McDonald’s Takes On
A Weakened Starbucks

Food Giant to Install
Specialty Coffee Bars,
Sees $1 Billion Business

By JANET ADAMY
January 7, 2008; Page A1

OLATHE, Kan. — This fall, a McDonald’s here added a position to its crew: barista.

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’ 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.

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Schultz Takes Over to Try to Perk Up Starbucks

By JANET ADAMY
January 8, 2008

In retaking the reins of Starbucks Corp., Howard Schultz will have to fix a coffee empire that he says has become stifled by bureaucracy and has lost the courage that helped it change how Americans get their coffee.

Starbucks ousted CEO Jim Donald yesterday and said that, effective immediately, Mr. Schultz, the chairman, will take on the additional role.

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Mr. Schultz, 54 years old, came to the Seattle coffee company in 1982 when it had four locations and nurtured it to become the empire it is today. Serving as CEO from 1987 to 2000, he presided over the company’s 1992 public offering. Starbucks now has more than 15,000 locations around the globe, products on supermarket shelves and its own record label.

Mr. Schultz said yesterday he plans to slow down the pace of new store openings in the U.S. and to close struggling locations. This year the company had planned to open 1,600 stores in the U.S. He said he also plans to improve the customer experience at U.S. stores, streamline management and accelerate expansion overseas.

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