Oh, Sweet Revenge: Dunkin' Donuts faces two high-end rivals: Krispy Kreme and Starbucks. It's doing just fine. A case study.(Company Profile)

Byline: Daniel McGinn

It's just after 4 on an early summer morning, and two uniformed men work the counter at Dunkin' Donuts in Framingham, Mass. As they serve takeout coffee to early risers, the workers seem blithely ignorant of the enemy that's gathering nearby. There are no lanterns visible from the Old North Church to shine a warning. But a half hour to the east, just across the Charles River in Medford, dozens of workers push trays of doughnuts around a new Krispy Kreme store as more than 100 customers line up outside. When the doors swing open at 5:30, they mark Krispy Kreme's entry into Dunkin' Donuts' home market--and the opening volley in the Boston-area Doughnut War. Krispy Kreme has a great first day, selling $73,813 worth of gooey treats. But back in Framingham, business holds steady: customers stream through the door all day long.

These should be dark days for Dunkin' Donuts, the fast-food breakfast chain that seems as if it's being overtaken by hotter, fresher competitors. When it comes to doughnuts, the country is gripped in a torrid relationship with fast-growing Krispy Kreme, which Fortune magazine recently crowned "America's Hottest Brand." In the land of coffee, Starbucks continues to dominate; this year it achieved the cultural two-fer of making its debut in the Fortune 500 and having its employees (the "Women of Starbucks") grace the pages of Playboy. Yet even as those rivals post double-digit sales growth, Dunkin' Donuts, a subsidiary of the British liquor giant Allied Domecq, is…