McDonald's (NYSE: MCD) program to sell premium coffee is not going well. That would make some sense. Even Starbucks (NASDAQ: SBUX), the kings of expensive Java, is doing poorly.
According to The Wall Street Journal, "Management may have to defend its giant bet on lattes and cappuccinos, which they want to add at all McDonald's 14,000 U.S. restaurants by next year." The newspaper says that early sales figures for the new drinks are mediocre.
If McDonald's did pull back on its sales of high end coffee-based drinks, it would be the best news Starbucks has had in a couple of years. As US same-store sales growth rates at the chain have fallen, the company's stock has moved from over $40 to below $15. Getting some competition out of the market could be critical to Starbucks recovery.
But Starbucks is not likely to be so lucky. With its massive size and tremendous cash-flow, McDonald's can afford to stay in the premium coffee business for years without a meaningful impact on its earnings. It sells too many hamburgers to be hurt by a slow start in latte sales.
McDonald's can wait Starbucks out and hope that, as things get worse for the coffee company, customers will turn to Ronald McDonald more frequently.
Douglas A. McIntyre can be reached at 247wallst.com.
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Reader Comments (Page 1 of 1)
7-21-2008 @ 2:04PM
Bill said...
Once upon a time, Micky D's had the best and freshest coffee of all the fast food places in my neck of the woods, then they came out with their gourmet coffee and offered to add the creamer and sugar then they forgot to add the same and recently even their coffee is not always fresh, a real no no for true coffee drinkers
7-21-2008 @ 3:15PM
william lindblad said...
Coffee is coffee and it is personal taste and the bean mix that count. In the last 20 years or so, there have been a major efforts to "expose" the U.S. consumer to "better taste" and
Starbucks certainly was one of the leaders. When it comes to the basic "java", they have a lot of competition, so you have to get fancy. This is great when the economy is going along good and people have some extra money to experience new taste.
When things get slow, the basic version will remain the seller and on the part of McD, this is going to be a worthless venture unless they plan on doing upscale at bottom rung price.
7-21-2008 @ 11:26PM
erisins said...
Mc Donald's can't make a decent hamburger much less decent coffee. Get real what's next the coffeeburglar?
7-22-2008 @ 12:01AM
Jason said...
Starbucks is definitely in trouble with McDonald's selling premium coffee. I would much rather stop by McDonald's and get a great cup of coffe along with their breakfast burrito :).
Jason
http://www.lonestarfinancing.com