As McDonald's Struggles, Starbucks Makes a Move Into Burgertown

McDonald's struggles continue in the U.S. Word that Starbucks plans to start making burgers isn't good news for the Golden Arches.

Jun 12, 2014 at 6:00PM

U.S. same-store sales were down again for McDonald's (NYSE:MCD) in May. The 1% dip comes on the heels of flat sales in April, which followed five straight months of declining comps for the company.


Wikimedia Commons.

And if that weren't reason enough to worry, one of the Golden Arches' key competitors in the coffee and breakfast arena recently announced that through its La Boulange concept, it plans to start serving up the dish that made McDonald's famous: the hamburger. 

The move was just the latest for Starbucks (NASDAQ:SBUX) that looks to take a bite from the fast-food standard-bearer's bread-and-butter menu offerings. If McDonald's is starting to feel a little paranoid, watching over its shoulder for Howard Schultz and the Seattle-based coffee-shop chain, you couldn't blame the company.

Breakfast, drive-thoughs, and burgers
First, Starbucks made a move into breakfast, selling hot sandwiches that look a lot like upscale versions of the McMuffin line. Then, it announced plans to expand into lunch and dinner. And that comes at a time when it's made it very clear that drive-throughs are now a key part of its growth strategy moving forward.


Wikimedia Commons: Elvert Barnes

Now there's word that Starbucks plans to start selling burgers. For now, it's only at one La Boulange restaurant opening in Los Angeles this month. But the reason this could be trouble for McDonald's is that it fits in with the larger trend of what's been happening in fast food here in the U.S. over the past several years.

While McDonald's continues to see growth outside the U.S., it's struggling in its home market. The reasons -- at least some of them -- seem apparent. Chains such as Starbucks, Chipotle Mexican Grill, Panera, and Dunkin' Brands' Dunkin' Donuts have been thriving.

Chipotle, for example, posted a phenomenal 13.4% same-store sales increase over the prior-year quarter reported in April. The average bill was up by just 2%, so that growth was driven primarily by more customers coming into each store.

McDonald's, meanwhile, is seeing customer traffic tail off.

Fast casual is the new fast food
While "fast casual" eateries like Chipotle, Panera, and Starbucks have been seen largely as something separate from fast food, what really seems to be going on here is a redefining of fast food in the U.S. Fast causal is really just better fast food, and customers are willing to pay up for fresher ingredients, a promise of healthier and more natural fare, and a less fast-foody atmosphere.

Traditional fast-food players like Wendy's have looked to make adjustments. The company is more than a year into plans to upgrade its menu with more premium offerings and to begin building stores that are more like modern, fast-casual restaurants.

McDonald's, too, has revealed that changes are on the horizon. The company plans new updated kitchen stations that will allow restaurants to offer a wider array of fresh ingredients and condiments so they can customize sandwiches to order.

But these moves are attempts to catch up with a trend that is already well under way. These changes -- and likely more that are yet to be made -- may well help stem some of the customer losses to fast-casual chains. But with players like Chipotle and Starbucks going great guns, the traditional fast-food players are likely in for more rough times ahead.

The Foolish bottom line
While same-store sales were positive worldwide, McDonald's continues to struggle in the U.S. The increasing expansion of Starbucks into food and the drive-through business isn't going to help the Golden Arches. Starbucks' move into burgers through La Boulange may just be in its infancy, but if customers in California find it to their liking, the one-time coffee-shop chain may end up taking a bite out of McDonald's Big Mac business, as well.

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John-Erik Koslosky owns shares of Chipotle Mexican Grill. The Motley Fool recommends and owns shares of Chipotle Mexican Grill, Panera Bread, and Starbucks. The Motley Fool recommends McDonald's. 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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