Wednesday, October 10, 2007

McDonald's Keeps Turning the Screws on Starbucks

Mcdonalds (MCD) announced they are going to provide free WIFI in its 1200 UK restaurants. Why does Starbucks (SBUX)care?

Doesn't the Green Mermaid also provide its customers WIFI? Yes they do but in Starbucks customers have to pay for it. Is this a huge deal that will sink the House that Schultz built? No. But, it is yet another reason for people not to go to Starbucks.

What McDonalds is doing is offering people another cheaper alternative to the pricey Starbucks. Since January Starbucks has seen milk and coffee cost spiral upward. They came in third in a taste test between them and McDonalds and Dunkin Donuts. Ignored the improved coffee and value proposition McDonalds offered customers. Increased prices, the second such action in less than a year and sat by and watch its customers defect to McDonalds who sales are up 15% to date this year and has never sold more coffee than it is now.

Now WIFI. If anyone thinks this will not happen in the US very soon, guess again. What will happen is the legions of salespeople out there who rely on their laptops will be frequenting the Golden Arches for a meal, a cup of coffee and free WIFI. Cost conscious college students will forgo their starbucks WIFI for the freebi at McDonald's.

Will Starbucks then be forced to give it away? Maybe they will. But even of they do, they still do not come out the winner because folks do now have another option AND another revenue stream for Starbucks is choked off. It won't amount to a huge amount but when when you are sticking by your 18% to 20% EPS growth, trade at 32 timer those earnings and face the aforementioned challenges, every single penny counts...

Just how long will it be before management comes clean and dials back EPS expectations?

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