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Dunkin’ buyers more loyal than Starbucks hipsters

Dunkin' Donuts promotional program, "DD Perks," is outpacing the early growth of Starbucks' "My Rewards," proving that the value-conscious, blue-collar buyer is more loyal then the fickle hipster, according to a Wall Street report.

The author of the report, Goldman Sachs, recommended buying Dunkin' shares as this display of loyalty should drive 2015 sales higher. The firm also said the Dunkin' K-Cup expansion to grocery stores will help drive the stock up by almost 20 percent.

"The coffee category is well-suited to loyalty programs given high-frequency purchases, and adoption has actually outpaced Starbucks in the early days (perhaps as a result of a generally more tech-savvy consumer today and/or a more value-conscious DNKN consumer), " wrote Goldman's Karen Holthouse in a note to clients Thursday.

"DD Perks," which started in the first quarter of 2014, had 2.5 million members by the end of 2014, higher than the 2 million members at the same stage following Starbucks' own program launch in 2009. Starbucks' program still has bigger sales at $12 billion versus Dunkin's $7 billion, but Goldman sees the spread closing over the years.

The Dunkin program offers a free beverage when you enroll and then five "points" for every dollar you spend that can be redeemed for another free beverage when you reach the 200 count. Starbucks' program offers a free drink after every 12th purchase, but that only comes with membership in its top level, which provides a personalized gold card that mimics the AmEx gold card status symbol.

Goldman upgraded Dunkin to "buy" from "neutral." Despite the difference in loyalty, the firm also rates Starbucks a "buy." Dunkin shares are down 9 percent over the last 12 months compared to a 32 percent gain by Starbucks.

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Dunkin's stock does not get much loyalty from analysts as almost half of them say the stock is just a "hold," according to FactSet. The average 12-month price target among analysts is just a few dollars from where Dunkin trades today.

A week ago, Dunkin Donuts said it would start selling its K-Cups online and in retail stores instead of just in its stores. While it was able to charge more for the in-store K-Cups than what it can when selling in grocery stores, Goldman believes overall revenue from the bigger distribution will be a net benefit.

"To the extent grocery cannibalizes K-Cups sales in stores, it reduces the economics of K-Cups to approximately 2.25 percent of (in-store) sales versus 5.5 percent of sales. However, we estimate a larger revenue pie ultimately offsets the percent of sales distribution—benchmarking DNKN to SBUX we estimate DNKN (was) leaving $200-plus million of revenue in a growing market on the table."