KEY POINTS:
When Charles Ruppert has a yen for a white-chocolate latte, he doesn't head to a Starbucks. He goes to a McCafe and pays 26 per cent less.
"McDonald's has got a real winner," said Ruppert, 55, a car-repair shop owner in Greensboro, North Carolina. Analysts think so too:
McDonald's shares will rise 18 per cent in the coming year, UBS Securities estimates.
McDonald's, the world's biggest restaurant chain, has added the frothy drinks at two-thirds of its 13,794 United States stores since introducing a stronger brew last year. Shares of Starbucks, the largest coffee-shop chain, are down 24 per cent this year, on track for their worst annual performance amid the slowest sales growth in more than five years at stores open at least 13 months.
McDonald's was "being extremely aggressive", said Peter Kwiatkowski, who helps manage US$21.9 billion ($29.7 billion), including 1.3 million McDonald's shares, at Fifth Third Asset Management in Cincinnati. "They're a lot cheaper than Starbucks coffee in general and they have the high quality to go with it."
Ruppert paid US$3.31 for a 20-ounce cup of latte at the McDonald's in Oak Ridge, North Carolina, compared with US$4.48 at Starbucks.
McDonald's coffee was drawing new customers and spurring food sales, especially at breakfast, said president Ralph Alvarez, 52, a two-coffee-a-day man.
"Coffee, by itself, is a high-margin business. But it doesn't compare with what we get selling a full meal."
McDonald's said this week that August same-store sales climbed 8.1 per cent, helped by coffee and breakfast items. Sales on that basis have advanced 7 per cent so far this year.
The chain offers lattes, cappuccinos and iced brews in 9000 US restaurants where coffee is ordered primarily at drive-through windows.
In the US, coffee sales through restaurants, cafes and other outlets may reach US$29 billion by 2011, 50 per cent more than last year, says the New York-based National Coffee Association.
Almost six in 10 adults drink coffee, making it the second most popular beverage after water.
Starbucks controls 52 per cent of the global specialty coffee market, says Euromonitor International. McCafe is the fifth largest with 1.7 per cent.
Word is getting out about McDonald's coffee. In March, Consumer Reports magazine reported that a taste test of basic black coffee found McDonald's stronger blend beat brews from Starbucks, Burger King and Dunkin' Donuts.
Consumer Reports' "trained tasters" visited two stores of each company. McDonald's coffee was "decent and moderately strong" while Starbucks was "strong but burnt and bitter enough to make your eyes water", the magazine reported.
Athena Gallins, who lives in Winston-Salem, North Carolina, found Starbucks' coffee so "strong and bitter" that she took it back to be diluted. "It's not worth the money," she said.
In the US, McDonald's coffee sales climbed 20 per cent through June from the February 2006 debut of the stronger blend. Sales that include hot, iced and specialty blends are up 34 per cent this year.
Sales at Starbucks stores open at least 13 months rose 4 per cent in the second and third quarters this year, the slowest growth rates since 2002.
Total revenue jumped 20 per cent to US$4.61 billion from January to June of this year.
Rising sales of McDonald's coffee prompted Marc Greenberg, a Deutsche Bank Securities analyst in New York, in June to reduce his Starbucks stock-target price by 14 per cent to US$32.
"The Golden Arches are doing coffee better," Greenberg wrote in an investors' note. He rates Starbucks as "hold".
McDonald's shares climbed 13 per cent from the beginning of this year to early this week.
Starbucks, named for the coffee-loving first mate in the novel Moby Dick, has set a goal of 40,000 locations. The Seattle-based company had 14,396 outlets as of July 1. In the US, it has 10,295, compared with almost 13,800 for McDonald's.
Ruppert's Oak Ridge cafe, one of 21 McCafes in the US, sells 20-ounce cups of coffee for US$1.55. McDonald's operates 1300 McCafes globally, with 406 in Australia, where it started the concept in 1993.
The McCafe counter is next to one that sells Egg McMuffin and McGriddle sandwiches. Coffee drinkers can relax on brown, green and burgundy cushioned benches, stools and tables near a flat-screen television.
Velera Hale, a housewife from Winston-Salem, North Carolina, bought her morning coffee at various outlets including McDonald's and Starbucks. Now she buys McDonald's seven mornings a week after the company opened a McCafe.
"It's a smoother blend that's not as strong as Starbucks," said Hale, 56.
Starbucks chairman Howard Schultz has acknowledged the threat of fast-food chains, even though his company has 87 per cent of the US specialty coffee-shop market, while McCafe has less than 1 per cent, according to Euromonitor.
Fast expansion and similar designs made Starbucks cafes lose the "warm feeling of a neighbourhood store", Schultz wrote in a memo to top executives in February.
Starbucks now sells warm breakfast sandwiches such as eggs Florentine with spinach and Havarti cheese. It offers gourmet salads including Asian sesame-noodle that cost US$6.
Alvarez said McDonald's had no plans to offer the breadth of Starbucks beverages such as raspberry latte with soy milk and half the caffeine.
"If your only business is coffee, you better have all those options," Alvarez said. "But we don't need 31 flavours, just enough variety to be considered a destination for coffee."
- Bloomberg
