• by Karlene Lukovitz  @KLmarketdaily, August 3, 2011

This week, U.S. Dunkin' Donuts restaurants are beginning to sell the brand's coffees in single-serve Keurig K-Cups.

That gives Dunkin' a slight jump on Starbucks, at least on the restaurant distribution front, since Starbucks will not start offering K-Cups in its restaurants (and in mass retail) until the fall.

Dunkin' announced its K-Cup agreement with Green Mountain Coffee Roasters Inc., parent of Keurig -- which owns about 80% of the single-serve market -- in February. The agreement does not extend to selling the Dunkin' brand coffee cups at retail, outside of its own restaurants.

The suggested retail is $11.99 for a pack of 14 Dunkin' K-Cups. Five of the brand's coffee flavors are available.

As one launch promotion, Dunkin' will run a giveaway between Aug. 4 and 12 in which 12 restaurant customers across the U.S. will be surprised with a check for $1,000, a Keurig Single-Cup Brewer and a year's supply of the Dunkin' K-Cups. In addition, the chain will surprise "select" members of its DD Perks loyalty program with one of the brewers and K-Cup packs.

The product launch comes on the heels of Dunkin' Brands' highly successful initial public offering, in which it sold 22.3 million shares, raising $422.8 million. In the first day of trading, the company's share price jumped 46% above the IPO price.

However, Dunkin' Brands' just-announced Q2 financials show a slight decline in net income, to $17.2 million versus $17.3 million in the same quarter of 2010. Dunkin' also announced that rising commodity costs are forcing the company to raise prices in both Dunkin' and its sister chain, Baskin-Robbins. The news caused the company's share price to drop on Wednesday.

Still, Dunkin' Brands' global system-wide sales increased 6.9%, revenues rose 4%, and operating income increased 6.8% in the quarter. Dunkin's U.S. comparable-store sales increased 3.8%, although Baskin's declined 2.8%. The company also has expanded its restaurants: Franchisees and licensees opened 140 units during this year's first six months, bringing combined Dunkin'/Baskin outlets to 16,427 globally.

"Since the first of the year, we have significantly increased the strength of our balance sheet, and after the completion of our initial public offering, have reduced our annual interest expense by 50%, to approximately $60 million, through a combination of debt retirement, restructuring and repricing," Dunkin' Brands CFO Neil Moses reported in the financials release. "This financing activity resulted in non-recurring charges which impacted year-to-date net income. The performance of the business in the second quarter demonstrates the strength of our business model and the integrity of our platform for future growth."

Starbucks: Multi-Pronged Single-Serve Strategy

Meanwhile, Starbucks is pursuing the rapidly growing single-serve market -- usually pegged at $4 billion currently on a global basis (about $100 million in the U.S.) -- on at least two fronts.

In mid-March, Starbucks announced a deal with Green Mountain Coffee Roasters to manufacture, market and distribute Starbucks- and Tazo tea-branded K-Cup portion packs for the Keurig Single-Cup brewing system.

That deal will provide a significant platform for Starbucks to make single-serve portion packs available through food, drug, mass, club, specialty and department stores in the U.S. and Canada starting in the fall.

The companies also plan to expand Starbucks K-Cup packs and Keurig Single-Cup brewing system distribution to Starbucks stores, and to sell the K-Cups through the Green Mountain, Keurig and Starbucks Web sites starting in 2012.

However, in February, Starbucks had signed an agreement with Courtesy Products, the leading provider of in-room coffee service to U.S. hotels. Starbucks initially announced that that deal would make Starbucks ground coffees available in up to 500,000 luxury and premium hotel rooms across the U.S., for use in Courtesy's CV1 in-room and on-demand brewed coffee system.

But in late March, at its annual shareholders meeting, Starbucks made it clear that its deal with Green Mountain in no way precludes offering its own brewing system -- that in fact, its agreement with Courtesy includes offering an on-demand, single-cup system for Starbucks and Seattle's Best ground coffee and Tazo teas for sale in multiple channels, exclusively through the Starbucks Global Consumer Products Group. The company's release did not include launch timing.

After that announcement, a Morgan Stanley analyst told International Business Times that while aligning solely with Green Mountain could produce greater profitability for Starbucks in the short term, it might hamper fully leveraging the single-serve opportunity in the longer term.

Questions raised by the announcement of the machine to be offered with Courtesy, said IBT, include whether the system will be closed (offering only Starbucks brands); whether it will be a pod system or use filter bags similar to those used in Courtesy's hotel-room machines; how much cheaper to the consumer and how much more profitable to Starbucks per serving this new system will be; and whether this makes it less likely that Starbucks will join Keurig on its next-gen system, scheduled to launch next year.

Whatever the answers, a UBS analyst stressed that single-serve brewing, along with breakfast/snack/beverage occasions at retail, premium coffee, and international expansion (especially in China), are the key reasons that UBS believes that Starbucks will deliver long-term, double-digit EPS growth.