More Bad News for Starbucks as McCafe Moves in For the Kill

Last Updated Jun 1, 2009 10:28 PM EDT

Things are not looking good for Starbucks. McCafe's continue to spread -- almost 70 percent of McDonald's outlets now offer specialty coffee, and the Chicago Tribune has reason to believe McDonald's will launch a national advertising campaign for its coffee starting in May.

"McCafe is a game-changer in coffee," a Deutsche Bank analyst wrote in a recent memo to clients. "We expect McDonald's will extract a significant toll on Starbucks' performance, beginning this summer in earnest." Deutsche Bank has downgraded Starbucks stock to "sell."

And as McCafe expands its reach, Starbucks is moving in the opposite direction, closing 200 U.S. stores this year, particularly in areas with high unemployment.

But the problem isn't just that McDonald's offers cheaper coffee than Starbucks. The problem is that Starbucks doesn't necessarily have anything to offer for its higher prices. The Starbucks phenomenon itself led to higher standards, and as a result, more cheap coffee options that don't necessarily taste like dirt water.

In fact, QSRWeb recently did its own blind taste test and found that a majority of its testers actually preferred McDonald's coffee drinks to Starbucks. So the question is not "Are customers willing to pay more for a better drink?" but "Is the drink really even better?"

Apparently though, not all of the McDonald's franchisees are excited about the opportunity to snag market share from Starbucks. There's some fear that the coffee roll-out will be an "expensive flop" and will divert essential advertising dollars away from more standard McDonald's fare.

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