McDonald's Thirst for Power

If you thought the concept of premium coffee at McDonald's (NYSE: MCD) was a little weird, well, you ain't seen nothing yet. The fast-food giant is exploring sprucing up its beverage lineup with thirst quenchers such as smoothies, iced coffee, and -- gasp! -- espresso drinks.

By all accounts the premium coffee offering at McDonald's seems to be going well; in some stores, McDonald's even offers Newman's Own, a coffee co-branded with Green Mountain Coffee Roasters (Nasdaq: GMCR). Meanwhile, McDonald's recently got the top honor in a coffee survey by Consumer Reports.

I'm not sure why, but maybe it's just the competitive landscape that brought this old story to mind: Krispy Kreme's (NYSE: KKD) doughnut-flavored beverage from several years back. As easy as it is to joke about doughnut-flavored drinks, Dunkin' Donuts, McDonald's, and Krispy Kreme have all been known to take pot shots at Starbucks (Nasdaq: SBUX) over the years, trying to take a bite out of its sales and success.

The concept of McDonald's serving up smoothies and espresso drinks probably couldn't come at a worse time for Starbucks. Psychology seems to be getting increasingly negative when it comes to how well the company's brand can survive its growth and continued pressure from rivals. Even Chairman Howard Schultz recently gave the company's executives a stern talking-to in a memo that brought up the risk that Starbucks is losing its soul.

The Wall Street Journal said McDonald's is currently testing specialty drinks and may soon offer espresso drinks like vanilla lattes, iced mochas, caramel cappuccinos, and other such drinks in more stores. These drinks would be dispensed by machines. (So much for the coffee-making theater Schultz spoke of in his memo; McDonald's isn't going to do that by definition, and perhaps this highlights why Schultz's warnings should be heeded. It makes sense that Starbucks should differentiate itself as rivals become more aggressive.)

At any rate, all commentary points to McDonald's trying not only to retain its breakfast crowd, but also to make its restaurants "destinations" through these new drinks, luring new customers into the Golden Arches. Although I've been pretty optimistic about McDonald's business initiatives over the last couple of years, I can't really imagine its stores as a place to kick back and slowly savor gourmet coffees. Fast food is frantic (not to mention a bit greasy), and McDonald's isn't about the overstuffed couches and the dim lighting that has made Starbucks a pleasant place to take a load off, read a book, chat with friends, or work on one's laptop. Then again, let's not underestimate the appeal of fast, cheap, to-go beverages.

I don't think it's prudent to underestimate McDonald's, since it's been doing extremely well lately. Although I am also optimistic about Starbucks for the long term, it needs to stay true to its roots and continue differentiating itself as its rivals become steadily more aggressive.

For related Foolishness, see the following articles:

• McDonald's has beefed up profits recently.
• Starbucks had a stirring quarter.

Starbucks is a Motley Fool Stock Advisor recommendation. To find out what other companies David and Tom Gardner have recommended to subscribers, click here for a 30-day free trial.

Alyce Lomax owns shares of Starbucks. The Fool has a disclosure policy.