India is the Next Battleground for Starbucks & Dunkin’ Donuts

DNKN: Dunkin' Brands Group logo
Dunkin' Brands Group

Barely a couple of weeks after Starbucks (NASDAQ:SBUX) announced its plans to partner with Tata Beverages to open its first outlet in India, Dunkin’ Donuts revealed that it will open its first outlet in the country by June, setting up the stage for a heated battle in the coming years. [1] Dunkin’ Donuts is owned by Dunkin’ Brands (NYSE:DNKN). Apart from Starbucks, Dunkin’ Brands also competes with McDonald’s (NYSE:MCD), Krispy Kreme, Dairy Queen and Cold Stone Creamery to name a few. We estimate a $29 price for Dunkin’ Brands, which is in line with the market price.

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Dunkin’ Donuts has partnered with Jubilant Foodworks, and it plans to open 80 to 100 outlets in the next five years in the country. Jubilant Foodworks also operates Domino’s Pizzas in India.

In the U.S., Starbucks can charge customers a premium as it is perceived to offer superior coffee. However, India traditionally has a tea-drinking culture with a lack of appreciation for superior coffee among the majority of its consumers. This means that Dunkin’ Donuts will have an edge over Starbucks in terms of pricing. Besides, the two companies will also have to deal with other well-established players such as Britain’s Costa Coffee and local players like Cafe Coffee Day and Barista.

Coffee Houses Need to Adapt to Indian Menus

For a typical Indian customer, a beverage is usually something which is accompanied with food and spending alone on a beverage is a new concept, although that trend is slowly changing. Many of these customers prefer to spend money on value and food is something they perceive to have greater value than beverages. Hence in our view the coffeehouses will need to provide an extensive menu suited to local tastes in order to succeed.

And just like it is in the West, the coffeehouses will have to compete against the ubiquitous McDonald’s and Yum! Brands. Restaurants like McDonald’s and Pizza Hut, with their extensive offerings in both food and beverages, provide a more holistic experience of a meal. A couple of months ago, McDonald’s also revealed its plan to double the number of restaurants in India to 500 by 2014. As tempting the market may seem, it is certainly not going to be easy for the new entrants.

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  1. Dunkin’ Donuts in India: all about doughnuts, not coffee,, February 21, 2012 []