starbucks, honing in on their bottom line.

The coffee companies are all making different changes and pursuing new avenues of growth. Dunkin' Brands continues to expand and McDonald's continues to attract more customers who view Starbucks as expensive. Starbucks is changing its payment system. The changes being made by Dunkin' and McDonald's are sure to bring in higher sales and revenue numbers. However, Starbucks shouldn't expect its deal with Square to bring in much in the way of sales. If Starbucks wants to remain competitive they must continue to change and grow alongside their competitors.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.