Did Starbucks' CEO Really Say That?

In a recent DJ Newswire interview (sub. req.), SBUX CEO Jim Donald said a couple things that left me shaking my head. When asked about the effect that McDonald's premium coffee will have on his business, he said he expects it to be a benefit. The reason? Consumers who like McDonald's premium coffee will likely migrate to SBUX's super-premium. To quote Donald: "we see that migration happening." On its face, the statement does make sense but when you take a step back and think about it, you have to wonder - especially when you consider:

Consumer Reports recently compared coffees and came up with an interesting result. According to its tasters, Starbucks' (SBUX) coffee was outdone by McDonald's' (MCD) premium coffee offering.

Led by a professional tester and some employees of Consumer Reports' food testing unit, the team sampled medium plain coffees (with no sugar and cream, mind you), from two stores each of Starbucks, Dunkin' Donuts, McDonald's and Burger King (BKC). The team of taste testers deemed McDonald's premium coffee the best-tasting and the best value, at $1.40 a cup. It might surprise some people that the priciest cup of that size regular coffee actually came from Dunkin' Donuts, at $1.65. In the Northeast, McDonald's sells Newman's Own brand coffee (which is co-branded with Green Mountain Coffee Roasters (GMCR)).

Let's take this one more step. If you want a cup of coffee in under 15 minutes, do you go to Starbucks? Me neither. Let's be honest, getting coffee at a Starbucks is quite often a real pain in the ass. I still have nightmares about going to order a one for my wife with a cue card knowing that the omission or addition of a single ingredient would cause me to deliver to her a piping hot cup of bile (don't think for a minute I did not notice the disapproving looks from the "barista" and those of you in line as I read the order off the card, either).

In McDonald's you have arguably the world's most efficient food and beverage distribution system. Now that machine is selling your main product and people really like it. This is good? Starbucks itself recognizes its production problems (remember, they blamed a summer earnings miss on them), which is why they are adding drive-thru windows at many locations. To enhance their offerings, SBUX has added breakfast foods and I believe are considering doing the same for lunch. What would you think if McDonald's said they viewed this as "good for our business"? Now, Starbucks does profit from the McDonald's coffee in the Northwest as their Seattle's Best coffee division supplies them, but there are no plans currently to expand this relationship. Earth to Starbucks here...

The switch to premium coffee is clearly working for McDonald's. In the last couple of conference calls, they have given huge credit to their coffee for both their increase in sales and customer counts. Contrast this to Starbucks' call in which they intimated their profit increases were mainly due to price increases on coffee and by selling customers more products once inside, not by increased customer counts. Translation: they are losing people to McDonald's.

This is what caused my jaw to drop: When asked about McDonald's premium coffee in other parts of the country, Donald said he "didn't know the details" - WHAT??!!?? Imagine the CEO of GM (GM) saying he was not aware of what Ford (F) was doing. Can you guess how fast WalMart's (WMT) CEO Lee Scott would be fired if in an interview he said he "did not know" what Target was doing? The very fact that McDonald's chose "Newman's Own" branded coffee gave them instant credibility for its quality, and is responsible for the immediate acceptance it has had. How can Donald not know this?

If I was currently a shareholder of SBUX, this would make me very nervous and I would advise any new potential investor to avoid these shares now.

The hard core Starbucks customer who garners much of his or her self worth from carrying that cup with the barely exposed green logo around will never abandon them, no matter how much they are forced to pay for their "vente soy non fat half-caff white chocolate mocha latte with an extra pump." However, the casual customer will and appears to be. I look at my wife and myself (- it is always a good idea when investing to look at yourself. No matter how unique you think you are, there are lots of people who think and act very similar to you). She was once a daily visitor for Mr. Donald and SBUX. Now, she runs a very successful law practice, has three children at home under four and a very tight schedule. She no longer has the 15 - 20 minutes it takes to park, go inside and get a cup of coffee at Starbucks. Instead, she has discovered that the cappuccino from the Christmas present her thrifty husband bought her is just as good. She can take it with her in her travel mug and avoid walking through the Massachusetts winter weather to get one (that cappuccino machine paid for itself in only six weeks).

As for me, if I am driving around this winter and want a cup of coffee, rather than lug two four-year-olds out of their car seats and in wait in line for one, now that I can get a really good one from inside my car at McDonald's while listening to them sing Brooks & Dunn's "Hillbilly Deluxe," why would I choose anything else? We can't be the only two people out there like this, and judging from McDonald's coffee sales growth, we aren't.

Mr. Donald... are you paying attention?

Comments

[William Trent_:]

Starbucks and McDonald's are not Ford and GM, nor are they WalMart and Target. The fact that each sells both food and coffee is irrelevant. Customers are either going to one or the other based on whether they want a hamburger (and possibly some coffee) or coffee (and possibly a sandwich.) They are going to Starbucks for atmosphere and quality, McDonalds for comfort food. You aren't going to see people with laptops hanging out at McDonalds to use the WiFi (though you may see homeless people hanging out there to use the bathroom.)

As to your preference for staying in car, Starbucks has drive-through service in some places as well, but I've found that I prefer going inside to get the cream and sugar just the way I like it. I don't see outsourcing that to McDonalds employees.

2007 Feb 08 11:50 AM

[Andrew Schmitt:]

Nice article... I agree his statement shows a large amount of spin.

We are in a Starbucks economy. Things may change and we'll have a McDonalds economy.

2007 Feb 08 11:56 AM

[Chris Thomas:]

I disagree with the assessment. In your own words: "If you want a cup of coffee in under 15 minutes, do you go to Starbucks? Me neither. Let's be honest, getting coffee at a Starbucks is quite often a real pain in the ass."

Which leads to the question: why is Starbucks the giant they are? Sure, they have good coffee, but that's not the whole picture. It's the brand. It's a the barista experience. It's being surrounded by jazz music and modern art and people wearing turtleneck sweaters. THAT's what you pay 5 Bucks for a Grande Mocha Frap.

It always kind of puzzled me when people talked about the competition between Starbucks and Dunkin Donuts. Because in my mind, just because both companies offer coffee doesn't mean they're selling the same thing. McDonalds having halfway decent coffee isn't so much a threat to Starbucks, but rather for Dunkin Doughnuts.

McDonalds isn't ritzy. It isn't posh and it's not cool. But it's cheap. McDonalds is fighting over Dunkin' Donuts market share - people who want a quick, cheap breakfast and a good cup of coffee to wake them up. Am I missing something here?

2007 Feb 08 12:28 PM

[Rob Sanheim:]

People don't go to starbucks because they love the coffee, they just love the experience and the coffee is _consistent_ and good enough. McDonalds is not consistent -- compare a cup at 4 pm versus 8 am...I bet the 4pm cup has been sitting on the burner for too long and is junk. Thats my experience at least, w/ regular mcdonalds that don't have the gourmet coffee yet.

Besides, people who want a truly great cup of coffee brew their own w/ filtered water and a nice burr grinder and all that. Or they go to local shops that they know and trust. They aren't going to starbucks or mcdonalds.

2007 Feb 08 01:13 PM

[Christopher...:]

There is still a large void in access to premium competition East of the Mississippi. In East Coast states it can be a challenge to find any premium coffee locations outside of metro areas besides Starbucks. Starbucks is the only company that has expanded into these markets which has led to its immediate succss. Consumers in these locales have not been readily exposed to any competing premium shops typically available in West Coast markets. If Starbucks is the only game in town, I would also head to McDonalds for coffee or skip the coffee all-together. I ceased heading to Starbucks ages ago (long lines, process-approach, quality issues, etc.) and really only go to shops that have a high-end coffee machines instead of the push-button esspresso makers. Sometimes Starbucks isn't worth the wait.

2007 Feb 08 01:57 PM

[Josh Martin:]

Thank you for taking the time to write about SBUX and MCD.
I do agree with some of the points you made, however, I would have to agree more with Chris Thomas' reply. I believe it will take a long time for MCD to really compete with SBUX. Right now, when asked about quality coffee, you think SBUX. When you want a peaceful, relaxing environment you immediatly think SBUX. I mean, I'm not going to meet my pals tonight at MCD to discuss some business.
I'm sure you agree with me there. I guess where there could be some potential competition is the morning rush. Even then, SBUX is a brand that is known for great coffee. Right now, MCD is a brand known for horribly cheap coffee. It will take time - I think a long time - for that to change.

2007 Feb 08 02:50 PM

[William Trent_:]

Yep, Chris Thomas hit the nail on the head. It's Dunkin that needs to worry about MCD, not SBUX.

2007 Feb 08 04:22 PM

[Jamaicatty:]

Well written except that it disregards that sbux will always hold that cachet over a pedestrain- ique 'Mcdonalds coffee' and there seems that sbux meets little in the way of price resistance from yuppies who are willing to wait for the vente mocha with extra this and that. I too am not a buyer just yet but waiting to see how the expansion in China takes hold ...or not

2007 Feb 14 12:49 PM

[filmiki:]

nice article, thx for it

2007 May 26 05:17 PM

[Amrael:]

Very good points here. I have rarely waited as long as 15 minutes, except during rush hour traffic times which is similar at McDonalds.


On Feb 08 12:28 PM Chris Thomas wrote:

> I disagree with the assessment. In your own words: "If you want
> a cup of coffee in under 15 minutes, do you go to Starbucks? Me neither.
> Let's be honest, getting coffee at a Starbucks is quite often a real
> pain in the ass."
>
> Which leads to the question: why is Starbucks the giant they are?
> Sure, they have good coffee, but that's not the whole picture. It's
> the brand. It's a the barista experience. It's being surrounded
> by jazz music and modern art and people wearing turtleneck sweaters.
> THAT's what you pay 5 Bucks for a Grande Mocha Frap.
>
> It always kind of puzzled me when people talked about the competition
> between Starbucks and Dunkin Donuts. Because in my mind, just because
> both companies offer coffee doesn't mean they're selling the same
> thing. McDonalds having halfway decent coffee isn't so much a threat
> to Starbucks, but rather for Dunkin Doughnuts.
>
> McDonalds isn't ritzy. It isn't posh and it's not cool. But it's
> cheap. McDonalds is fighting over Dunkin' Donuts market share -
> people who want a quick, cheap breakfast and a good cup of coffee
> to wake them up. Am I missing something here?

Apr 17 11:02 AM

[Amrael:]

The taste tests were done with black coffee no sugar or cream or flavor. That is the same as comparing a cube steak to an angus burger with mayo and tomato, salt and peper.

If your coffee is so complicated you need a cue card that is so detailed that it irritates others waiting in line - then you will not get what you are looking for at McDonalds for sure.

Apr 17 11:03 AM