Coffee Wars

At the nearby Dunkin' Donuts, the steady appearance of customers walking in prompted one employee to abandon his lunch to help out at the counter.

When a coffee fix is needed, it doesn't seem to matter that gasoline is pricey, that the wait at the drive-through window is 10 minutes long or even that it's lunchtime. It also explains why Dunkin' Donuts and Starbucks shops dot Route 9.

The old rivalry between soda giants Coke and Pepsi has lost its fizz compared with the percolating battle for America's coffee money. In 2005, the retail coffee market - a category encompassing convenience stores, fast-food restaurants and coffee houses - was worth $19 billion, up from $18.5 billion in 2001, according to the National Coffee Association in New York.

While Starbucks is still the undisputed market leader, Dunkin' Donuts has turned up the heat by serving its own fancy lattes and creating a Starbucks-like ubiquity. Yet, the pursuit of the habitual, on-the-go coffee drinker is far from a two-way race.

It involves a host of competitors, ranging from the trendy lunch-spot chain Panera Bread to Wawa convenience stores, where coffee is brewed in as many as 20 carafes to handle the morning stampede.

It's just that Dunkin' Donuts and McDonald's, which recently introduced a "premium" roast to mark its much-awaited entry into the contest, appear to be leading the chase after Starbucks.

"It's definitely a race that's heating up," said Phyllis Ezop, an Illinois-based retail consultant. "Starbucks can still act like it's the dominant player, but I don't think they can ignore McDonald's and Dunkin' Donuts."

Here's what they're all after: Wall Street analysts estimate that loyal consumers visit their favorite coffee spot 20 times a month - and often more than that. (After all, coffee contains caffeine.) At that rate, the purchases translate into roughly $36 a month - and that's if you're drinking an 8-ounce cup of drip coffee from Starbucks. Lots of customers regularly fork over as much as $4 for a Venti-sized, whipped-cream-topped Frappuccino.

McDonald's promotes its latest roast as rich and robust. The proprietary blend is made with beans from a variety of South American countries, according to a company spokeswoman.

"There's a much stronger coffee culture," said Robert Nelson, president of the National Coffee Association. "There's a coffee shop on every corner, so it's convenient to access."

"Coffee is cool, if you will," he said.

Let's face it: The coffee-drinking world -- even for die-hard java junkies - changed after Seattle-based Starbucks transformed the ordinary cup of joe into a pricey ritual. At Starbucks, "small" is "tall," and when baristas pour a cup of coffee, they refer to it by blend - Sumatra, Verona and Gold Coast are just a few examples.

The chain, which has 6,000 stores around the world and brought in $6.4 billion in revenue last year, also created an atmosphere as inviting as a latte itself, with soft chairs, hip music and Internet access. But its beverages, which include tea and bottled water, represent the heart of its business. The chain generates 77 percent of its revenue from beverages, according to the company's regulatory filings.

"Everybody clearly sees Starbucks has met with success," said Bob Phibbs, a retail consultant and author from Long Beach, Calif. "Everybody's chasing that."

Executives from Starbucks declined to be interviewed for this story. But in a statement issued by an outside public relations agency, the company said, "We are not losing business because others are beginning to serve a higher quality coffee."

"No matter what retailer enters into the specialty coffee industry," the company said, "consumer education rises and everyone's business grows."

Phibbs said the public's waning demand for soda is benefiting the coffee market, and since premiums are high on a cup of regular drip coffee, it is also a business opportunity. "Everyone is trying to move coffee from being a commodity to a place where it's somehow different," he said. "McDonald's is the most recent to say, 'We've got something special.'"

"Are people going to go out of their way to get coffee from McDonald's? I don't think so," Phibbs said.

Consider Sheri Lacy's husband.

After leaving the Starbucks in Millburn recently with her coffee drink, Lacy realized she should have picked up a cup to take home to her husband. She called home from her car and, yes, he did want coffee.

"Would Dunkin' Donuts be okay?" she asked lightly. After all, she was parked right outside the tiny, older Dunkin' Donuts on Millburn Avenue. "Go back to Starbucks!" her husband insisted.

"My husband doesn't even have any of that snob appeal," Lacy said.

Some people behave the same way about Dunkin' Donuts.

Manalapan resident Joe Fitzgerald drives right by Starbucks on Route 9 to get his fix at the Dunkin' Donuts next door, where he is religious about buying coffee with French vanilla flavoring.

"The coffee next door is too strong for me," Fitzgerald said, throwing a glance toward Starbucks. The French vanilla coffee is his regular "reward" after a workout at the gym. "Over the past few years, I've dropped a lot of bucks here," he said.

It isn't difficult to find one.

In fact, Dunkin' Donuts and Starbucks are starting to resemble Lowe's and Home Depot. In some locations, they sit across the highway from one another. In others, they are side by side, around the corner, on opposite sides of an intersection. In some towns, Starbucks is starting to be boxed in by Dunkin' Donuts.

"Starbucks is a very formidable competitor," said John Gilbert, vice president of marketing for Dunkin' Donuts. "But we're working hard to be better than them."

For years consumers thought of Dunkin' Donuts as a doughnut shop that sold coffee, said Ezop, the retail consultant from Illinois. "The new ownership is really trying to revamp the company. They're going stronger on the coffee. Coffee is definitely one of their strengths."

And Dunkin' Donuts isn't reluctant to make it the subject of national advertising campaigns, unlike Starbucks, which does not advertise nationally. "It's reaffirming for passionate Dunkin' Donuts customers. It makes them feel good about a small choice in life," Gilbert said of the company's television commercials that recount real-life situations described by customers. "For others, it helps them understand what this buzz is all about."

Sandy Becker, a professor of marketing at Rutgers University's business school, believes the buzz exists because coffee has changed dramatically in terms of its appeal.

"Starbucks has created a whole new culture, and coffee is at the center of it," Becker said. "It's an affordable luxury. It's not a luxury car or expensive clothing, but it's a brand you're proud to carry around."

"Starbucks would say they sell an experience," he said. "Dunkin' Donuts sells what's in the cup."

Jenn Higgins, a 33-year-old recruiting consultant for Johnson & Johnson, often passes up her favorite - Dunkin' Donuts - because, well, it's about a block from her office in downtown New Brunswick.

"I know this is lame," she said, "but I'd have to go out of my way to go to Dunkin' Donuts."

SOURCES: Company documents, Securities and Exchange Commission filings.