Starbucks shifts to meet challenges

For years, Starbucks was described — much to CEO Howard Schultz' chagrin — as the McDonald's of coffee, not just for the ubiquity of its stores but for its intense focus on delivering a consistent product, from Ballard to Boston to Beijing.

Now, after batting away pretty much all of its smaller rivals, Starbucks finds its biggest competitive challenge coming from none other than Mickey D's. The burger chain has taken dead aim at Starbucks with its own lower-priced, "unsnobby" coffee drinks and "McCafe" coffee stands.

To meet Ronald's challenge, the Starbucks of 2010 is doing things that would have been anathema to the Starbucks of 2000: putting its Seattle's Best Coffee brand into Subway and Burger King eateries and AMC movie theaters; instituting a 10-cents-a-share quarterly dividend; and selling (gasp!) instant coffee under the Via name.

And in a shift from the strategy of blanketing the United States with stores (memorably mocked by The Onion with the headline "New Starbucks Opens in Rest Room of Existing Starbucks"), Starbucks now sees much of its growth potential residing overseas, especially in China.

That aggressive growth, in which the company plowed its profits into more and more new stores, effectively suffocated potential rivals and prevented any of them from becoming the coffee world's Burger King, D.A. Davidson analyst Bart Glenn said.

"Once they built up to a critical scale, it became very tough for anyone to come in and knock them off," Glenn said. "They would have to do things even better than Starbucks, which is a challenge."

Starbucks' own challenge, he said, is to get more revenue out of its existing stores and leverage its brand name and expertise into new markets — more or less what McDonald's is trying to do to Starbucks.

This article was originally published June 12, 2010, and clarified June 15, 2010. Starbucks was founded in 1971. The original article said it was founded in 1985, but that's the year it was incorporated.