Coffee Wars: McDonald's vs. Starbucks

It appears McDonald's Corp. (MCD) has pulled ahead of Starbucks Corp. (SBUX) in the cutthroat U.S. coffee war by offering similar "luxury" products at a 20% discount, attractive to consumers looking for places to save.

Recent price checks by Deutsche Bank show the Golden Arches sells a medium iced mocha for $2.89, compared with $3.65 at Starbucks.

In Canada, McDonald's tried to put a dent in Tim Hortons' (THI) market share by offering free coffee in the morning for two weeks back in April.

The bank said in a consumer report Thursday:

Call it a crazy guess, but we think the ability to get this good-tasting product at close to 11,000 outlets, many of them with drive-thru, is having negative impact.

Buying a drink that is close to $4 once a week works out to some $200 a year, not exactly "chump change" in a recession. Buying McDonald's instead saves about $40 a year. That's worth at least a few Big Macs.

There are risks to the McDonald's gambit, including diluting pricing for the entire market over the long term.

In any case, the short-term benefits of the aggressive McDonald's campaign has Deutsche Bank giving the company a Buy rating with a target price of $65, and a prediction of same-store sales to go up 4% in the second quarter.

Starbucks, on the other hand, remains bearish in the bank's eyes.

The note said:

Although we note the company's progress recognizing the need to reduce the store base and improve value for consumers, we continue to believe measures taken are not enough to contain erosion of comps or meet impending competitive pressure from McDonald's.

The company gets a Sell rating with a target price of $9.

There is also a much more practical perspective on the whole coffee war: does anybody actually need to buy a premium drink, even at a discount?

The note said:

If you do not drink coffee (at Starbucks), what will happen? Nothing. We compare this to what happens when one goes without food basics like water and bread needed to live. There’s a value gap there too.

No kidding.

Comments

[Michael Clark:]

'...There are risks to the McDonald's gambit, including diluting pricing for the entire market over the long term..."

Remember when competition was supposed to drive down prices for everyone? That was supposed to be the benefit of capitalism. Now, the strategy of undercutting competition by lowering price is considered risky because it might dilute pricing generally. That is one of the things this financial crash is all about. There has been a conspiracy to INFLATE prices for years now. Price dilution will actually defalte the bubble and allow us to start over again, after 18 years of maximum price inflation that has left us all in debt with a weaker currency.

Lower prices are the ANSWER to our dilemma.

Jul 20 07:14 AM

[John Bowman:]

I never had a cup of coffee at Starbucks and never will. I will brew mine at home for a nickel or a dime per cup, thank you.

And if I'm out, the 69 cent cup at McDonalds will do.

Jul 20 08:50 AM

[User 77025:]

I did try coffee at Starbucks and never again. I don't understand how people could love drinking mud. And I am with you with making coffee at home and having McDonalds coffee. It's the best!!


On Jul 20 08:50 AM John Bowman wrote:

> I never had a cup of coffee at Starbucks and never will. I will brew
> mine at home for a nickel or a dime per cup, thank you.
>
> And if I'm out, the 69 cent cup at McDonalds will do.

Jul 20 08:59 AM

[WhoisJohnGalt:]

Here's my reasoning for choosing Starbucks over other "cheaper/practical" coffee for work. Courtesy of energyfiend.com, here's the caffeine content of popular brews:

Dunkin Donuts Coffee (16 oz.) - 143mg at a price of $1.95 plus tax

MCD Large Coffee (16 oz.) - 145mg at a price of ~$2.00 plus tax

SBUX Grande Pike Roast (16 oz.) - 330mg at a price of $1.97 plus tax

I'm not really one to drink coffee for its aroma, taste, etc. Whatever wakes up the most in the morning does just fine. Now as seen above, with so much caffeine jacked into its coffee, Starbucks is the clear economical choice with over double the drug (it is - let's not kid ourselves) content. And surprise to those who have not walked into a Starbucks recently, but cheap options exist. The other exquisite latte stuff? Probably incorporating a high premium for the "ambience" you get from the shop.

Jul 20 09:36 AM

[Ted Hurlbut:]

Starbuck's did a great job marketing an upscale lifestyle. Coffee was just the vehicle. Mcdonald's timing has been great, with consumers increasingly value conscious. But they're only selling coffee. Starbucks still retains the capability of refreshing the lifestyle positioning of their brand, and extending into related lifestyle niche's with new brands.

Jul 20 10:05 AM

[icepop:]

I buy a variety of high quality green beans averaging 3.70/lb., roast them at home all for about .12/cup. I can make whipped cream, caramel or whatever flavor I want for much less and have a beverage that is superior to anything on the market.

I'd only get McD's because my thermal bottle ran dry. We as Americans fall for ridiculously expensive marketing and products that are of average quality.

Jul 20 10:09 AM

[ksmithdc:]

Starbucks is a prime example of the emperor's got no clothes. People go there for the experience, not because they have the best tasting coffee. In fact, I think their coffee sucks. (My opinion).

I've always liked McDonald's coffee much more. It's basic..no frills. Unfortunately now McDonald's is trying to be like Starbucks with all the gourmet coffee choices. (Meanwhile none of them taste great). Surprisingly the one with the superb tasting iced coffee is....(wait for it).....Burger King. LOL

Jul 20 10:17 AM

[Jeff B.:]

McD's & DD coffee is cheap beans made into weak coffee. I have tried McD's "premium" coffee drinks. They are horrible. Tastes like all sugar & corn syrup added to cheap coffee & artifical whipped cream. It's so "in" now to dump on Starbucks, but any discerning coffee drinker will tell you that they still have the best coffee of all the major chain restaurants. Yes, the "experience" is good (an alternative to bars), but people also go for the coffee. The "experience" at McD's is just awful & their products cheap processed crap. Vote with your dollars, friends.

Jul 20 11:09 AM

[jkosnett:]

That's exactly right. A McMocha is not a competitive product to what a real coffeehouse, and not just Starbucks, serves....


On Jul 20 11:09 AM Jeff B. wrote:

> McD's & DD coffee is cheap beans made into weak coffee. I have
> tried McD's "premium" coffee drinks. They are horrible. Tastes like
> all sugar & corn syrup added to cheap coffee & artifical
> whipped cream. It's so "in" now to dump on Starbucks, but any discerning
> coffee drinker will tell you that they still have the best coffee
> of all the major chain restaurants. Yes, the "experience" is good
> (an alternative to bars), but people also go for the coffee. The
> "experience" at McD's is just awful & their products cheap processed
> crap. Vote with your dollars, friends.

Jul 20 11:28 AM

[Jimbo:]

I order breakfast blend from ccmcoffee.com in Tampa. Five pounds is roasted immediately and is delivered the next day for just under $30 including shipping. The coffee is superior to both Starbucks and McDonalds.

Jul 20 12:06 PM

[Alpine Butt...:]

Gentlemen,

I completely disagree with all your analysis of the $4 coffee. It is about taste. It is not about experience (or just a little). Why on earth would anyone pay $4 for a latte? It is a well packed espresso with fresh crema on top. Properly foamed milk that picks up the oils from the fresh roasted beans. And the smell. Women that don't like to over eat can have a liquid that is satisfying and doesn't make your stuffed stomach hang over your pants. Ten minutes with a delicious coffee and the rest of the afternoon is great.

When you automate the espresso process and have untrained kids in a hurry to slap out hot milk (with poor foam and no smell from the coffee) why on earth did I just pay $4 for that? And if Starbucks can push a button so can anyone. It becomes a drink for people who can't tell the difference and will eat any old junk food. Those people are hardly likely to discriminate on name and are likely to fall to price and convenience. Pile it up with whip cream (edible oil product) and sugar... who will notice?

This is why the independent coffee shops stay in business and won't be competing with McDonald's. Starbucks lost the core of its earning power when it switched to automated espresso machines. Now it's a race to the bottom of price.

Jul 20 12:28 PM

[spikesj:]

If you like to hang out with Ronald and scores of screaming, snot-nosed children, as their parents completely relinquish any simblance of responsibility for their behavior, by all means go have coffee at McDonalds. For my $4.00+ I'll take quiet music and intelligent behavior by other patrons any day.

Jul 20 12:28 PM

[jarco:]

It is clear Starbucks stepped way out of their nitch and opened far too many stores in an attempt to ramp up sales. When the broadening of customer base reaches down to those who worry about a few cents perhaps up to once or twice per day, then the results are predictable.

Many US companies failed doing likewise. Prime example, among numerous others, was domestic automakers. They would offer a stripped down version hoping to attract the masses and alienated a more sophisticated and potentially reliable customer base. Not so with BMW, Benz, etc. along with Toyota and Honda. The latter two knew enough to set up separate entities; namely, Lexus and Acura.

Jul 20 01:01 PM

[Wisdom vs. ...:]

when i was in the espresso biz years ago, we independents would say to each other, 'starbucks will crater once people try excellent espresso.' now, i doubt that italian-quality espresso will infiltrate main street any time soon, so when the economy gets back to normal, starbucks will continue to grow. coffe lovers, if you live in an at least medium-sized city, there is at least one italian deli or independent bar that has coffee beans that blow starbucks' away.

Jul 20 01:13 PM

[Fremont Rea...:]

I bought into the MCD story when they did the store remodeling akin to starbucks, and the story got better with the premium coffee roll-out. I'm still waiting to see how the cafe story plays out. I've tried their lattesa capacinos and prefer them to McDonalds. I'm accummalated some shares a month ago and will continue to hold.

Jul 20 01:23 PM

[narbloc:]

I've owned half a dozen McCafe's in Australia or 10 years and they continue to grow at a faster rate than my regaular stores, it's a wonderful addition to the McDonald's business and it has long term strength, we now bake pastries all day long for the McCafe. it just keeps growing.

Jul 20 05:27 PM

[a. palmer jr.:]

I hope McDonald's coffee has improved since they offered the free coffee I tried a few weeks ago. It was so bad I had to pour it out. I haven't tried it since and I have never tried Starbuck's because it's slightly higher than I want to pay for my morning coffee.

Jul 21 07:59 AM

[jason.b:]

A lot of consumers of starbucks just get the coffee of the day at about $2 a cup for a grande size. Compare that to mcdonalds who is about $1.75 and you are only saving $0.25 but comprising greatly on taste. I personally don't like ordering my coffee around the smells of fried unhealthy food.
The economy is clearly hurting starbucks because there is less demand for premium coffees but i suspect Mcdonalds will have less long term impact on Starbucks that is being feared.

In fact, it may benefit Starbucks long term if Mcdonalds can expand the premium market to those who normally don't buy premium coffee, ie blue collar types. Its like introducing cheap drugs to get people hooked to later buy expensive drugs, I know bad analogy, but something that popped into my thoughts..

Jul 21 10:03 AM

[Adina Genn:]

By staying focused on the customer experience, the company will likely continue to win fans as consumers see McDonald's coffee as good tasting and a good value. That's the basis of the "formula" that has fueled McDonald's growth since Ray Kroc took the helm, as I learned in co-writing "Everything I Know About Business I Learned at McDonald's (McGraw-Hill).

Jul 21 10:47 AM

[Fabien Hug:]

Poor people if all what you can get for a lifestyle experience is Starbucks. Go to a coffee shop in ... Amsterdam.

Jul 21 07:56 PM