Mgmt 490 assignment 1 (3 pages)

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MarketBeat Blog - WSJ.com : The Coffee Wars http://blogs.wsj.com/marketbeat/2008/01/07/the-coffee-wars/?mod=sphe...

1 of 2 1/7/2008 5:27 PM

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< Midday Tidbits — In the Cards -- Previous | SEE ALL POSTS FROM THIS BLOG | Next -- The Golden Age > January 7, 2008, 3:02 pm

The Coffee Wars

Posted by David Gaffen

Shares of Starbucks are up 1.6% on the day, perhaps on news that XM Satellite Radio, as a payment for getting out of a marketing agreement with the coffeehouse chain, was issuing shares of its own stock worth $22 million. But the company is facing a new challenge, that from McDonald’s, which plans on throwing a wrench into the words by introducing its own coffee bars — replete with the “barista” concept that Starbucks promotes.

Analysts have been noticeably quiet on this today, with nary a word from the researchers covering Starbucks. But one consultant says the Seattle-based chain ignores McDonald’s at its own peril, saying a “nose-in-the-air” strategy will work well for three to six months, but that’s about it. “Ignores the reality that Starbucks’ recent growth has come not from Volvo-driving college grads, but from lower-income, less educated people than they originally served,” writes Bill Conerly, on his blog. “These are people comfortable at McDonald’s.”

Mr. Conerly, an economist, says he “loves price cutting,” but says a price war with McDonald’s just isn’t going to work — guess who has the lower-cost structure? He advises the company perhaps even consider raising prices and moving upmarket (hard to imagine this happening, though ) and also throws out the idea of cornering the market — not on coffee, but corners in various downtown areas (some would say this has happened already).

The enduring appeal of the brand puts it in a position to rebound after several years of falling operating margins, particularly in the international division , write analysts at FBR. “Its issues seem to be magnified as they surfaced at a time when the overall industry is facing challenges stemming from a tightened consumer,” they write.

But Douglas McIntyre, writing on Bloggingstocks.com, says the situation is a tough one for Starbucks, which fell 42% in 2007, lately trading at $18.36 a share. By contrast, McDonald’s rose 33% in 2007. “Investors will fairly ask whether Starbucks can do anything to stop the erosion of its customer base as coffee drinkers move to other outlets like Dunkin Donuts and McDonald’s,” he writes.