McDonald's New Weapon Means War With Starbucks

McDonald's Egg McMuffin
rusty_clark / Flickr

McDonald’s Corp. (NYSE: MCD) has launched a new kind of restaurant. Called CosMc’s, it looks like Starbucks. And since Starbucks Corp. (NASDAQ: SBUX) has been in trouble, the coffee chain should worry.

CosMc’s stores will be relatively small and beverage-driven. Its food and snack business will be modest. The drinks mirror Starbucks’ fruit drinks and fraps. Its sandwiches are modest-sized and described as “bite-sized.” “CosMc’s seamlessly blends brand-new, otherworldly beverage creations with a small lineup of food, including a select few McDonald’s favorites – all designed to boost your mood into the stratosphere, if only for a few moments,” the company said.

How Vulnerable Is Starbucks?

Starbucks drive-thru
Source: Jason Whitman / iStock Editorial via Getty Images
McDonald’s will start with just 10 CosMc’s locations, but that will likely change. If so, Starbucks will have the kind of competition it has tried to avoid as Wall Street worries about its customer growth.

Starbucks shares have declined for almost two weeks. According to Bloomberg, this has not happened since the coffee store chain’s initial public offering in 1992. The drop-off has knocked $12 billion off its market cap. Among the causes are estimates that its same-store sales have fallen recently.

This year was expected to be a strong period for the company and its new CEO, Laxman Narasimhan. Revenue for the most recently reported quarter was 11% higher to $9.4 billion. Net income rose 10% to $1.2 billion. Comparable store sales rose 8% worldwide.

Investors’ question is whether recent observations about same-store sales at Starbucks are correct. No one can say for certain, outside the company, whether sales growth is slowing. And, if it is slowing, no one outside Starbucks can explain why. CosMc’s won’t help Starbucks rekindle growth if growth indeed is a problem. (Here are five reasons to avoid Starbucks today.)

Starbucks’ strength with Wall Street is built on a nearly endless expansion, which may be problematic. Store count reached 20,228 at the end of the past quarter, up from 18,416 in the same period the year before. Starbucks may have overbuilt, particularly in the United States. And overbuilt chains eventually face challenges in same-store sales. As competition grows, that rebound will face a challenge.

Does McDonald’s want more of Starbucks sales? Yes, and CosMc’s may be its new weapon.

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