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McDonalds versus Starbucks

June 8, 2008

I had gotten into the habit of stopping into Starbucks in the morning, at least a couple of times per week after hitting the gym, in order to buy one of their now-infamous (see below) breakfast sandwiches (protein + calories = yum) and a cup of coffee (critical). Pretty tasty, but a guilty pleasure for at least two reasons: it’s expensive, and those sandwiches aren’t exactly the most healthy thing for breakfast. Although after a strenuous workout, I could do worse.

But then two things happened. First, I started getting sick of those darn sandwiches, and began wondering if life didn’t have something else to offer for breakfast, you know?

Second, Starbucks had a major management shake-up (http://www.reuters.com/article/hotStocksNews/idUSWNAS629620080111) early this year. That, in turn, resulted in Starbucks launching its new Pike Place Roast coffee (http://biz.yahoo.com/bw/080407/20080407006099.html?.v=1), which I don’t like. And an announcement that Starbucks would stop serving my breakfast sandwiches (http://www.fool.com/investing/general/2008/01/31/starbucks-stinks.aspx)!

My initial reaction to the whole sandwich thing was outrage. But then I started paying attention to the context of the announcement. Starbucks’ CEO said the sandwiches were overwhelming the smell of the brewing coffee. But the real reason is that, by serving coffee and breakfast sandwiches, Starbucks found itself competing more closely with McDonalds (http://www.businessweek.com/print/magazine/content/08_16/b4080000943927.htm) - and losing.

I thought to myself, well, I don’t like Starbucks coffee anymore, because Pike Place roast is no good (full disclosure: I actually drink decaf, which always tastes worse than regular, but still, their old decaf was much better). And I was already looking for an alternative to their breakfast sandwiches. So why not switch over to McDonalds?

Brilliantly, right when the shake-ups at Starbucks started, McDonalds, smelling the blood in the water (or maybe just the sandwiches), initiated a major marketing push for their breakfast menu and new coffee-shop-like coffee drinks.

Where is this all going? Well, I went to McDonalds this morning for the first time in many years (ok, aside from visits made out of desperation on road trips - but even those are rare). I got a Sausage Egg McMuffin and a decaf coffee. And it was … really good. Better than Starbucks. And I didn’t have to get out of my car (yes, there are a number of drive-through Starbucks in Seattle, but none of them anywhere near as close to me as McDonalds). And I paid 25% less!

What’s the future look like for Starbucks? The economy is bad, which CEO Schultz admits in one of the interviews above is hurting sales of $4 lattes - a luxury item by any metric. Their stock has gotten pummeled (http://moneycentral.msn.com/companyreport?symbol=sbux), while McDonalds (http://moneycentral.msn.com/companyreport?Symbol=Mcd), by comparison, is actually doing okay (McDonalds also has a better net margin). Of course, the economy won’t be bad forever. But Schultz’s command-and-control management style leaves little room for executive growth, and succession planning has never seemed to be one of his priorities.