McDonalds Coffee Bars?

Fast-food giant plans to serve up lattes at all U.S. outlets.


McDonald’s Corp’s plan to expand the beverage
lineup at its U.S. restaurants with cappuccinos, lattes and other
drinks is expected to add $1 billion to annual sales, a spokeswoman
said on Monday.
The
espresso-based drinks, which are currently in 800 of McDonald’s nearly
14,000 U.S. locations, mark the newest effort by the world’s No. 1
restaurant company to upgrade its coffee offerings and take on rival
Starbucks Corp.
McDonald’s
has even added a “barista” position in its restaurants and dedicated a
section of counter space to the automated espresso machines so
customers can see the drinks being made, spokeswoman Danya Proud said.
Those details were first reported Monday in the Wall Street Journal.
But though McDonald’s expects the coffee
drinks, smoothies and new bottled beverages to add $1 billion to its
annual revenue (the company recorded $21.6 billion in sales in 2006),
investors and analysts said they do not expect much of that to be at
Starbucks’ expense.
“People
don’t go to McDonald’s for their coffee, they go for their food,”
Friedman Billings & Ramsey analyst Howard Penney said in an
interview. “It’s ridiculous to think that McDonald’s is going to take
all of Starbucks’ business. Even McDonald’s doesn’t think that’s going
to happen.”
In the
last year, Starbucks shares have fallen 48 percent on investor fears
about slowing U.S. sales growth, soaring dairy prices and increased
competition from McDonald’s, Dunkin’ Donuts and other fast-food rivals.
McDonald’s stock, meanwhile, has climbed 33 percent as extended hours,
demand for breakfast offerings and other new products have fueled U.S.
growth.
About one
in five Americans drinks some kind of espresso-based coffee each day,
and the market is supposed to grow by at least 4 percent each year
until 2011.
In
November, Don Thompson, president of McDonald’s USA, announced the
aggressive plan. "We want to move from beverages as an accompaniment to
being a beverage destination,” Thompson said in a November meeting with
analysts. “Our speed, our convenience, the value that we can afford to
customers without quality comprise will make us a formidable player.”
One
McDonald’s investor said the Golden Arches’ foray into espresso-based
drinks would still not provide the choice that many die-hard Starbucks
customers have come to expect. As a result, McDonald’s could end up
taking market share from other relative newcomers to the latte field.
“If
you want a half-caf, no-whip, low-fat, sugar-free, raspberry syrup
latte you are probably not going to get that at a McDonald’s,” said
Janna Sampson, co-chief investment officer at OakBrook Investments in
Lisle, Illinois. “But you aren’t going to get that at Dunkin’ Donuts
either. It’s a more direct hit at Dunkin’ Donuts’ business.”
Still,
fears about competition have helped drive Starbucks’ multiple below
that of McDonald’s. The stock trades at about 17.6 times analysts’
average 2008 earnings estimate, compared with a multiple of 18 for
McDonald’s shares.
In
2007, Consumer Reports magazine rated the McDonald's drip coffee as
better-tasting than Starbucks. Starbucks responded that taste is
subjective and its millions of customer visits per week demonstrated
the popularity of its coffee.
According
to the Wall Street Journal, only about 800 of McDonald's have the
specialty coffee drinks now, and some may not get the full beverage
program until 2009.
Dunkin’
Brands Inc. added espresso beverages to Dunkin’ Donuts shops in 2003
and credits the full-line of coffee drinks with helping its aggressive
growth plans.
And
Canadian coffee chain Tim Hortons, which is expanding its own U.S.
presence, said customer demand for one-stop food and coffee shopping is
growing.
A full-court press by McDonald’s couldn’t come
at a worse time for Starbucks Corp., the world’s largest chain of
coffee houses, which is struggling with rising dairy prices, growing
competition and flattening store traffic in the U.S.
In
a note to clients on Monday, Penney said Starbucks shares are “severely
undervalued,” adding that the current multiple does not reflect the
value in its fast-growing international or consumer products businesses.
Starbucks’ biggest opportunity to ( No Swearing ) investors, however, is to slow the rate of its domestic store growth, Penney said.
“They
shouldn’t be growing as fast,” he said. “The biggest thing they can do
to improve their rate of growth is to slow the domestic unit growth.”