McDonald's vs. Starbucks: Not Much of a Coffee Fight

The coffee business can be a tough one, and there are no shortage of companies that would like to take a slice of Starbucks' (SBUX - commentary - Cramer's Take) sizable business.

Some investors believe that McDonald's (MCD - commentary - Cramer's Take) may be the company to carve off a significant chunk, but I have my doubts about its ability to do so and the attempt's effect on Starbucks' shares.

After 50 years of selling hot mud, McDonald's continues to awaken to the notion that its customers might enjoy coffee that tastes good. According to Crain's Chicago Business, "McDonald's Corp. plans to sell lattes, cappuccinos and other specialty drinks in all of its 14,000 U.S. restaurants next year. McDonald's predicts the new drinks will add more than $1 billion a year to sales."

Not surprisingly, the anti-Starbucks crowd has latched on to this announcement as proof that Starbucks is doomed. 24/7 Wall St. even called it a "coup de grace," which is defined as a "death blow intended to end the suffering of a wounded creature."

Although Starbucks' stock is certainly suffering, down about a third from the high reached earlier this year, it is difficult to make the argument that the company is wounded, or in need of a merciful end to its suffering.

Reality Check

It's time for the doubters to face some facts. First, McDonald's is not planning to match Starbucks "product for product." Last month, Bloomberg reported that McDonald's President Ralph Alvarez said the company has no plans to offer the breadth of Starbucks' beverages. Instead, they intend to compete for the plain-Jane cappuccino, offering it at about a 25% discount to the equivalent Starbucks model.

Secondly, Starbucks doesn't need to concede future market growth to others. McDonald's is already selling cappuccinos in two thirds of its stores, according to the Bloomberg article. That potential market-share loss has already been baked in, and it doesn't seem to be hurting Starbucks too badly.

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At the time of publication, Trent was long Starbucks, although positions may change at any time.

William A. Trent, CFA, is a freelance equity analyst based in the New York metro area. He has been an equity analyst since 1996 and is co-author of Understanding and Evaluating Prospectuses, Offering Documents, and Proxy Statements. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Trent appreciates your feedback; click here to send him an email.