Dunkin' Donuts, Coca-Cola Team Up to Take On Starbucks

By Markets Fool.com

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Dunkin' Donuts is bringing one of its signature products to grocery stores. Image source: Dunkin' Donuts.

Dunkin' Donuts (NASDAQ: DNKN) used to pride itself on people having to visit its locations in order to buy its signature products.

The chain even had a jingle that celebrated making the public come into one of its shops in order to have its doughnuts, which a Chowhound reader wrote out as follows:

Dunkin' Donuts, you can't buy 'em in a grocery store. Dunkin Donuts, you can't buy 'em in a bakery. Dunkin Donuts, they're not for sale in a restaurant... you have to get 'em at Dunkin Donuts, it's worth the trip.

Dunkin' still requires people to visit its stores to pick up a doughnut. Unlike rival Krispy Kreme, the chain does not package doughnuts for sale in grocery stores. And the same has always been true for the company's famous coffee. Getting a cup required either brewing it yourself or stopping by a Dunkin' location to pick some up.

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But now, Dunkin' has teamed with Coca-Cola (NYSE: KO) to bring a bottled line of ready-to-drink coffees to grocery stores, convenience stores, mass merchandisers, and Dunkin' Donuts locations nationwide in early 2017. It's a direct shot at rival Starbucks (NASDAQ: SBUX), which has been the sole restaurant brand of cold coffee drinks sold nationally in those stores.

What is Dunkin' doing?

Through this deal, where Coca-Cola will manufacture, distribute, and sell the product, Dunkin' will make its first attempt to conquer the ready-to-drink coffee category. That's a $2.3 billion market, according to the company, which Starbucks has been a strong player in for years.

"We are delighted to be working with The Coca-Cola Company, a world-class partner that will provide us with world-class consumer access, by bringing ready-to-drink Dunkin' Donuts coffee to the refrigerator cases of grocery, convenience stores and mass merchandisers, as well as inside Dunkin' Donuts restaurants, across the United States," saidDunkin' Brands CEO Nigel Travis in a press release.

The CEO believes that this deal will be a game changer for his company, not only helping it sell more coffee in alternative locations, but also building its brand and increasing store traffic.

"This new product introduction will increase consumption of Dunkin' Donuts coffee andincrease our brand relevance with existing and new consumers, including many younger customers, which we believe will in turn, drive incremental visits to our restaurants," he said.

Franchisees will profit, too

Unlike Starbucks, where the company owns most locations, Dunkin' uses a franchise model. Because of that, the company had to take steps to make sure that franchisees benefit from any sales made in their market, but not in their stores.

The company plans to equally share its net profits from these new outside-the-restaurant sales with qualified U.S. Dunkin' Donuts franchisees.

Will this work?

Dunkin' should have a built-in market for its ready-to-drink line. Its existing customer base may have been forced to buy packaged Starbucks products or other brands when in grocery or convenience stores. This deal should end that by bringing people who prefer Dunkin' Donuts coffee the option to buy it outside its restaurant stores.

In addition, this move should add sampling from people who enjoy coffee but have not frequented a Dunkin' location. It's hard to see how this move won't be successful and the biggest surprise is actually that the company waited this long to make it happen.

Daniel Kline has no position in any stocks mentioned. He drinks a lot of coffee and while he prefers Starbucks, he will try these. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool recommends Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.