Starbucks Corporation
(NDAQ:SBUX) may be trading near its 52-week lows but many believe that
it has nowhere to go but down. The coffee chain is facing increased
competition from convenience-industry players like McDonalds, Dunkin
Doughnuts, and regional coffee shops that threaten to slow the growth
numbers to which investors have been accustomed.
McDonalds (NYSE:MCD) announced plans to take on Starbucks more
directly today by installing premium coffee bars with baristas serving
up cappuccinos, lattes, mochas, and frappes. Internal documents project
that this program will add $1 billion to McDonald’s annual sales of
$21.6 billion. The move marks another jump for a company that is
already in its sixth year of a successful turnaround, while Starbucks
has been struggling after years of strong growth numbers.
Starbucks has traditionally relied on the quality of its coffee to
set it apart from fast food companies like McDonalds; however, the fast
food chains recent switch to premium blends has many worried. It fact,
the February issue of Consumer Reports even rated McDonald’s drip
coffee as better-tasting than Starbucks! Since 80% of Starbucks
customers do not drink in the store, quality may be the only thing
keeping them coming back, which could present a problem.
Starbucks has taken actions of its own in order to combat the
growing fast food threat. The coffee chain started serving lunch at
many of its locations, offering customers a healthier alternative to
fast food joints like McDonalds. The move has some worrying, however,
that the chain may be eroding its good name by lowering itself to fast
food standards. Starbucks also continues to boast the largest selection
of specialty coffees, which should keep it ahead of McDonalds for
serious drinkers.
Overall, Starbucks appears to be in danger of at least a
significantly slowed growth with premium coffee blends expanding into
fast food chains. Meanwhile, its own plans to introduce food has
alienated some customers and has had very little impact on the
company’s bottom line. It will be interesting to see how Starbucks
responds to these threats as its shares continue to trend lower in the
medium term.
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