It has been assumed for several quarters that as McDonald's (NYSE: MCD) adds high-end coffee, Starbucks (NASDAQ: SBUX) might suffer. But, an analysis by Bloomberg shows that the coffee chain may be in for some very rough times. One money manager, speaking about McDonald's, told the news service, "They're a lot cheaper than Starbucks coffee in general, and they have the high quality to go with it.''
McDonald's says that it offers lattes, cappuccinos and iced brews in 9,000 U.S. restaurants. McDonald's coffee also tastes pretty good. Bloomberg reports that in March, a Consumer Reports taste test of basic black coffee found McDonald's stronger blend beat Starbucks, Burger King Holdings Inc. (NYSE: BKC) and Dunkin' Donuts Inc.
In June, rising sales of McDonald's coffee prompted Deutsche Bank Securities Inc. analyst Marc Greenberg to reduce his Starbucks stock-target price by 14 percent to $32. "The golden arches are doing coffee better,'' Greenberg wrote in an investors' note. He rates Starbucks as a "hold.''
The more Wall Street looks at the situation, the more it sees Starbucks in a bind. McDonald's has more locations and a lower price point for premium coffee. The value of Starbucks shares are based almost entirely on same-store growth and its goal to eventually have 40,000 stores worldwide.
None of that is working out for it.
Douglas A. McIntyre is a partner at 24/7 Wall St.