Starbucks Vs Mcd

The Coffee Wars: Starbucks (SBUX) vs. McDonald's (MCD)

Posted Feb 12th 2008 2:15PM by Steven HalpernSteven Halpern RSS Feed

Filed under: Starbucks (SBUX), Newsletters, McDonald's (MCD), Stocks to Buy

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"I am quite confident that business students in the future will be reading case studies on the battle between Starbucks (NASDAQ: SBUX) and McDonald's (NYSE: MCD)," says value investor Charles Mizrahi.

In his Hidden Values Alert, the advisor explains, "This is a classic case of a castle with a wide moat coming under attack because the attacker believes it has caught the duke napping." Here, Mizrahi shares a fascinating over the "Coffee War."

"As background, in 1982, Starbucks had five retail stores and was selling coffee to restaurants in Seattle, Washington. It was during that year that Howard Schultz signed on to manage retail sales and marketing. After traveling to Italy, he convinced the owners of Starbucks to open a coffee bar.

"It was a huge success. One year after going public in 1992, Starbucks had 275 locations. Today, Starbucks is the leading retailer and roaster of coffee in the world. There are nearly 7,000 Starbucks stores in the U.S. and almost 1,800 in international markets.

"Schultz's genius is that he took a commodity (a cup of coffee), made it a brand, and was able to charge three times its market price. His vision was to make Starbucks serve as the 'third place' people gather, between home and work.

"As the company's expansion swept the U.S., Starbucks also began adding drive-through window service and selling breakfast sandwiches. By doing this, Starbucks encroached on McDonald's territory, and it was only a matter of time before 'war' would be declared.

"Before attacking Starbucks head-on, McDonald's scoped out the marketplace, saw what needed to be done, and then began executing. In 2003, McDonald's initiated a turnaround strategy, remodeling its stores, moving toward oversized chairs and softer lighting and colors, and even installed wireless Internet.

"In 2005, McDonald's began taste testing its coffee and in February 2007, Consumer Reports magazine rated McDonald's drip coffee as better testing than Starbucks'. In a page out of Starbucks' playbook, McDonald's moved its espresso coffee machines to the front counter.

"The company now plans to roll out coffee bars with similar-tasting beverages, served by baristas, at lower prices, to its 14,000 U.S. stores in 2008.

"Starbucks' moat had done a very good job of keeping competitors from attacking the castle. But over the past few years, Starbucks has slipped up just enough to allow McDonald's to feel confident that it could take on this coffee giant.

"Starbucks is not taking the McDonald's threat lightly. Chairman Schultz became more active, took the title of CEO, and already has made some changes. He wants to bring back the 'romance' and 'theater' that Starbucks once provided.

"In addition, Starbucks plans to reduce the number of promotions and items it offers and to focus on consistency of operations among all store employees. In other words, Starbucks is going back to basics and trying