MCD/SBUX - I love the SBUX-MCD debate!

05/21/08 08:47AM EDT
I love the SBUX-MCD debate, because we have come full circle. In 2003, the investment community was under the assumption that SBUX (and other upstarts at the time) had made the McDonald's brand irrelevant. The consensus was wrong then.... and the consensus thinks McDonald's is going to alter the Starbucks business model. ....the consensus will likely be wrong again. It's a good thing we have Deutsche Bank to help build the consensus.

The Market value of MCD would not be in excess of $60 billion if they did not know how to compete effectively. Collectively, Burger King, Wendy's, Carl's Jr. and Taco Bell are all good, strong brands in the QSR segment because they have had to compete against McDonald's. The fact that McDonald's is moving into the specialty coffee space is good for SBUX. It will force them to be a better competitor. SBUX is in a strong position today because make most of the specialty coffee competition is irrelevant. McDonald's 14,000 store distribution system is powerful network and should not be dismissed.

Recently, DB recently published a 27 page report on MCD entering the specialty coffee business and the potential impact on SBUX. This research note was so one sided (and biased it appears to be a complete suck-up to MCD) and appears to have been written in a vacuum, as there was no information about the growth in the specialty coffee category and there was no mention of the impact on other competitors. It's almost as if Dunkin Donuts is irrelevant to the debate. I guess they don't want to get Bain angry.....

Anyone with excel, word and some level of creativity can publish the McDonald's company line to justify a couple of ratings. While senior management at MCD is risking a lot on the beverage platform, I can't believe that a note this one-sided is a good thing, or even reality. Of the 27 pages in the DB report, not even one page was allocated to the risks nor addressed where his potential assumptions could be aggressive. Since I don't want to open excel right now, I'm going to let words put things into perspective. But..... Not my words. Words from McDonald's owner/operators who actually have to execute the business plan. The following are direct quotes from people much closer to the reality of the SBUX-MCD debate than any of us will be......

I think it will be a hard sell for the company once real numbers are offered for coffee after the initial rollout starts. With Jan Fields hitting the road this winter; the full court press has started..
Specialty coffee could be done for 1/3 the cost. The sales don't justify remodeling the whole store. Good item... just way too expensive to put in. And I have had it for several months and do better than average with my sales of it..
This coffee thing is a train wreck. I have never seen anything so expensive and unproven crammed down our throats with so little resistance. There isn't a Starbucks within 100 miles of my stores and the company contribution is a joke. I just don't understand this one!.
The coffee programs still a crap shoot. We need a -Newman-deal.-type plan to make it worthwhile. The Corporation is getting too greedy
Coffee is a concern to me. Upper management has its head in the sand one more time. They should start to worry about owner/operators a little more instead of Wall Street. Without owner/operators upper management loses their golden parachutes. A big joke once again. Everything always comes and goes in cycles. I believe we are entering our negative cycle one more time.
McDonald's has enjoyed great sales run for the past few years. All good things must come to an end and this is ready to happen. The company needs to look at how hard they have pushed most operators and move to plan .B. quickly. The specialty-beverage rollout (CBI) comes at a time when McDonald's operators are under increasing pressure from both rising food and labor costs. Add to that the requirements for more labor to run a store, operators are in trouble. If McDonald's wanted to help operators and operations, it would move now to find ways to cut labor in the stores. The rollout of CBI could not come at a worse time for most operators. Operators have no more money to invest in the business. Many are living day-to-day. This also comes at a time when banks are under heavy pressure from bad loans in the housing market. Things could come apart for
McDonald's. Operators have no cash and nowhere to get a loan. Add to that the increase of the federal minimum to $5.85 an hour and [my state's] (and other states) increase to $6.90 and above in .08. Operators are under unreal pressure and something has to give. The system will lose some operators and things get worse. In addition, the operators can not hit the menu board to recover some of their costs. The increase of prices forces customers to trade down to the Dollar Menu -- a big loss leader for operators - thus making the problem much worse. The cost of both chicken and dairy are up this year. Chicken is now more than beef? The cost per case for delivery is moving up very fast leaving no profit on the bottom line for operators. Add the profit-margin pressure operators are feeling from the Dollar Menu and many operators will be out of business. As commodity prices raise, margins thin and the Dollar Menu eats away profits, operators and McDonald's will have a very poor year. Operator margins are under pressure. There is no room for a mistake or capital investment. The overall outlook is not bright for McDonald's. This is not a doom-and-gloom prediction but what is really happening to most McDonald's operators. As the economy slows so will McDonald's
The Dollar Menu must change with the times. The new coffee items do not look like a home run for individual stores but looks real good for McDonald's. My regional manager warned me not to take on more debt because he/she doesn't think the specialty coffee program will work and it will not pay for itself. Of course he/she will force me to do it anyway but he/she doesn't think it will work. I'm sure he'd/she'd get fired if I used his/her name...
Price of gas is hurting the restaurants on travel routes to vacation areas. Increased costs of doing business in the east; utilities, taxes, labor and backdoor costs don't seem to factor into the cost of paying for CBB. Most of the sales and profits of CBB come from iced coffee sales and sweet tea, which we are already doing without spending construction costs. Not much profit on specialty coffee yet that is where the costs of CBB are. If you take out financing to pay for CBB you will have trouble paying it off with the profits from specialty coffee (lattes, cappuccinos, espresso). So factoring in the increased costs, and poor profit on specialty coffee it has a negative effect on cash flow. I am sure though when McDonald's presents the figures for CBB they will include the products were selling without CBB to make the picture of cash flow seem like a brilliant move. Corporate careers will be made on this move. Why can't we just advance their careers and leave us alone!
They are trying to scare us into CBB with chatter about Starbucks. We can coexist beside Starbucks just fine. We sell burgers, they sell coffee. Leave it alone...
Let's keep iced coffee and forget the specialty drinks...
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