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Why McDonald's Should Take a Page Out Of Starbucks' Playbook

By Tamara Walsh - Sep 23, 2015 at 1:22PM

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McDonald's and Starbucks are both expanding their menu operations in big ways. However, the hype surrounding Mickey D's all-day breakfast may be overstated.

McDonald's (MCD -0.21%) is trying a lot of new things lately in its relentless pursuit of success. Starting next month, the burger chain will begin serving all-day breakfast. Pancake fanatics everywhere rejoiced. Even Wall Street showed its appreciation, as investors pushed McDonald's stock higher when the news broke on Sept. 2. While this is a massive operational change for the fast-food giant, it isn't the only restaurant chain that's making bold menu moves today. Starbucks (SBUX -0.33%) recently unveiled "Starbucks Evenings " -- a curated menu of wine, beer, and small plates that's now available at select Starbucks locations in the United States and U.K. markets.

McDonald's and Starbucks' attempts to expand into new 'dayparts' (a fancy industry word for different times of day), highlights an industry trend in which restaurant chains are pulling out all the stops in hopes of attracting customers from early morning to late evening. However, expanding its menu to include lower-margin breakfast items throughout the day may not boast the payoff McDonald's is hoping for. Instead, the fast-food chain should take a page out of rival restaurant chain Starbucks' playbook. After all, McDonald's did this before to great fanfare with the launch of McCafé -- more on that in a minute.

Let's take a closer look at what these new menu expansions mean for the restaurant rivals, and why Starbucks is better setting itself up for success.

Implementing the Starbucks strategy
Mickey D's has followed in Starbucks' footsteps before, jumping into specialty coffee a few years back with the successful launch of its McCafé platform. This not only introduced higher-margin products into Mickey D's menu, but also gave Starbucks' customers a cheaper option for their daily Frappuccino fix. Unfortunately, McDonald's latest menu expansion (all-day breakfast) isn't likely to have the same appeal (or profit-boosting upshot) as its McCafé concept.

For starters, McDonald's isn't offering its full breakfast menu all-the-live-long-day, as many hopeful patrons were initially led to believe. Rather, customers can choose from a limited number of breakfast items throughout the day. McDonald's will be expanding the hours when it offers hotcake platters; sausage burritos; breakfast sides hash browns, yogurt, and oatmeal; and either McMuffin or biscuit items. Ultimately, this could result in frustrated customers rather than satisfied ones.

Another reason that McDonald's all-day breakfast pales in comparison to Starbucks new direction is because McMuffins and sausages cost significantly less than McDonald's burger meals, whereas Starbucks decision to sell beer, wine, and dinner bites adds higher-margin items to its menu. I'm not suggesting McDonald's sell pinot noir with its fries, but perhaps a beefier (and pricier) burger would spur the revenue growth McDonald's seeks.  

As it stands, McDonald's is making an all-day bet on lower-margin items, while Starbucks is rolling out evening offerings that boast its priciest beverages yet: beer and wine. It's easy, then, to see why investors are flocking out of McDonald's stock and into shares of Starbucks these days.

Starbucks truffle mac-and-cheese. Source: Starbucks.

Taking stock
When it comes to creating shareholder value, McDonald's and Starbucks are on two different trajectories. Starbucks stock, for example, has gained a whopping 40% year-to-date compared to a mere 7% gain in shares of McDonald's over the same period.

The two companies have taken different directions in other areas as well recently. McDonald's was late to incorporate a digital and mobile strategy into its business, whereas Starbucks established itself as a leader in mobile technology. In fact, Starbucks recent launch of its mobile order and pay app has been a game changer for the company, and one that McDonald's may one day want to replicate.

If McDonald's truly wants to reinvigorate its business, all-day breakfast isn't going to cut it. Rather, the fast-food giant should yet again take a page out of Starbucks' playbook and add high-margin products to its menu. In the meantime, investors are better served owning shares of Starbucks today -- particularly as the coffee retailer expands into new, more profitable segments such as evenings.

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Stocks Mentioned

McDonald's Corporation Stock Quote
McDonald's Corporation
MCD
$244.01 (-0.21%) $0.51
Starbucks Corporation Stock Quote
Starbucks Corporation
SBUX
$72.48 (-0.33%) $0.24

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