Comparison of Coffee: Starbucks and McDonald's
Posted Feb 12th 2008 2:15PM by Steven HalpernSteven Halpern RSS Feed
Filed under: Starbucks (SBUX), Newsletters, McDonald's (MCD), Stocks to Buy
"I am quite confident that business students in the future will be reading case studies on the battle between Starbucks (NASDAQ: SBUX) and McDonald's (NYSE: MCD)," says value investor Charles Mizrahi.
In his Hidden Values Alert, the advisor explains, "This is a classic case of a castle with a wide moat coming under attack because the attacker believes it has caught the duke napping." Here, Mizrahi shares a fascinating over the "Coffee War."
"As background, in 1982, Starbucks had five retail stores and was selling coffee to restaurants in Seattle, Washington. It was during that year that Howard Schultz signed on to manage retail sales and marketing. After traveling to Italy, he convinced the owners of Starbucks to open a coffee bar.
"It was a huge success. One year after going public in 1992, Starbucks had 275 locations. Today, Starbucks is the leading retailer and roaster of coffee in the world. There are nearly 7,000 Starbucks stores in the U.S. and almost 1,800 in international markets.
"Schultz's genius is that he took a commodity (a cup of coffee), made it a brand, and was able to charge three times its market price. His vision was to make Starbucks serve as the 'third place' people gather, between home and work.
"As the company's expansion swept the U.S., Starbucks also began adding drive-through window service and selling breakfast sandwiches. By doing this, Starbucks encroached on McDonald's territory, and it was only a matter of time before 'war' would be declared.
"Before attacking Starbucks head-on, McDonald's scoped out the marketplace, saw what needed to be done, and then began executing. In 2003, McDonald's initiated a turnaround strategy, remodeling its stores, moving toward oversized chairs and softer lighting and