McDonald's Takes on A Weakened Starbucks - Case Study Example

? Business & Management (SL) IA Commentary On: How Can Starbucks React to the Threat of McDonalds Selling Low Cost Coffee? Candi Candi Number: Word Count: 1702 Acknowledgements I take this opportunity to express my deep sense of gratitude to my esteemed guide, Professor ……, for his exemplary guidance and continuous encouragement right through the course of this assignment. I would also like to thank the managers at the Starbucks store in ……. and the McDonalds outlet at ……. for sparing their valuable time and giving appropriate answers to all my queries. I am obliged to the entire staff of these outlets for helping me understand the processes adopted by them and the type of clientele that these food outlets attract. I would be failing in my duty if I don’t thank all those employees of Starbucks and McDonalds who responded to the phone calls and e-mails sent to these organizations. Last but not the least, I would like to thank all my friends who have been supporting and helping me with this assignment. Table of Contents Contents Pages Executive Summary 4-5 Introduction 5 McDonald’s Vs Starbucks 5-6 Problem for Starbucks 6 Sources of Information 6-7 SWOT Analysis 7-8 Financial Analysis 8-9 Findings 10 Recommendations 10-11 Appendices 12-25 Works Cited 26 How Can Starbucks React to the Threat of McDonalds Selling Low Cost Coffee? Executive Summary Starbucks and McDonald's are big multinational companies that have made their presence felt in the businesses they operate in. Seattle based Starbucks was founded with the objective of providing Italian espresso bar experience in the United States. As a business strategy Starbucks operates by forming a personal relationship with its consumers. On the other hand McDonalds is a family restaurant and attracts people from all age groups. Strictly speaking, both these behemoths have distinct target markets. Starbucks attracts the affluent while customers who are price sensitive are McDonald’s target market. McDonald’s has rolled out its low-priced coffee brand and in the process has started eating into the share of Starbucks. McDonald's appears well placed to become Starbucks’ biggest competitor in the specialty coffee segment in the coming years. Starbucks now has to devise strategies to counter McDonald’s move and not let its market share dip. The present paper is a commentary on ‘How can Starbucks react to the threat of McDonalds selling low cost coffee? To answer this question relevant information on both these companies has been collected from various primary and secondary sources. A comparison has been made on the business operations of both Starbucks and McDonald’s, SWOT analysis has been carried out and finally a financial comparison has been made. Some alternatives that can be adopted by Starbucks to react to McDonald’s move have been suggested based on aforesaid analysis. I personally feel that Starbucks should not respond to McDonald’s move with a price cut, rather it should elevate the quality perception in the minds of the customer and build a set of loyal customers who are willing to pay a premium price in exchange of getting the ‘coffee experience’ that Starbucks has to offer. Introduction I have decided to write a commentary on ‘How can Starbucks react to the threat of McDonalds selling low cost coffee? I have chosen this topic since it involves two big U.S. based companies who have worldwide operations, have a huge set of loyal customer base and are well known for their quality products. Starbucks Vs McDonald’s Starbucks is Italian-style coffeehouse chain based in Seattle, Washington. The company was founded in 1971 and has more than 17, 000 retail stores in 60 countries. Since inception Starbucks has believed in serving the best coffee to its customers. In fact, the company delivers much more than a simple cup of high quality coffee; it ensures a wonderful experience for the customer. A look at the product portfolio of Starbucks clearly indicates that the company has a huge variety of coffee products. Starbucks offers more than 30 blends and single origin premium coffees. The specialty coffee chain’s hand crafted beverages include fresh brewed coffee, hot and iced espresso beverages, and Frappuccino coffee. Starbucks also offers numerous options like Starbucks bottled Frappuccino, coffee drinks, Starbucks Discoveries chilled cup, Starbucks Doubleshot espresso drinks and Seattle’s Best Coffee in the ready-to-drink category. Starbucks VIA Ready Brew and Starbucks K Cup portion packs are two of the company’s well known consumer products. McDonald’s, based in Oak Brook, Illinois, is the leading global foodservice retailer in the world. The restaurant was founded in 1940 and as of today has more than 34,000 restaurants in 119 countries. McDonald’s reportedly serves approximately 69 million people every day. While McDonald’s is literally a household name when it comes to burgers, this quick service restaurant is also making fast inroads in the coffee business. McCafe, with the tag line ‘Deliciousness, made for you’ is available in numerous variants like fresh coffee, fruit smoothies, shakes and frappe. Problem for Starbucks McDonald’s entry into the world of coffee business is posing a serious business problem for Starbucks. The latter charges a high price for its coffee servings given the high quality of the beverage and the wonderful experience that surrounds it. On the other hand, McDonald’s McCafe is relatively cheaper and therefore customers are getting attracted towards it. The switch from high priced coffee of Starbucks to low priced coffee of McDonald’s increases many fold in times of recession. Consumers, in general, tend to spend less on such discretionary items during recessionary conditions. Therefore companies like McDonalds, which attract the price conscious customers, tend to gain at the expense of other companies, by offering the same quality product but at a lesser price. The question now is ‘How can Starbucks react to the threat of McDonalds selling low cost coffee?’ Sources of Information To answer this question, I have collected information on Starbucks and McDonald’s from the following sources. Secondary Sources 1) McDonald’s Website and Annual Report 2011. 2) Starbucks’ Website and Annual Report 2011. 3) The Economist: Business: Coffee Wars; Starbucks v McDonald's. 4) Wall Street Journal: McDonald's Takes on a Weakened Starbucks; Food Giant to Install Specialty Coffee Bars, Sees $1 Billion Business. Primary Sources 1) Unstructured interviews with managers at staff at McDonald’s outlet. 2) Unstructured interviews with managers and staff at Starbucks outlet. 3) Information gathered over phone and responses to e-mails sent to these organizations. SWOT Analysis A good starting point to answer this question is to carry out a SWOT analysis for both companies. This analysis will reveal the strengths and weaknesses these companies possess. An insight will also be gained on the opportunities and threats that Starbucks and McDonald’s confront. SWOT Analysis of Starbucks Strengths Weaknesses Strong brand name Concentration of business in United States Focus on quality and innovation Increasing competition Worldwide operations High priced products Opportunities Threats Expansion in other countries Recessionary conditions Product innovations High prices of raw material Carbonated drinks getting bad publicity Entry of low priced competition SWOT Analysis of McDonald’s Strengths Weaknesses Strong brand name High employee turnover Well defined business processes Advertisements aimed at children Employees adept at multi-tasking Quality control issues at franchisees Opportunities Threats Further expansion through franchising Anti-obesity awareness Inclusion of healthy diets in menu Competition from small regional players Increase in take-away stores Recessionary condition may dampen sales Financial Analysis We now shift focus to the financial health of both Starbucks and McDonald’s Starbucks The Starbucks annual report 2011 reveals that the company generated net revenue of $11.7 billion in 2011, up from $10.7 billion in 2010. The operating income of the company also rose from $1419 million in 2010 to $1728 million in 2011. In percentage terms, the operating margin increased from 13.3 percent to 14.8 percent. The earnings per share in 2011 also grew significantly to $1.62, up from $ 1.24 in 2010. The cash flow and capital expenditure registered a slight decline to $ 1,612 million in 2011, down from $1,705 million in 2010. Starbucks declared a dividend of $.56 per share in 2011. The company did very well on the ‘comparable store sales growth’ (Company-Operated Stores Open 13 Months or Longer) parameter with 8 percent growth in 2011. The balance sheet of the company also looks good with current assets of $3794 million as against current liabilities of $2075 million. Starbucks reported its goodwill at $321.6 million in 2011, up from $262 million in 2010. McDonald’s McDonald’s generated revenues of $27 billion in 2011, up from $24 billion in 2010. The net income of the company also increased from $ 5 billion in 2010 to $ 5.5 billion in 2011. The quick service restaurant had earnings per share of $5.27 in 2011 vis-a-vis an earnings per share of $4.58 in 2010. The global comparable sales grew at 5.6 percent and the fast food giant registered an astounding 34.7 percent rate of return for its shareholders in 2011. A look at the last 5 years total revenue (see graph above) reveals that McDonald’s has maintained a steady rate of growth except in the year 2009 when its revenues dipped to $22,745 million, down from $23,522 million in 2008. Starbucks too suffered a dip in revenue during the same period. While the trend of total revenue remains the same, Starbucks is less than half the size of McDonald’s in terms of total revenue. Findings The SWOT analysis and financial analysis of Starbucks and McDonald’s establishes that both companies are pretty sound financially and have a strong brand image. While McDonald’s is clearly ahead in terms of reach (number of outlets) and annual sales, both companies have had a similar trajectory over their business operations. Starbucks is smaller in scale vis-a-vis McDonald’s. To quite an extent this disparity in scale can be explained by the different target market that these companies have. Starbucks has used its financial resources wisely and has invested in state-of-the-art technology. All important parameters pertaining to incomes and profit margins are healthy. Thus, on a company level, Starbucks has no real threat of its revenues falling to a level lower than its costs. Recommendations Starbucks is positioned as a premium coffee and therefore it charges a high price. Lowering the price as a response to competing with McDonald’s low priced coffee is likely to erode the first-class image that Starbuck’s has created for itself. Therefore Starbucks should look at something different and not tinker with its existing prices. Alternative 1 Starbucks’ soluble coffee product VIA is meant for price sensitive customers. Starbucks’ should aim to increase its distribution network so as to increase the sales of VIA Ready Brew instant coffee. If the company manages to tie up with more supermarkets and grocery stores, the product will be available at more places and to a larger number of customers. In this way, Starbucks will be able to match the number of outlets that McDonald’s has. In nutshell VIA will act as a flanker brand and compete with the low priced McCafe. Alternative 2 To increase customer loyalty, Starbucks should periodically review and update its customer rewards program, “My Starbucks Rewards”. The rewards that Starbuck’s customers accumulate can be swapped for any item from the company’s portfolio. In this way, Starbucks will not have to reduce the price but at the same time customers will feel that they have got something more without having to pay for it. In other words, Starbucks will not have to reduce the price and at the same time it will continue to attract its target customers. The rewards will be used as an indirect means to return the high price charges upfront. Appendices McDonald's Takes On A Weakened Starbucks; Food Giant to Install Specialty Coffee Bars, Sees $1 Billion Business The Wall Street Journal (January 2008) McDonald's is setting out to poach Starbucks customers with the biggest addition to its menu in 30 years. 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's ice-blended Frappuccino. Internal documents from 2007 say the program, which also will add smoothies and bottled beverages, will add $1 billion to McDonald's annual sales of $21.6 billion. The confrontation between Starbucks Corp. and McDonald's Corp. once seemed improbable. Hailing from very different corners of the restaurant world, the two chains have gradually encroached on each other's turf. McDonald's upgraded its drip coffee and its interiors, while Starbucks added drive-through windows and hot breakfast sandwiches. The growing overlap between the chains shows how convenience has become the dominant force shaping the food-service industry. Consumers who are unwilling to cross the street to get coffee or make a left turn to grab lunch have pushed all food purveyors to adapt the strategies of fast-food chains. It also shows how the chains' efforts to adapt to a changing market have had drastically different results on their bottom lines. McDonald's is entering the sixth year of a successful turnaround, while Starbucks has begun struggling after years of strong earnings and stock growth. Still, the new coffee program is a risky bet for McDonald's. 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. The program attempts to replicate the Starbucks experience in many ways -- starting with borrowing the barista moniker. Espresso machines will be displayed at the front counters, a big shift for a company that has always hidden its food assembly from customers. McDonald's says it wants customers to see the coffee beans being ground and baristas topping the mochas and Frappes with whipped cream. "You create a little bit more of a theater there," says John Betts, McDonald's vice president of national beverage strategy. Ads for the espresso drinks running in the Kansas City area, where the concept is already being tested, say you don't get a "condescending look" for mispronouncing the size of the drink at McDonald's -- a jab at the "grande" and "venti" sizes at Starbucks. (At McDonald's, you just ask for small, medium or large.) Starbucks Chairman Howard Schultz popularized lattes and cappuccinos in the U.S. after borrowing the idea from espresso bars he visited in Italy. When he began expanding Starbucks beyond Seattle in the late 1980s, he said he wanted the cafes to serve as a "third place" where people gather between home and work and feel some of the romance of the European cafe. But the coffee chain has evolved into more of a filling station. It is now battling fast-food outlets for some of the same customers and meal dollars. Today, about 80% of the orders purchased at U.S. Starbucks are consumed outside the store. The average income and education levels of Starbucks customers have gone down, the company has said. As part of a big push into food, Starbucks sells lunch at more than two-thirds of its company-owned locations in the U.S. Starbucks's rapid store and menu expansion have slowed traffic at older locations and gummed up operations behind its counters. After years of downplaying threats from rivals, Starbucks executives now say they're preparing for competitive encroachment. "We understand all too well that we have built a very attractive business for others to look at and try and take away," Mr. Schultz told investors on a conference call this November. "We are up for the defense and we are going to get on the offense." Starbucks declined to make executives available for this story or specifically address competition from McDonald's. McDonald's executives say they aren't launching espresso drinks to go after Starbucks, but instead to cater to consumers' growing interest in specialty drinks. And although McDonald's is encroaching on the business that Starbucks invented, analysts say McDonald's may pose more of a threat to Dunkin' Donuts, which has a more similar customer base. Analysts also point out that McDonald's overall beverage expansion, which includes bottled drinks, is as much aimed at taking business from convenience stores and vending machines as it is from specialty cafes. Starbucks increased its sales even in parts of the country where Dunkin' Donuts has a strong presence. Some analysts say Dunkin' and other fast-food competitors actually have helped Starbucks by expanding the total market for upscale coffee drinks. A Dunkin' spokeswoman says the company doesn't comment on competition but says the chain believes it has "democratized" espresso and become a coffee destination. McDonald's grew from a single San Bernardino, Calif., hamburger outlet that opened in 1948 into the world's largest restaurant chain by offering consistent hamburgers and french fries served quickly and at a low price. Its beverage lineup, anchored by Coca-Cola Co. sodas, was designed to complement its food. McDonald's executives watching the growth of Starbucks at the beginning of this decade realized that they were missing out on the fastest-growing parts of the beverage business. Data showed that soda sales had flattened while sales of specialty coffee and smoothies were growing at a double-digit rate outside McDonald's. Customers were buying food at McDonald's, then going to convenience stores to get bottled energy drinks, sports drinks and tea, as well as sodas by Coke competitors. Early on, Starbucks didn't see the Golden Arches as a competitor "because McDonald's was selling hot, brown liquid masquerading as coffee," says John Moore, who spent almost a decade in Starbucks's marketing department before leaving in 2003. McDonald's move into upscale coffees dates back to a concept that is unfamiliar to most of its customers: the McCafe. It started in Australia in 1993. McDonald's brought the cafes to the U.S. in 2001 by carving out a corner of the restaurant, decorating it with leather couches and adding a counter that sold cappuccinos and sweets. But the cafes never took off here because they didn't feed into McDonald's drive-through business, where two-thirds of sales take place, says Don Thompson, president of the chain's U.S. business. In 2003, McDonald's initiated a turnaround strategy called Plan to Win. Among other things, it included a total remodeling at thousands of U.S. locations. Molded plastic booths were replaced with oversized chairs, lighting was softened and muted tones took the place of bright colors. Wireless Internet access was also added. "We began to realize . . . we could definitely sell coffee in this environment," Mr. Thompson said. In 2006, McDonald's changed its drip coffee to a stronger blend and began marketing it as a "premium" roast. In recent years, Starbucks started to see fast-food chains as more of a threat, according to former employees and people close to the company. In parts of the Northeast, store managers told baristas their biggest competition was Dunkin' Donuts, now a unit of Dunkin' Brands Inc., which made a national push into espresso drinks in 2004. Starbucks increased the pace of its store expansion at the beginning of this decade. Some changes, including drive-through windows and breakfast sandwiches similar to the Egg McMuffin, mirrored techniques used by fast-food chains. This led to tensions among management and employees about whether the chain was eroding the core of the Starbucks experience, according to former employees and people close to the company. At McDonald's, the success of its upgraded drip coffee emboldened the chain. In 2005, it began testing drinks sold under the McCafe banner at a handful of franchises in Michigan. It sold lattes and cappuccinos from the front counter so it could pass them to the drive- through windows. McDonald's researchers contacted customers of Starbucks and other coffee purveyors and conducted three-hour interviews where they videotaped the customers talking about their coffee-buying habits. The researchers got in the cars of the customers and drove with them to their favorite coffee place, then took them to McDonald's and had them try the espresso drinks. "There was a surprise factor," says Patrick Roney, a director of U.S. consumer and business insights at McDonald's. "The people who were on the fence . . . there was an opportunity to get those." Restaurants that tested the drinks began passing out complimentary small mochas and lattes. "A lot of our customers don't know what a latte is," says John DeVera, an Overland Park, Kan., franchisee who is testing the drinks. Management advised restaurant operators to hire baristas who are "very friendly" and show a "willingness to learn about the competitor's product," according to a 2006 internal memo about how to start selling the drinks. "For example, a typical Starbucks customer would ask for a Grande Latte; our Baristas need to know that this is a medium size drink," the memo says. Unlike at Starbucks, where baristas steam pitchers of milk then combine it with the espresso, McDonald's process is more automated. It uses a single machine to make all the components of each drink. Espresso is brewed using beans with a darker roast that are more finely ground than those for drip coffee, resulting in a concentrated form that's usually mixed with hot milk to make lattes and cappuccinos. McDonald's has three flavors it adds to its espresso drinks, a significantly narrower lineup than Starbucks, which boasts thousands of drink combinations. During testing, plain shots of espresso were taken off the menu and more whipped cream was added to some drinks. The company also moved the espresso machines to the front counter from the back after realizing the drinks undersold when employees made them with their backs to the customer. Drinks are priced from $1.99 to $3.29 and come in vanilla, caramel and mocha flavors. In advertisements in test markets, McDonald's tells customers those are 60 cents to 80 cents less than competitors' prices. Heather Pelis, a 19-year-old babysitter from Rayville, Mo., says she didn't like the McDonald's vanilla latte when she tried it. "It was a little syrupy tasting," Ms. Pelis said recently while drinking a drip coffee at a McDonald's in Liberty, Mo. But she says she'd be willing to try another espresso drink because they are cheaper than the caramel macchiatos she buys at Starbucks, and because McDonald's is more conveniently located. The nearest Starbucks is a 30-minute drive from her, she says. McDonald's franchisees say they think the new coffee drinks will be particularly helpful in drawing young consumers who prefer them to drip coffee. Gary Granader, a Detroit-area McDonald's franchisee, has started seeing groups of teenagers at some of his restaurants after school since he added espresso drinks a year ago. Mr. Thompson says McDonald's also is considering adding some type of music-downloading service at its locations. McDonald's beverage expansion will add a new line of bottled drinks by Coke competitors. The drinks being considered include PepsiCo Inc.'s Mountain Dew, Lipton green tea and Red Bull GmbH's namesake caffeine drink. Restaurants also are getting a soda fountain with flavor shots that allow customers to create their own drinks like cherry Sprite and vanilla Diet Coke. Mr. Thompson said that Coke remains the "big brand" at McDonald's, and a Coke spokesman said the company is not concerned about the competing beverages being sold at McDonald's. Only about 800 of McDonald's U.S. restaurants have the specialty coffee drinks now, and some may not get the full beverage program until 2009. Executives and franchisees will not give specifics on how well the espresso drinks have sold in tests. McDonald's has already made some headway in gaining coffee credibility. In February, the magazine Consumer Reports rated the chain's drip coffee as better-tasting than Starbucks. Starbucks responded that taste is subjective and its millions of customer visits per week demonstrated the popularity of its coffee. The rating nevertheless angered some top officials at Starbucks, according to a person familiar with the situation. Around the same time, Mr. Schultz sent a memo to Starbucks executives warning that the chain may be commoditizing its brand and making itself more vulnerable to competition from fast-food chains and other coffee shops. He lamented the loss of the "romance and theatre" that occurred when the company switched to automated espresso machines several years ago. To improve store traffic and same-store sales growth, Starbucks has said it is trying to make its operations more consistent. It is reducing the number of items and promotions it offers and is focusing on what executives call the "vital few" areas that improve results, like selling more beverages and attracting more customers. Starbucks executives have attributed the slowdown in sales growth and store traffic in the U.S. to the weak economy. 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. But some Starbucks baristas say that the chain's push into food and drive-through service has made that a lot more difficult. Some workers say their managers instruct them to ask customers whether they want a breakfast sandwich with their coffee -- a selling technique that feels unnatural when they know the customer doesn't want one. "The more and more business they get in the store, the more it seems like another fast-food job," says Joe Tessone, a Chicago barista who has worked at Starbucks for three years. The overlap between McDonald's and Starbucks has put Jack Rodgers in an unusual position. In 1958, McDonald's pioneer Ray Kroc granted Mr. Rodgers one of the chain's first franchises for a restaurant in St. Charles, Ill. Mr. Rodgers eventually traded that location and today owns part of three McDonald's around Newport Beach, Calif. Mr. Rodgers later moved to Seattle where in 1985 he wound up investing in the predecessor chain of the modern-day Starbucks cafe. He later became a Starbucks board member and executive. He left the company in 1996 but remains a shareholder and a friend of Mr. Schultz. Now Mr. Rodgers is looking at adding the lattes and cappuccinos to his McDonald's restaurants. He didn't envision the chains would compete so closely when he first invested in Starbucks. "Not in my wildest dreams did I see this coming," he says. Business: Coffee wars; Starbucks v McDonald's The Economist (Jan 12, 2008) Howard Schultz once said that he finds it painful when people compare his firm, Starbucks, to McDonald's. The founder of the world's biggest chain of coffee shops thinks a visit to Starbucks should involve "romance and theatre", a far cry from the pit-stop-like experience of eating a meal at the world's biggest fast-food chain. Yet in its efforts to expand and attract less affluent customers over the past couple of years, Starbucks has started to become more like McDonald's--even as McDonald's, for its part, has been moving upmarket to become more like Starbucks. Starbucks is now struggling with the most serious crisis in its history--much as McDonald's did at the beginning of the decade. Last year Starbucks' share-price fell by 42%, making it one of the worst performers on the NASDAQ exchange. In the last quarter of 2007 Starbucks recorded its first ever year-on-year decline in customer visits in America, easily its biggest market. When analysts at Bear Stearns, an investment bank, downgraded the firm's shares on January 2nd, they plunged by another 12%. This sealed the fate of Jim Donald, the chief executive since 2005. On January 7th the company said it would replace him with Mr Schultz, who stepped aside in 2000 to become chairman. Mr Schultz is not trying to pass the buck. His company is in trouble, and much of it is self-inflicted. "I'm here to tell you that just as we created this problem, we will fix it," he promised. He wants to slow down the pace of expansion and improve the "customer experience" in America, while accelerating expansion overseas. But he says there is no "silver bullet". Analysts agree that Starbucks' main problem is overexpansion--as it was at McDonald's in 2001, when the chain crossed the 30,000-store mark and struggled with a dearth of innovation, market saturation and poor control over restaurants. Howard Penney, an analyst at Friedman, Billings, Ramsey in New York, thinks Starbucks needs to cut its rate of expansion in America by half. "They are growing too fast in a mature market," he says. The firm has more than 10,600 coffee shops in its homeland, and another five or so open every day. Starbucks had been aiming for 20,000 shops in America and 20,000 abroad, but that goal is now in doubt. Not all of Starbucks' poor performance is of its own making. Prices for food commodities are at all-time highs, prompting the firm to increase prices twice in the past year. This has scared off customers, who have been defecting to fast-food chains such as Dunkin' Donuts or Panera Bread, which sell reasonable coffee for as little as a quarter of the price of a fancy Starbucks brew. In November Starbucks launched its first national television-advertising campaign in an effort to win them back. Adding to Starbucks' woes, and further emphasising its similarity with McDonald's, the burger chain is about to launch a direct attack of its own. This year McDonald's plans to add Starbucks-style coffee bars to nearly 14,000 of its American restaurants--the biggest diversification ever attempted by the company. McDonald's has already made smaller forays into the coffee market, and with some success. Last year Consumer Reports, a trade magazine, rated its filter coffee more highly than that offered by Starbucks. Starbucks should be worried, says Mr Penney, though he thinks McDonald's is taking a big risk. About 65% of its sales in America are made in drive-through restaurants where customers stay in their cars, placing their orders and then receiving their food through a window. It is impossible to make a Starbucks-style "double-tall decaf hazelnut latte", which takes time, when impatient motorists are queuing. In Germany, a test market, some 300 McCafes are doing well, but they are not attached to drive-throughs. Mr Schultz saw his firm's crisis coming. In February 2007 he warned of the "commoditisation" of the brand in an internal memo to senior executives that found its way onto the internet. "Over the past ten years...we have had to make a series of decisions that, in retrospect, have led to the watering down of the Starbucks experience," he admitted. He cited the switch from hand-pulled espresso machines to the automatic variety, which helped to speed up service but diminished the spectacle of coffee-making. The result, he conceded, was that some customers found Starbucks coffee shops sterile places that no longer reflected a passion for coffee. Analysts and investors welcome Mr Schultz's return because it shows the company is taking action to correct its drift. The main architect of Starbucks' expansion is seen as the best person to lead a return to the firm's roots as a specialist coffee shop with a local touch. McDonald's, by contrast, having just recovered from its own overexpansion, is venturing into a whole new market. May the best latte win. Annual Report: Starbucks Annual Report: McDonald’s Works Cited Adamy, Janet. "McDonald's Takes on A Weakened Starbucks; Food Giant to Install Specialty Coffee Bars, Sees $1 Billion Business." Wall Street Journal: A.1. Jan 07 2008. ABI/INFORM Complete. Web. 17 Nov. 2012 . "Business: Coffee Wars; Starbucks v McDonald's." The Economist Jan 12 2008: 58-. ABI/INFORM Complete. Web. 17 Nov. 2012 . McDonald’s. 2012. Web. 20 Nov. 2012. Starbucks. 2012. 19 Nov.2012. Read More