Jan 8, 2008

Fried vs. Ground

As Howard Schultz takes over the reigns of Starbucks once again, The Wall Street Journal is also reporting that McDonald’s is preparing to open its own coffee bars in an attempt to take on Starbucks. It seems McDonald’s plans on having espresso makers and actual “baristas” in a special section in the front of the store in order to sell their high-end coffee drinks.

And while most analysts are treating this as a head-to-head competition, I’m not really seeing it that way. To me, it’s a questionable move by McDonald’s to sell overpriced coffee drinks to the vast blue collar market that’s unserved by Starbucks.

Let’s face it: in January 2008, the presence of a Starbucks on the corner is as good an indication as any that you are in an upper middle class neighborhood, or a business district favored by white collar professionals. I mean I’ve even read articles about towns pleading with Starbucks to open a store there so as to advance their efforts towards gentrification. And while Starbucks has expanded way too rapidly in recent years, there are still vast swaths of the country where the words “venti soy latte” are never heard.

The McDonald’s coffee bars have their best opportunities in those areas where Starbucks are few and far between and in business districts where speed and convenience are far more important than brand preference. That said, I’m still not convinced that your average McDonald’s customer is going to want anything to do with a $3 caramel macchiato or that the competing smells of brewed coffee beans and deep-fried fast food will be anything other than noxious.

Starbucks may have to close down stores in some of the more downscale areas where they probably shouldn’t have gone in the first place. Maybe even give up on the Starbucks McMuffins. But the market for the two behemoths seems to be wide open: each will take a different end of the market. The bigger question, to me, is will McDonald’s be able to sell high-end coffee drinks to anyone other than harried office workers, high school students and road trippers?

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