McDonald’s (MCD) said Friday its same-store sales rose 5.7 percent in January, driven by strong international growth. Yawn… haven’t we heard the same thing every month for a few years now? Aren’t shareholders thrilled that because of this you have not had a down year in the last 5?
For the month ended Jan. 31, U.S. same-store sales rose 1.9%, boosted by sales of breakfast (COFFEE!!) and dollar-menu items. Europe same-store sales jumped 8.2% on strong sales in France, Germany and the U.K.
Now, much of the current though process out there is that McDonald’s is over-reaching with the new coffee offerings slated to be completed in 2009. McDonalds on the other hand sees and additional $1 billion in sales. Who to believe? McDonalds of course.
Why? Those who think that McDonalds is over reaching keep saying that they will never “over-take Starbucks (SBUX)”. Here is the thing though. McDonalds has no plan to do this. What they do plan to do, and have been doing exceptionally well, is tap into a vast market gap.
Millions of people want very good coffee at very good prices. That is what McDonalds is providing. They have no intention of being an upscale coffee house. What they do intend on being and based on all empirical evidence to date they are succeeding at, is the nations most convenient place to get a cup of good coffee.
With 14,000 locations virtually all with speedy drive -thru’s, McDonalds has given the nation another reason not to stop and get out of their car to get their daily fix.
Starbucks’ Howard Schultz keeps pounding home the specter of the size of the US market for quality coffee. He is right that the market is huge. But, he is wrong if he thinks they will all pay $8 for a couple cups of it. The far larger market is those folks who want the quality but will not pay the price. This is not an “coffee specific” event. This trend in the same whether we are talking about cars, computers, or cell phones. We Americans want value.
Years ago the gap between the quality of McDonalds’ coffee and Starbucks’ was vast. It has close considerably and for your basic “cup of Joe”, there is none. McDonalds has expended its potential market for its offering while at the same time, shrunk that of Starbucks. This move into lattes and cappuccinos will further shrink any remaining gap.
Starbucks could alter this easily but they won’t until shareholder dissatisfaction becomes so great that even Schultz’s head is called for. Starbucks is no longer a growth company and it appears management is the last to recognize this. That does not mean they cannot reward shareholders, they just can’t if their reality escapes them.
Until they stop the exodus of customers, they will not right their ship. What to do? Give customers more value.
Want proof? Just sit back and watch McDonalds the next couple years.
Disclosure (“none” means no position): Long McDonald’s, None
