The Great Coffee War of 2009: McDonald's prepares to trash Starbucks

Tom Barlow

May 5th 2009 at 2:00PM

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McDonald's (MCD) has launched a $100 million assault on the boutique coffee industry, a media blitz pushing its McCafe brand as an alternative to offerings of the Starbucks (SBUX) franchise. It if has its way, you will leave the green-and-black and never look back. But Starbucks and others hoping to grab or maintain market share are not going down without a fight.

Six months ago, when I last had a McDonald's latte, it bore the same resemblance to coffee that grape Kool-aid does to Chateau LaTour. The gloppy, overly sweet sludge tasted like an instant mix. That has changed. Now the lattes are made in an automated machine that makes espresso on command, heats milk and dispenses both in the proper proportions at the push of a button. The one I tried yesterday was surprisingly palatable. In fact, it was better than the one I bought from SBUX for my own scientific comparison. It also cost less, $2.39 vs. $2.80.

Starbucks, which just reported an eight percent drop in revenue in the first quarter of 2009, is also planning a multimillion dollar campaign to protect the brand and the notion that its products provide a greater value, justifying the higher price point. Commoditization of the boutique coffee market poses a huge threat to the already-struggling company. Of course, it's worth noting that Starbucks isn't lily white in this fight, and even now, as it defends its coffee turf, continues to go after McD's on-the-go breakfast meal business.

Not to be outdone, Dunkin' Donuts has also announced it is dropping the price of its lattes by 15 percent in the New York City market, undercutting even McDonald's with a sub-$2.00 small size.

Do I see a price war in the offing? Fire the first bean salvo, and may the best cup win.