Monday, January 14, 2008

Big Bet:

Chris Dannen at Fast Company’s blog post “Competition” offers:

“McDonald's has nearly 14,000 stores nationwide, all of which will be equipped with full-fledged coffee bars and baristas by year's end. Having already begun adding plush seating, gentler lighting and subtler colors to their franchises, the big M is looking to steamroll the limping Starbucks on its own turf. Starbucks, however, isn't going anywhere; rather, it's McDonald's that will be maimed most by its own campaign to destroy the Seattle super-brand.

Admittedly, McDonald's is one of those monolithic brands that will likely have a longer half-life than radium -- but that hardly makes it invulnerable. By adding the "theatre" of a coffee bar (as one McDonald's VP has phrased it), the company has gained little more than the potential to alienate customers, confuse its menu and open up a black hole for capital.”

The mixture of food and coffee is the norm in Europe, though it has not been perfected in the states. McDonalds tried the café experiment several years ago with mixed results. Will its counter customers migrate to the coffee bar? Can it scale to 14,000 coffee bars by year end? Even for McDonalds 14,000 units in a short period time has to be a logistical nightmare! Will the concept be muddled? Has it run out of ideas for expanding the food menu?

Warren Buffet’s investment strategy is to analyze, find opportunities where there is a margin of safety in a great investment and then make big bets. McDonalds is clearly making a Big Bet.