McDonald's bringing on the baristas

The fast-food giant is taking on Starbucks by opening coffee bars in its restaurants nationwide. Wall Street likes the idea. Here's why.
By Kim Peterson

Would you like a cappuccino with your Big Mac? That might sound a little strange now, but McDonald's (MCD, news, msgs) is hoping its new specialty coffee bars boost sales and cut into Starbucks' (SBUX, news, msgs) business.

The fast-food giant plans to bring baristas and espresso machines to nearly 14,000 locations in the U.S. this year. Customers will be able to order lattes, mochas, ice-blended coffees and other specialty drinks.

It's all part of a company strategy to turn McDonald's from a grab-and-go fast-food chain into an order-and-stay restaurant where customers can surf the Internet and linger over coffee.

Better interiors on the way The company has rolled out wireless Internet at many locations. It's tried to make restaurants homier with more-welcoming lighting and music. The interior color schemes no longer look like a Happy Meal box.

"We began to realize . . . we could definitely sell coffee in this environment," a McDonald's executive told The Wall Street Journal.

But will customers bite? Or sip, in this case? Some store franchisees say their customers don't know what a latte is. According to the Journal, the company hopes specialty coffee sales will help add $1 billion in annual sales, which are currently at $21.6 billion.

• Talk back: Will you buy coffee drinks at McDonald's and linger longer?

McDonald's risks turning off customers who appreciate the burger-and-fries philosophy the company was founded on nearly 70 years ago. But if successful, the strategy could bring in new consumers -- perhaps the kind who willingly shell out $4 for a cappuccino at Starbucks.
McDonald's shares climbed slightly today on the news to close at $58.03.

Yet even as McDonald's goes upscale, Starbucks has begun reaching out to the on-the-go customer. The company has outfitted many locations with drive-through windows and sells to-go meals for breakfast and lunch.

Starbucks has more than 14,000 stores and opens an average of six new locations every day. But the company isn't seeing the kind of customer traffic growth it did in the past, and its stock price has fallen from $35 a year ago to $18.38 today.

• Read posts about Starbucks on the Top Stocks blog

Starbucks is undergoing its own corporate self-examination right now. The company said today it's replacing Chief Executive Jim Donald with Chairman Howard Schultz. It also plans to slow the rate of store openings and will even close some stores that aren't doing well.

Is there enough business for both?
Starbucks investors didn't seem too worried about a new McDonald's strategy: Shares of the coffee chain edged up slightly today.

That raises a key question. If McDonald's finds success with its new coffee drinks, will Starbucks be affected? Do the two companies have enough customers in common?

Right now, there are huge differences. Despite all its renovation attempts, McDonald's is no Starbucks. It's hard to imagine savoring a cappuccino and a book while a 2-year-old's birthday party is taking place across the room.

And Starbucks isn't McDonald's. When you have 15 minutes to grab lunch before returning to the office, Starbucks doesn't usually come to mind.

Who knows -- McDonalds' plan to introduce lattes to the masses might even help Starbucks. So the two companies can probably coexist as coffee purveyors just fine, without beating each other up in competition.

But if Starbucks starts selling cheeseburgers, that will be another story.

Kim Peterson is a freelance journalist who contributes frequently to MSN Money's Top Stocks blog.