McDonald's and Starbucks' Java Joust

• Email
• Share
• Print

McDonald's (NYSE: MCD), home of the Big Mac and world-famous French fries, has been getting a lots of publicity lately for going gourmet with its coffee. Recent stories from BusinessWeek, the Associated Press, and the Chicago Tribune, among others, have touted the forthcoming rollout of the fast food outfit's premium-roast brew. Notably, Tuesday's Tribune story was accompanied by a photo of a McDonald's employee out on the street, serving free cups of joe to passersby from a backpack full of coffee.

In a move that's hard to consider pure coincidence, Starbucks (Nasdaq: SBUX) announced yesterday that a week and a half after the nationwide launch of McDonald's new coffee, it will hold the first-ever "Starbucks Coffee Break." For a few hours on that March 15, Starbucks will treat the general public to free cups of coffee, both inside its stores and via employees on streetcorners lugging -- you guessed it -- backpacks full of coffee.

The news shows that Starbucks is responding aggressively to the new challenge -- as well it should. For people seeking a coffeehouse atmosphere, McDonald's can never truly compete. But for the commuter who just wants a premium cup of coffee, the Golden Arches are a formidable force. If you thought Starbucks had a lot of locations, consider that at 13,000 restaurants, McDonald's has nearly twice as many venues as the coffee purveyor. Price is another factor; a twelve-ounce cup of McDonald's premium coffee will be $0.30 cheaper than Starbucks'.

Of course, investors shouldn't panic about the challenge from McDonald's. Starbucks will surely keep a loyal clientele by continuing to offer one-of-a-kind specialty products. The latest example of this strategy is the company's plan to begin selling coffee from Rwanda, an initiative that plays both to socially conscious customers and those simply looking for something unique.

In the final analysis, McDonald's premium brew will probably peel away some value-minded customers, which might dampen Starbucks' growth somewhat. To stay competitive over the long term, though, Starbucks may just have to learn to let these folks go. The coffee purveyor's long-term success lies in selling premium coffee to customers willing to pay for its taste, not on offering a lowest-price guarantee.

For more on the brewing coffee competition:

• Is Starbucks Getting Cold?
• Next: McDonald's Riches Brew

Fool contributor Brian Gorman is a freelance writer in Chicago. He does not own shares of any companies mentioned in this article.