10 Possible Starbucks Responses to McDonald's Coffee Threat

Jan. 09, 2008 2:09 PM ETSBUX, MCD7 Comments
Bill Conerly profile picture
Bill Conerly

I've used Starbucks' (SBUX) business strategy as a way to discuss the Trial and Error Economy (here and here). I'm not, by any means, the world's greatest expert on the company, but it provides a great vehicle for teaching about corporate strategy. Now, according to the Wall Street Journal, McDonald's (MCD) will sell premium coffee drinks made by baristas at most of their 14,000 stores.

How should Starbucks react to the McDonald's threat? Here are some ways:

1. Do nothing. Best implemented with one's nose high in the air, saying that Starbucks customers would never buy coffee at McDonald's. Would work very well for three to six months. Ignores the reality that Starbucks' recent growth has come not from Volvo-driving college grads, but from lower-income, less educated people than they originally served. These are people comfortable at McDonald's.

2. Cut prices. This is the time-honored method of competition. As an economist, I love price cutting. As a business consultant, I almost always advise clients to avoid a price war. In the case of Starbucks, I'd ask the company, "Who do you think has the lower cost structure?" Not only should we look at labor costs, but consider this: at 9:00 am, McDonald's has lots of excess capacity. Serving an additional customer is very cheap. At the same time, Starbucks' chairs are full and there's a line at the order counter. Serving additional customers means real estate expansion and hiring more staff.

3. Differentiate the product. In the classic form, the existing customer begins to differentiate, highlighting their product superiority. Of course, Starbucks is already selling a product that it has successfully differentiated. The practical way to do that now, in the face of McDonald's, is a "nobody makes a latte like Starbucks" campaign (using a catchier slogan than I just suggested, but pushing that theme.)

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Bill Conerly profile picture
Dr. Bill Conerly connects the dots between the economy and business decisions. He has the unique combination of a Ph.D. in economics from Duke University and over 30 years’ experience helping companies adapt to changing economic conditions. He has worked in economics and corporate planning at two Fortune 500 corporations and at a major bank, where he was senior vice president. He has earned the Chartered Financial Analyst (CFA) designation.   Companies have used Dr. Conerly’s expertise to help with decisions regarding capital expenditures, inventory levels, expansion into new markets, pricing, business models and financial structure. Dr. Conerly is an on-line contributor to Forbes.com and the author of The Flexible Stance: Thriving in a Boom/Bust Economy (2016) as well as Businomics (2007). He had been interviewed on the News Hour with Jim Lehrer, CNN and CNBC. He has been quoted in the Wall Street Journal, Fortune Magazine, and USA Today.

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