Why This Starbucks Strategy Is a Big Threat to McDonald's

Traditional fast-food rivals Burger King and Wendy's may be stealing away McDonald's customers with revamped menus, but it's companies like Starbucks and Dunkin' Brands that may be the bigger long-term worry.

May 22, 2014 at 11:37AM


Wikimedia Commons: Michael Rivera.

Starbucks' (NASDAQ:SBUX) growth story, even in the seemingly saturated U.S, is far from over. And its latest growth strategy may hit McDonald's (NYSE:MCD) where it hurts.

We're not talking about Starbucks' push into breakfast foods, although that's certainly an area where it poses a threat to the Golden Arches. We're talking about the drive-through window, the hallmark of nearly every non-urban McDonald's in the U.S. over the past 30-plus years.

Starbucks is ramping up growth of its drive-through restaurants. The reason is simple: People already in their cars don't want to get out of their cars when they don't have to, and that can serve as the deciding factor as to where they grab a coffee and a sandwich.

The company is planning 1,500 new stores in 2014, including 600 in North America. Many of those new stores -- approximately 60% -- will have a drive-through window.

The push coincides with Starbucks' continuing expansion into food sales. The company sees opportunity, and so far, it says results have been promising.

Here's CEO and Chairman Howard Schultz on the subject:

Highly profitable drive-throughs represent a significant growth opportunity for us and continue to remain a focal point of our store development efforts. And with this tremendous success ... we are leveraging our drive-through store portfolio to provide further incrementality and add new runway for growth that is strategically complementary to our high-profile urban street-front locations.

And Cliff Burrows, group president, U.S., Americas, and Teavana, perhaps more succinctly:

One of the things [that has] been really encouraging for us is the strength of adoption and purchase of food items through the drive-through.


Drive-throughs are convenient for all kinds of reasons -- weddings included. But food, probably more so. Source: Wikimedia Commons/Larry D.Moore.

Attacks from above and below
The timing of Starbucks' push into drive-throughs and food couldn't be worse for McDonald's. The Golden Arches are struggling to stem the loss of customers from the chain's U.S. stores. How bad has it gotten? The flat same-store sales the company reported in April were a significant improvement over the losses it recorded over the prior few months.

As more traditional rivals Burger King and Wendy's revamp their menus and look to siphon off some of McDonald's customers, America's fast-food standard-bearer is also facing increasing competition from nontraditional rivals like Chipotle, Starbucks, and Dunkin' Brands (NASDAQ:DNKN).

Companies like Starbucks and Dunkin' Brands may be disrupting the market more than those traditional rivals, as they expand far beyond coffee and pastries and look to breakfast, lunch, and beyond to grow business.

America runs on drive-through
The drive-through is also a key component of success at Dunkin'. More than 80% of the Dunkin' Donuts locations opened in 2013 are drive-throughs, and company executives say these windows are key to "making it even easier for guests to use our brand every day."

One concern as the Boston-based chain expands further into pricier real-estate markets like California is the ability for its franchisees to find good locations that can accommodate drive-through windows. Dunkin' management made the point last month of addressing these concerns. Here's CEO and Chairman Nigel Travis:

To get rid of some myths, our franchisees are finding sites, they're finding sites with drive-throughs. They're signing sites with drive-throughs. They're excited, based on what they tell me, about what they're seeing...

This is important, as Dunkin' has plans to aggressively expand in the U.S. It's eyeing 15,000 locations, long term, up from its current 11,000.

The Foolish bottom line
The U.S. is not McDonald's only significant market. In fact, some of the biggest opportunity lies in China and other emerging markets. But the U.S. remains key to the Golden Arches, and times are tough in the company's home market. As traditional rivals like Burger King and Wendy's revamp menus to claim a bigger share of the fast-food market, McDonald's has another worrisome concern: the expansion of chains like Dunkin' Donuts and Starbucks into breakfast, lunch, and dinner.

Drive-throughs play a key role in that expansion, and both Dunkin' and Starbucks are boasting of progress on that front. That's good news for investors in those companies, but bad news for the Golden Arches.

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John-Erik Koslosky owns shares of Chipotle Mexican Grill. The Motley Fool recommends Burger King Worldwide, Chipotle Mexican Grill, McDonald's, and Starbucks. The Motley Fool owns shares of Chipotle Mexican Grill and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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