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McDonald's goes after Starbucks, Starbucks freaks out

Today’s Wall Street Journal (January 7, 2008) reports that McDonald’s is looking Starbucks square in the eye and going after its core customer.

“Starting this year, the company's nearly 14,000 U.S. locations will install coffee bars with ‘baristas’ serving cappuccinos, lattes, mochas and the Frappe, similar to Starbucks' ice-blended Frappuccino.”

Greedy McDonald’s forecasts $1 billion in annual sales from the program.

The move is a good sign and a bad sign for Starbucks. It’s a good sign in that it recognizes just how mainstream “upscale coffee” has become—it validates Starbucks’ position as a key purveyor of that type of drink.

It’s bad for Starbucks for the very same reason—it shows how commoditized the Starbucks experience is—the very thing that Starbucks chairman (now CEO) Howard Schultz warned about in his famous leaked memo of February 2007.

It is sort of shocking that things have gotten to this point. Starbucks was supposed to be the polar opposite of a commodity purveyor of food like McDonald’s. But guess what? They added food to the menu as well as drive-through windows to achieve growth, and they became, in the end, somewhat McDonald’s-like.

Starbucks is very worried about this encroachment from a potential competitor—so much so that the company just announced it is bringing back Howard Schultz to run the company as CEO. Schultz is going to lead “a major restructuring initiative” that includes a series of initiatives like closing poorly-performing stores, new products, new store designs, and better training for its baristas.

I can understand that Starbucks is concerned. But I will bet you, dollars to donuts, that McDonald’s will never encroach on the true Starbucks consumer. The brand’s “immune system” (to quote former Coca-Cola Chief Marketing Officer Sergio Zyman) won’t allow it. Sure, if you want a syrupy, cheap latte you will be able to get one at Mickey D’s. But the Golden Arches cannot imitate the ambience of Starbucks—which still exists, no matter what anybody says or how supposedly commoditized the chain has become.

At the very worst, says the Journal, “the new coffee program is a risky bet for McDonald’s.” Why? “It could slow down operations and alienate customers who come to McDonald's for cheap, simple fare rather than theatrics. Franchisees say that many of their customers don't know what a latte is.”

I, for one, am absolutely disgusted at the lengths McDonald’s will go to to take over the eating experience of every American. Is there nothing sacred anymore? Starbucks, for all its failings, is still that special “third place” and I would never go to McDonald’s to replicate it.

At the same time, I can understand McDonald’s motivations. Like any brand hungry for growth, it sees an expansion opportunity. However, the McD’s brand does not have "permission" to expand into the Starbucks space. If I were Starbucks, I would not be terribly worried about it. In fact, I might view it, if anything, as a way to expand my own market. And Schultz has said as much. As the Journal article notes:

“Mr. Schultz has said that new competition actually helps Starbucks by expanding the specialty-coffee category. ‘Those consumers over time are going to trade up,’ he told investors in November. ‘They're going to trade up because they are not going to be satisfied with the commoditized experience or the flavor.’ He has emphasized that Starbucks's baristas, who are instructed to memorize customers' drink orders and make genuine conversation with patrons, will continue to set the chain apart.”

At the same time, Starbucks needs to see this as a major warning signal. As I have said before, it is time to reinvent the brand—now. Starbucks should consider killing its own brand and resurrecting it as something even better—the ultimate, uncopyable “third space” that is suited for the way we live now. There is no growth left for Starbucks as it stands anymore—it has saturated the market. It is time to do something daring, different, and better—astounding and delighting the millions (billions?) of dedicated Starbucks fans out there who are rooting for the brand to survive and succeed.

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