Is Starbucks Bracing for a Mac Attack?

Starbucks

A battle may be brewing between two once-unlikely contenders: the burger behemoth known for low-cost fast food and the Seattle giant that took the price of a cup of coffee to new heights. As Starbucks Coffee Co. puts its visionary chairman Howard Schultz back in the driver’s seat and announces a “transformation,” a spokeswoman for McDonald’s Corp. confirms a report that it plans to launch coffee bars in its 14,000 US locations.

The report first appeared in The Wall Street Journal, which also said the McDonalds units would be staffed with “baristas” who would serve cappuccinos, lattes and other specialty coffees. Quoting internal McDonalds documents, the article said the program was expected to add $1 billion to the company’s annual sales.

“Think of what it will take to staff up 14,000 locations. This can’t be simple,” says James Tenser, principal of Tucson-based VSN Strategies. At the same time, Tenser notes, “Starbucks has struggled with adding food to the menu. While changing out space and recruiting and training ‘baristas’ at McDonalds units will be challenging, it may not be as difficult as Starbucks going McDonalds’ way.”

The significant margin in coffee, compared with cheeseburgers, Tenser adds, “should not only be welcomed at company-owned units but also attractive in getting McDonalds’ franchisees to buy in. It is a challenge for any large company with substantial franchisees to bring them on board.”

In a leaked internal memo last February, Schultz, then chairman of Starbucks, warned management of decisions “that, in retrospect, have led to a watering down of the Starbucks experience, and, what some might call a commoditization of our brand.” This month, Starbucks fired CEO Jim Donald and put Schultz back in charge.

Within weeks, Schultz, who now carries all three top titles, unveiled a “leadership team who will be responsible for executing the company’s transformation agenda.” In a statement, he describes the focus as “providing customers with a superior Starbucks Experience and building on Starbucks legacy of innovation.” The company has also announced that it is lowering its 2008 expansion plans a tad, now calling for 2,500 new units this year, versus the previously announced 2,600.

“McDonalds’ shares are up and Starbucks are down,” Tenser notes. Of Starbucks, he tells GSR, “a business that grows that fast has its reality check. Its smart to go back to its roots, and it was sure to face a challenge. That doesn’t mean that it can’t continue to grow, but this is a predictable moment.”

Tenser acknowledges that he did not anticipate that the challenge might come from McDonalds, but adds, “it is brilliant of McDonalds to upgrade its coffee. I’ll bet you tomorrow’s cup of coffee that it will try to chip away at price, and there’s room in there while still making a hefty profit.

“There is probably room for both concepts: a group of Starbucks loyalists and others who appreciate good coffee but not at $4 for a latte and can get something equivalent for $2.50 and also get a hamburger at the same time,” he continues. “Starbucks has status as a place to hang out,” he adds alluding to Schultz’s early description of Starbucks as a “third place,” which is not home and not work.

“I don’t think McDonalds will ever succeed at becoming a place for college kids to gather,” says Tenser. “The battle may be over grabbing customers at an ‘either/or moment.’ People have blended behavior and they may patronize both Starbucks and McDonalds, each part of the time.”

Although there are now some drive-through Starbucks, Tenser points out, “the McDonalds’ concept is to bring them in and move them through versus sit down and relax. It will be interesting to see if McDonalds will come up with an espresso machine that delivers consistent quality quickly. Especially at peak times, they need to move efficiently.

“Whether they can come up with a reliable machine and trained personnel will soon become apparent,” he predicts. “Certainly McDonalds University will be going overtime. This is a really big strategic shift.”

In response to GSR’s request for a comment from McDonalds regarding the Wall Street Journal report, a spokesman provided a statement, which says, “Specialty coffee is currently in test in more than 800 US restaurants. With the success of our specialty coffee test, we’ll expand these offerings in our restaurants.” She later acknowledged that the WSJ article “is correct.”