Please ensure Javascript is enabled for purposes of website accessibility

Egg on Starbucks' Face?

By Brian Gorman – Updated Nov 16, 2016 at 12:16PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Starbucks should avoid anything that equates it to McDonald's.

I spend too much money at my neighborhood Starbucks (NASDAQ:SBUX). However, it may surprise you to learn that I'm not usually buying coffee. More often than I should -- for my finances or my health -- I walk a few blocks to the coffee purveyor to buy its pricey baked goods.

Based on that anecdotal evidence, I'd say that Starbucks is good at selling non-coffee consumables. So Starbucks' recent tests of a hot breakfast item, similar to the McDonald's (NYSE:MCD) Egg McMuffin, would seem like a reasonable idea. But as much as I trust management's judgment given its success to date, I still think this is a bad move.

Starbucks has been kicking around the hot-food concept for a while now. In an interview with The Motley Fool last February, Starbucks CEO James McDonald mentioned the idea of testing hot items. More recently, an article in Crain's Chicago Business played up the angle that Starbucks is elbowing in on McDonald's territory with the Egg McMuffin knockoff.

There are many reasons why adding hot breakfast isn't the coffee giant's best move. For example, hot food is bound to complicate in-store operations, potentially leading to mistakes and unhappy customers. Honestly, though, this doesn't concern me, especially considering that Starbucks has smoothly expanded its offerings in the past. The big problem as I see it is the risk to the company's greatest asset: its brand.

I just don't think Starbucks should want to be seen as McDonald's competitor -- but by offering a hearty bacon-and-egg breakfast, that seems to be where the company is drifting. Notably, the move comes as McDonald's is spiffing up its restaurants and rolling out premium coffee. As Edward Jones analyst Linda Bannister remarked, "McDonald's is moving more upscale, and Starbucks is moving more downscale."

Starbucks' downscale shift is potentially dangerous. The company thrives in part on customers' belief that Starbucks offers them unique, premium goods worth the higher price. When Starbucks starts getting compared to McDonald's, consumers might start wondering why they should spend so much at the coffee outfits' locations when, in many cases, they can get something similar across the street at Mickey D's. Those aren't the thoughts that Starbucks should want to brew.

Further decaffeinated Foolishness:

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

None

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

McDonald's Corporation Stock Quote
McDonald's Corporation
MCD
$245.95 (-0.80%) $-1.99
Starbucks Corporation Stock Quote
Starbucks Corporation
SBUX
$84.17 (-0.63%) $0.53

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
329%
 
S&P 500 Returns
106%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/24/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.