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Dunkin' Donuts: Reinventing Itself One Cup at a Time

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In coffee wars, chain does battle for hearts and wallets.

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Once upon a time, coffee was simple. It was "battery acid," "brain juice," "caffeine fix," "cup of joe" or simply "cuppa."

But now, coffee is the latest battlefield in the culture wars as frou-frou Starbucks (SBUX) and blue-collar Dunkin' Donuts slug it out in the $50 billion market.

Dunkin' Donuts seeks to reinvent itself and attract more upscale, white-collar customers, while holding on to its loyal blue-collar base. This means Dunkin' now sells hot sandwiches but calls them "stuffed melts," because "panini" is too snooty.

The company serves the hit-and-run market -- commuters seeking "fuel" to get cranked up for the day -- while Starbucks seeks to create a community where people sit on couches, chat, peck at their laptops and work crossword puzzles. The souring economy may play into DD's strength, as consumers trim expenses and focus on what they need rather than what they want.

The cultural divide between the corporate image of the two companies is huge. Just about everyone sipping a $5 latte knows Starbucks is named after the first mate in Herman Melville's novel, Moby Dick. Reviewing Starbucks' aggressive expansion since its founding in 1971 -- the company is the world's number one specialty coffee retailer with more than 15,000 shops in about 35 countries -- you get the feeling that the coffee maker shared Captain Ahab's monomania, but turned it to socially acceptable ends by upgrading the nation's taste in coffee and rewarding investors with solid returns.

In contrast, DD's pink and orange logo suggests the company's working-class heritage and its furnishings might graciously be described as bus station chic. Dunkin' Donuts operates about 7,900 shops in 30 countries.

The culture clash raises a basic question: How can no-frills Dunkin' Donuts, which aggressively drops its g's and eschews earth tones, compete with Starbucks, emperor of yuppiedom, while fending off competition in the daily grind from fast food rivals McDonald's (MCD) and Burger King (BKC)? The answer: A $2.4 billion buyout in 2006 by venture capitalists Thomas H. Lee Partners, Bain Capital Partners and the Carlyle Group. This isn't the National Endowment for the Arts so there's likely to be an IPO in the future.

Dunkin' Donuts now sells about 2.7 million cups of coffee a day - or nearly one billion a year. The company says it's the top retailer of hot regular coffee-by-the-cup in America. It may have an opening. A respected consumer publication says Startucks' coffee isn't, ahem, so hot. At the high end of the market, Starbucks competes with Peet's Coffee & Tea and Caribou Coffee.

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No positions in stocks mentioned.
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