It's Not About the Doughnuts

Right now, he points out, Dunkin' is already selling 2.8 million cups of coffee a day, or 16% of all coffee sold by the cup in the U.S. And they've only begun to fight. Currently the chain is opening about 700 shops a year, in places like Charlotte, Cleveland, Detroit, Tampa, and Cinncinnati. They'll expand that to 800-1000 a year, he says. It's a game that relies on ubiquity. "You don't go 20 miles out of your way to have a cup of coffee," he says. Currently, Dunkin' has 1,644 shops in New England, or one for every 7200 people. Starbucks has 203. "We're not going to be able to replicate that, " Luther says, " but I think one to every 15,000 to 20,000 people [in target markets] is probably a good goal." (Worldwide, Starbucks has more than 4,700 retail stores and 2,800 licensed units, versus Dunkin's 6,000.)

That ambitious roll-out plan may run up against some trouble when it comes time to find the requisite real estate, says Pawlak. "If you're thinking about gourmet coffee, you want to go into areas that are more white collar and affluent," he says. "The A and B sites are basically gone, so your choice is to settle for a C site or buy an A site that's very expensive." Luther says he's concerned, but not daunted by the situation, since the high margins in the coffee business will allow him to snag good sites. "We are not finding real estate to be our major issue," he says.

The Future: A Billion Cups and Counting

Liz Barnett is a Dunkin' Donuts executives' dream girl. The 18-year-old freshman at Roger Williams College has taken her Manhattan-spawned addiction to the chain's French vanilla coffee ("large, light and sweet") with her to school in Rhode Island, the very epicenter of Dunkin's fiefdom. Within a few blocks, Barnett can sample the wares of six different Dunkin' Donuts shops, an opportunity she hasn't let pass her by.

Plus, she's a peer influencer, helping to hook that precious 18 to 24 year old demographic that Luther covets. On a recent trip back to her high school in New York, she discovered her Dunkin' dedication had lived on as a sort of class legacy: "My friends there said, 'We all drink Dunkin' Donuts because of you!"

While she had half a dozen Starbucks within a short stroll of her home on New York's Upper East Side, she said she gravitated to a hole-in-the-wall Dunkin' on E. 86th St. because of the coffee's less bitter taste. Now, as a price-sensitive student, she's also attracted by its price. "Dunkin' Donuts is economically beneficial to me," she says. "I don't want to get a $5 cup of coffee if I can get a $1 cup of coffee."

Still, she's a little annoyed that the chain's quality varies so much from shop to shop - from the watery brew at the restaurant near school, to the "horrible" service at the one near the gas station. She recognizes that this a problem that affects many franchise operations, including McDonald's, but, she says, "I notice it much more in Dunkin' Donuts than anywhere else."

For his part, Luther knows he has a problem. When he took over in 2003, one of his first acts was to embark on a road show to meet his 2700 franchisees. His message to them:"We're changing this game, we're raising the stakes, if you don't like it, get out. We'll buy your store." He also took a number of franchisees to court over lax standards, and won nearly every case. Things have calmed down considerably since that litigious interlude, but Luther is resigned about his ability to deliver the customer experience he'd like.

"Everybody says it's about the crew members," he says. "But not only can you not get them to up-sell, you can't even get them to smile and say thank you! Half the time you've got an 18-year-old kid who's looking at his watch, or an immigrant who's not speaking the language as well as you want." Luther's solution? To help the customer feel the love based on the quality of the product, not the transcendent experience. "We'll keep the place clean, you'll get it fast, it will be portable, and the quality will be there. That will be the ritual that we meet."

Freed from the notion then, of having to compete on Starbucks's terms, Luther can set his sights on expanding to locations where speed, price, and quality are the relevant metrics: alternative venues --- kiosks and drive-thrus in airports, carts in ski resorts, counters in supermarkets. And, perhaps the biggest possible deal, a partnership with Wal-Mart, which is still in the testing phase, but going well.

"Five years from now, if you're looking for coffee," Luther says, "there will be only two places you'll be thinking about: Starbucks and Dunkin'. We don't want to replace them -- my God, they're terrific. All I want is a little piece of the pie: A billion cups a year," he says, exploding into gales of laughter.