Earnings Police Go After McDonald's (MCD) Premium Coffee

Probably the worst thing that ever happened to Starbucks (SBUX) was when McDonald’s (MCD) went into the premium coffee business. Consumer Reports even rated the fast food chain’s java ahead of the sludge that Starbucks is serving.

McDonald’s has 14,000 US stores, so it holds a natural advantage for product distribution.

Just as the number of people who want to buy expensive coffee from Starbucks has slowed, McDonald’s is finding out that the latte business may not match hawking cheap, greasy hamburgers to overweight Americans.

According to The Wall Street Journal, as MCD hits earnings time, "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." Sales of the good stuff are not going as planned.

The dream of every executive at Starbucks will not come true. McDonald’s is not going to drop out of the high-end coffee business because it can afford to hang in for the long-term. Management at the fast food chain has earned the right to keep products in the market for extended periods by murdering Wall St. expectations for the last five years and pushing the company’s stock up almost 170% over the same period. Shares in Starbucks are up about 5% during that stretch.

McDonald’s probably reasons with some conviction that Starbucks is weakening and that is an opportunity. The coffee company still charges more for most of its drinks than McDonald’s does. Starbucks has lost a great deal of its hip sheen. It has become an assembly line retail outlet staffed by employees who may be more worried about losing their jobs than they are whether the next customer wants a muffin with that cup of Joe.

McDonald’s will stay in the extra-special coffee business because it knows it can make a buck on it. Bringing in the kind of profit margins that Starbucks does on its products is just too attractive.

Douglas A. McIntyre