McDonald's (MCD) New Coffee Play: End Of Starbucks (SBUX) As Growth Company

McDonald’s (MCD) will open coffee bars at 14,000 of its US outlets. According to The Wall Street Journal the "locations will install coffee bars with "baristas" serving cappuccinos, lattes, mochas and the Frappe, similar to Starbucks’ ice-blended Frappuccino."

McDonald’s says it anticipates sales of $1 billion a year from the new business. That figure is over 10% of Starbucks global top line and closer to 15% of US revenue. If the big fast food chain is successful, it could take out most of the coffee company’s domestic revenue growth.

The "big hurt" at Starbucks has been coming for some time. McDonald’s got into the premium coffee business over two years ago. Other companies like Dunkin’ Donuts also like the high margin business. Starbucks has tried to fight back with a breakfast food menu of its own. The move does not seem to be drawing more customers as US same store sales growth as slowed.

Shareholder concern about competition for Starbucks has cut the stock in half in just over a year. It now trades near a 52-week low, changing hands at $18.11.

The shares are likely to go much lower on the McDonald’s news and could certainly drop below $15 if the new initiative causes Starbucks traffic to move away from visiting its stores.

A lot of McDonald’s stores are open all night. Starbucks management is not going to be able to sleep. Maybe they should stop by.

Douglas A. McIntyre

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