Coffee Smackdown: Dunkin vs Starbucks image from SeattlePI.com

Coffee Smackdown: Dunkin vs Starbucks image from SeattlePI.com

With the latte giant reeling from overexpansion and a softening economy, the doughnut maker took aim at its upscale rival. Now McDonald’s has joined the coffee fray as well. Can Starbucks pull through?

By Joseph V. Tirella, MSN Money

In late 2007, Dunkin’ Donuts made a surprising announcement: In a national taste test in 10 major U.S. cities, the chain had put its most popular brew up against Starbucks’ — and clobbered the coffee conglomerate, 58% to 42%.

The test was held even in two cities where Dunkin’ Donuts had a distinct disadvantage: Los Angeles, where the company doesn’t have a single store, and Starbucks’ hometown of Seattle. “We wanted to show that nationwide, people prefer Dunkin’ Donuts to the perceived leader,” says Frances Allen, the company’s brand-marketing officer.

Armed with the test results, Dunkin’ Donuts immediately launched a national multimedia advertising campaign that essentially declared war on Starbucks. Its timing was perfect: The latte giant was overextended, battered and vulnerable. Its stock had slid from the mid-$30s to the mid-$20s over the previous year (it was below $10 this week); its on-every-corner strategy had left it overextended, with too many unprofitable locations; and the global economy was about to fall off a cliff.

Meanwhile, Starbucks was facing an attack on another front: McDonald’s had joined the coffee fray as well, positioning itself as an alternative provider of premium coffee. The fast-food giant plans to outfit most of its 14,000-plus U.S. stores with a McCafé, a coffee bar that will sell espresso-based drinks such as cappuccinos and lattes.

More than a year later, Starbucks’ pain is obvious. The company reported a 97% drop in profit for the fourth quarter of 2008 — partly due to a $105 million restructuring plan — and is struggling to regroup. It has announced the shuttering of about 800 U.S. stores, restored visionary leader Howard Schultz to the CEO’s seat and made wholesale changes to its menu. The company’s latest round of layoffs, announced Wednesday, will eliminate 6,700 jobs.

It’s not clear whether the one-time darling will be able to come back. Today’s economic climate is tailor-made for a blue-collar brand like Dunkin’ Donuts, already a $5.3 billion-a-year business.

“Dunkin’ is a cheaper way for consumers to get their high-end java fix,” says longtime beverage industry analyst Bump Williams, the head of Bump Williams Consulting.

Read the whole story at: MSN Money