Last updated February 13, 2008 9:50 p.m. PT

Ronda Churchill / Special to the P-I

A new pot brews as Melissa Gaizo collects payment from a customer.

Coffee clash in the West

Starting in Vegas, Dunkin' Donuts is expanding into new areas to challenge the Starbucks empire

By CRAIG HARRIS
P-I REPORTER

LAS VEGAS -- In the land of glitzy casinos, an ambitious East Coast fast-food chain is laying its bets on Sin City as it expands nationally and challenges coffee's highest roller: Starbucks Corp.

Dunkin' Donuts, which despite its name generates more than half its revenue from coffee sales, plans to build at least 62 locations here during the next few years after it opened its first in mid-October. Initially, Dunkin' will build in residential areas, but if all goes well the company will move onto the Strip, where Starbucks has a huge presence.

After Dunkin' pulled out of Washington several years ago, Las Vegas is now its westernmost outpost. But Canton, Mass.-based Dunkin' Brands is laying the groundwork to possibly return to the Pacific Northwest after recently introducing consumers to its coffee in Puget Sound-area grocery stores. Even Issaquah-based Costco Wholesale Corp., which has a long-standing relationship with Starbucks, is considering putting Dunkin's packaged coffee in its Washington warehouses if it continues to do well in other markets.

The projected number of Dunkin's Las Vegas openings doesn't even equal half of the 146 Starbucks outlets here, but the expansion is significant. Consider that just two years ago Dunkin', with more than 5,000 U.S. shops, had just 50 of its stores west of the Mississippi.

"They (Starbucks) have had a lot of the market for a while, and now they are feeling the competition," said Don DeMichele, a Las Vegas Dunkin' franchise operator. "We are not afraid to be near a Starbucks."

In addition to Las Vegas, Dunkin' plans to open dozens of stores in Phoenix, Houston, Dallas and Austin, Texas, as part of its Western manifest destiny. And, in migrating from its New England base, the java and frosted-confections seller wants to open stores in Pittsburgh, Indianapolis and Nashville, Tenn.

The ultimate goal: Triple the number of U.S. locations to 15,000 stores by 2020.

"We have a lot of space to grow. In the U.S., we are in less than 40 percent of the country," said Frances Allen, Dunkin's chief marketing officer.

Dunkin's growth spurt comes as Seattle-based Starbucks, which has twice as many U.S. locations as Dunkin', is slowing its domestic openings.

Jake Kahle, who this month visited Dunkin's latest restaurant in northern Las Vegas, said he likely will switch his loyalties after buying a vanilla latte at Starbucks daily.

"The prices are lower here," said Kahle, a 44-year-old marketing executive. "And you get more."

Dunkin', which like McDonald's Corp. has peeled away some Starbucks customers by offering drip and specialty coffee at lower prices, said it has no plans to alter its growth plans despite a troubling economy. Dunkin' says its coffee drinks are 15 percent to 30 percent less than Starbucks'.

"I talk to a lot of peers in the industry, and there are challenges. But we are doing well," said Lynette McKee, Dunkin's vice president of franchising.

Dunkin' says it won't fall into the same trap as Krispy Kreme Doughnuts Inc., which expanded too fast, had accounting problems and had to close stores. The difference is that Dunkin' doesn't rely on doughnut sales for growth.

Instead, 63 percent of Dunkin's sales come from beverages, with most of that being coffee, while just 17 percent come from doughnuts, according to the company. The remaining 20 percent come from bagels, muffins and breakfast sandwiches. The company announced Wednesday a new "all-day" menu of pizzas and sandwiches, the biggest change since it launched espresso drinks in 2003.

The company, which is privately held, said it focuses on coffee because of higher margins, although it did not disclose sales figures.

Starbucks Chairman Howard Schultz, who took over the daily operations of the company last month and has implemented a number of changes to win back customers, said he respects Dunkin', but Starbucks remains in control of its destiny.

And, not backing away from a challenge, Schultz added that Starbucks, with more than 11,000 U.S. locations, does just fine in Dunkin's backyard.

"In New England, where they outnumber us 100 to 1, that is one of our best-performing markets," Schultz said.