McDonald's Coffee Poses Material Threat to Starbucks -Deutsche Bank (MCD, SBUX)

May 20, 2008 9:26 AM EDT
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Deutsche Bank issued a research report this morning highlighting several reasons why McDonald's (NYSE: MCD) specialty coffee roll-out poses a "material competitive threat to Starbuck's (Nasdaq: SBUX) core business - premium coffee beverages." The firm maintains a Hold rating on shares of Starbucks.

The firm calls McDonald's coffee roll-out a "3-pronged attack of lower price points, massive distribution and speed/convenience..." which could create a $0.05 incremental EPS risk for Starbucks over the next year. Specifically, Deutsche calculates, based on test markets, that McDonald's could sell 30-40 units/day (which is only 30% of the company's long-term target range), implying $35,000 per store or $490 million on a system-wide basis. According to Deutsche, this amount of revenue comes without advertising or word-of-mouth growth, but still represents 6-6.5% of Starbuck's coffee sales. Eventually, Deutsche believes McDonald's coffee sales could reach $1.4 billion in 2009, which would be close to 25% of Starbuck's estimated U.S. coffee sales.

Deutsche believes shares of Starbucks will remain range bound for some time as "soft 2008 performance continues, no sign of a turnaround has emerged, and current share prices already discount significant improvement in 2009."

Starbucks Corporation engages in the purchase, roasting, and sale of whole bean coffees worldwide.

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