Starbucks Takes a Shot at McDonalds - With Seattle’s Best.doc

Starbucks Takes a Shot at McDonalds - With Seattles BestWith McDonalds experiencing a fair amount of success with its McCafe coffee brand - one analyst estimates that the company sold about $1.5 billion in coffee last year - Starbucks could no longer sit on the sideline. Last week the Starbucks announced that it would sell one of the premium brands it owns - Seattles Best Coffee - in Burger King restaurants, as well as Subway restaurants, AMC movie theaters, and other supermarkets and coffee houses around the country, 30,000 locations in all. The company wont admit that McCafe played a part in its decision to expand Seattles Best, a former rival that Starbucks purchased in 2003, and which has sat quietly in 500 Borders book store locations over the last few years. “Our end game is to bring our great coffee everywhere,” says Michelle Gass, a veteran Starbucks marketer who is now president of Seattles Best. “Howard Schultz, the Starbucks CEO discovered, wow, hes got this diamond in the rough of a brand that is part of the corporation, and we had not put the resources and the backing into it.”No matter the ultimate motivation, Starbucks has thrown another salvo in what has been one of the more heated business competitions in the country, the fight for share in the $13.7 billion specialty coffee category. Analysts are applauding Starbucks move. “Seattles Best offers Starbucks enormous growth potential,” says John Glass, who covers restaurants for Morgan Stanley. “And it makes sense to partner with Burger King and Subway against a common enemy - McDonalds.” With Starbucks seemingly saturated on every street corner around the country, the company needs to deliver its blend to other channels in order to expand. The Seattles Best brand will sell for lower prices at fast food joints than Starbucks coffee does in its own stores.The strategy presents a fair amount of cannibalization risk. If I get used to buying Seattles Best at Burger King, why should I fork over an extra few bucks, and higher profits, to Starbucks? The company argues that since Seattles Best offers a different taste profile - a more mellow, accessible flavor - each brand will develop its own fans. And the truth is, theres probably room for more players, since, even in the face of the recession, there seems to be demand for higher-quality coffee. McCafe rolled out last summer, during the downturn, and despite its success, as Glass points out in a research report, Starbucks same store-sales have risen the last two quarters, including a 7% jump in the first quarter of this year. “McDonalds heavy advertising for McCafe may have increased awareness for the entire coffee category, and helped improve sales figures overall,” says Greg Schroeder, an equity analyst with Wisco Research.This summer, McDonalds will launch its frappe, a Frappuccino-like beverage, and fruit smoothies to provide Starbucks with even more competition. Frozen coffee is less crafted, and more commoditized than hot lattes; McDonalds will sell its frappe in the $2.29-$3.29 price range, while Starbucks Frappucinos are retailing between $3 and $5, according to Glass. So McDonalds foray into frozen coffee may have a greater negative impact on Starbucks sales. But as Glass points out in his research report, only 37% of U.S. Starbucks locations have a McDonalds store within a half mile. This relative lack of geographic overlap may lessen the McDonalds threat.Starbucks is betting that Seattles Best will further slow the McDonalds coffee momentum. “What we, Seattles Best, distinctly have is a real coffee compa