The McStarbucks Menace?

Just how upmarket can McDonald's (NYSE: MCD  ) go? We'll find out this year, as the world's leading fast-food chain starts rolling out coffee bars within its namesake burger joints, complete with their own McBaristas.

You probably saw this coming. Chains like McDonald's and Burger King (NYSE: BKC  ) have been upgrading their brews and testing exotic spins like iced coffee with hazelnut syrup recently.

I realize that I was one of the first to plead for Mickey D's -- or is that Mickey D-Caf now? -- to play the Starbucks (Nasdaq: SBUX  ) card four years ago. Then again, McDonald's was in a funk at the time, while Starbucks was thriving. Now that the roles are reversed for each company's shareholders, I'm less sure that I want to see espresso machines beneath the Golden Arches.

This morning's Wall Street Journal details the rollout plans. Carrying through on last year's initiative to upgrade its beverage offerings, the chain will start selling lattes, cappuccinos, and mochas later this year. There is even the Frappe, a clone to Starbucks' signature chilled Frappuccino coffee drinks.

Test markets have been dishing out espressos for $1.99 to $3.29 -- price points $0.60 to $0.80 lower than what the local Starbucks charges.

Has it hit you yet? The sinking feeling in your gut that McDonald's is biting off more than it can brew this time?

Please, anything but the Big Macchiato
Barbell pricing has fueled McDonald's revival, perking up both ends of the pricing spectrum. The company was able to offset its foray into higher-priced, higher-quality entrees like premium chicken salads and white-meat chicken tenders with a broader Dollar Menu of popular items.

But will that barbell now land on McDonald's feet, once consumers calculate that a large latte is the financial equivalent of three double cheeseburgers?

It's hard to fathom that McDonald's will attract the same crowds that frequent the aromatically stimulating local Starbucks. The in-store experiences are just too different:

  • Instead of percolating coffee and hip tunes, McDonald's patrons are likely to smell and hear the sizzle of deep-fat fryers.
  • You can't stretch out as you read the morning paper, or fire up your Kindle in a soft armchair. McDonald's stiff plastic seating is designed for easy cleanup of the honey mustard and ketchup stains left behind by messy eaters.
  • It's hard to feel you've escaped to a Milan coffee shop when a mother a few tables down berates her child for losing a sock in the McPlayplace crawl tube.

Those aren't the only factors working against McDonald's. Syrups in test markets are limited to vanilla, caramel, and mocha. Isn't this awfully similar to the fudge, caramel, or strawberry toppings on Dollar Menu sundaes? It seems that Mickey D's having a hard time straying from its thrifty roots.

Better luck at the drive-thru
Still, I don't think McDonald's is entirely out of whack here. Now that Starbucks is riskily ramping up its locations with drive-thru windows, McDonald's is positioning itself nicely as the home team.

A crippling Consumer Reports article last year deemed McDonald's premium roasts better-tasting than Starbucks'. The move inspired Starbucks founder Howard Schultz to wonder if his company had lost its soul.

The only thing that Starbucks has certainly lost is its market premium. The stock was downgraded by Bear Stearns last week, even after the shares had surrendered more than 40% of their value in 2007. Want to know the one thing that Starbucks and McDonald's have in common? They're both trading at 18 times this fiscal year's profit target.  

McDonald's move will hurt casual java havens. If Caribou (Nasdaq: CBOU  ) isn't profitable today, it will be that much harder to turn the corner when every fast-food and convenience store is pimping discounted cups of joe.  

The McDonald's beverage overhaul isn't limited to premium coffees. It has Jamba (Nasdaq: JMBA  ) in its sights with its new fruit smoothie offerings. And the addition of bottled beverages is an upmarket move that may bump up McDonald's against places like Panera (Nasdaq: PNRA  ) , especially if menu upgrades follow.

However, the most hotly contested battle is brewing in coffee -- if not within McDonald's itself. Will its attempt to be the jack of all edible trades dilute its brand? If so, McDonald's barbell approach could soon transform the burger giant into the ultimate dumbbell.


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