Surprise: McDonald's Coffee is Giving Starbuck's Some Unwanted Competition

As McDonald's continues to post quarter after quarter of impressive growth, one has to wonder just how long it will be before executives at Starbucks (SBUX) "consider the competition."

On Monday, McDonald’s (MCD) announced that global comparable sales rose 8.2% for the month and 7.0% for YTD November. Systemwide sales for McDonald’s restaurants worldwide increased 16.3% in November, or 9.6% in constant currencies.

In the U.S., comparable sales increased 4.4% for the month as consumers continue to enjoy McDonald’s Premium Roast coffee and breakfast menu selections, compelling Dollar Menu options and convenient restaurant operating hours.

McDonald's Chief Executive Officer Jim Skinner said, "McDonald’s commitment to evolve the restaurant experience to achieve even greater customer relevance continues to deliver results. Again in November, each area of the world contributed to our strong top-line performance."

People out there are indeed fearful of the economy. We can debate whether of not that fear is warranted all day but this simple fact is they are. When they feel that way the first thing that gets cut are the luxuries that are easily replaceable. Starbucks coffee fits the bill perfectly.

When you consider how many households have their own cappuccino machines or "K" cup coffee systems, a $5 plus beverage is going to be passed on. When you consider that I can get one at McDonald's for $2, or, make it myself for about 60 cents, then the $5 purchase will just not be made. Judging from recent results at Starbucks, there are ton of folks out there that feel the same way.

Starbucks shares have seemingly bottomed at $23, down from near $40 earlier in the year. Seemingly is the key word. Should Starbucks not impress with results in the current quarter when people are gift giving and in a spending mood, the outlook is indeed dire and shares will fall further.

MCD vs. SBUX 1-yr chart:

Comments

[omooc:]

As a senior citizen (I am just one year shy of being an octogenarian), I can buy coffee at MCD for 50 cents (some stores offer it at 25 cents). The quality is comparable to that at SBUX. During the Money Show in DC last October, I had occasion to taste 4 different coffee one day: (1) in the morning, at SBUX, which has a shop on the hotel premises, (2) during break, at a booth in the exhibition hall where a coffee grower was promoting his chain, (3) at lunch, where an oil company was soliciting participants to its drilling venture, and (4) on the way home, at a MCD. Clearly, that at (2) was the best; (1), (3) and (4) were about the same -- but (4) must be rated as a Best Buy. omooc

2007 Dec 12 11:37 PM

[CrossProfit:]

"comparable sales increased 4.4%"

At SBUX this figure was 5%.

Why do you think that SBUX is feeding into MCD? The opposite is more likely from the figures, given that MCD is a much larger chain and this was the first full quarter that the entire chain offered premium coffee.

Why do people constantly compare two different types of coffee when doing a price comparison? Yes, SBUX is more expensive, but only slightly.

Compare a latte with latte, drip with drip etc.

As to the comment above, 'omooc', where does MCD offer a cup of coffee for $0.25? Perhaps as an add on to a meal, but not as a stand alone purchase. There seems to be a lot of anti SBUX sentiment going around which took off after the last price increase.

CrossProfit

2007 Dec 13 01:55 AM

[firboy4:]

I believe that a lot of Starbucks coffee drinkers will be quite tempted to try out McDonalds coffee and find it satisfactory enough to spend more money there, thus making Starbucks lose market share. I only say this because there are times when I have just read some bad economic news or had to spend more on gas or something else. And I try to make up in little ways to regain that money spent. And that would be by at least trying a cheaper similar item, not only, but including coffee products.

Now I would assume that Starbucks biggest item is a simple cup of coffee, and since McDonalds now has a similar item, I'll bet that there will be lots of people who can't really tell much difference, or enough to warrant paying more for a better cup, when the one at McDonalds is at least almost as good.

Though I don't go out of my way to drink either Starbucks or McDonalds coffee, I will say that I used to work for a gourmet coffee roaster, and found that people's tastes in coffees are so varied, that sometimes I wonder if you just put the right environment or packaging on some Folgers it would sell just as well, and people would think it's just the best coffee they've ever had!

I have no faith in Starbucks anymore at a stock to own. Not only are they going to open way too many stores this year, but they are also going to have more competition from Dunkin' Donuts who, from what I hear, are going all out to open their operations connected to tons of convenience stores. And people DO like their coffee too!

2007 Dec 16 05:37 PM