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Starbucks is under attack from the french fry king


I like Douglas McIntyre’s 24/7 Wall Street blog a lot but today, over on bloggingstocks.com, he’s questioning the McDonalds-Starbucks competition that’s so obvious I wonder what he’s missing. First the news: McDonalds once again reported strong monthly sales growth, up 13% overall and 8% at stores open over a year. McDonalds shares (Symbol: MCD) are up a tad on the news and Starbucks stock (SBUX) opened down a touch but is now up a touch. Regardless of the minute to minute machinations, and contrary to Doug’s questioning, every current or potential Starbucks shareholder ought to be worried — very worried — about what Ray Kroc’s empire is up to in coffeeland because the Golden Arches are aiming to take away as much of the Green Mermaid’s livelihood as they can.

As I’ve written about before, McDonalds coffee foray has been aimed at Starbucks’ customers since the beginning. Maybe he missed some of the TV commercials I blogged about in March, 2006, or the new restaurant layouts that BW wrote about starting last May? While McDonalds doesn’t offer the fru-fru $6 whipped cream concoctions that seem like they should be super-profitable, the burger chain is taking away Starbuck’s quick serving, high margin bread and butter. Why, I do believe it was Starbucks own management that blamed the popularity of Frappuccinos for driving away customers and depressing profits last summer?

And the burger chain’s strategy is also working, as anyone can see. Here in my own leafy suburb west of Boston, a Starbucks outlet is doing less business since the Golden Arches started offering premium hot and iced coffee. And word around town is that the chain recently canceled plans to open a second store which would have been in even closer proximity to the local Mickey D’s.

Or go back and review the infamous Schultz memo (via starbucksgossip.com) from Valentine’s Day. Chairman Howie lays it out so clearly it’s obvious. As Starbucks ignored and paved over its roots as a real coffee house, it opened the door for competitors that lacked those characteristics to undercut the chain on price and service. I can’t put it better than Howie’s own words:

“I take full responsibility myself, but we desperately need to look into the mirror and realize it’s time to get back to the core and make the changes necessary to evoke the heritage, the tradition, and the passion that we all have for the true Starbucks experience. While the current state of affairs for the most part is self induced, that has lead to competitors of all kinds, small and large coffee companies, fast food operators, and mom and pops, to position themselves in a way that creates awareness, trial and loyalty of people who previously have been Starbucks customers. This must be eradicated.”

In Morningstar analyst speak, Starbucks filled in its moat, the barrier to entry that would-be competitors would have to scale to challenge the chain in its core market. As far as I can tell, Howard and Co. have done absolutely nothing yet to address — let alone eradicate — this problem. Last month, they were unveiling an expanded menu of food. That seems like going backwards. If the green mermaid wants to stay afloat, she’d better get back to basics.


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