While the Dow Jones industrial average has fallen 31.9% over the past year, McDonald's has slipped only 3.4%. That bests rivals Burger King, which fell 24.6%, and Yum! Brands, parent company of KFC, Pizza Hut and Taco Bell among other fast-food restaurants, which fell 28.6%, reported WDSU-TV. Part of McDonald's success is also tied to its coffee offerings, designed to take on Starbucks.
"The fast-food chain is on the opposite end of the financial spectrum from most of its competitors, as most sitdown restaurants and chains have reported a decline in foot traffic and revenues," Forbes said. "Consumers are trying to save money where they can and that means pulling back on expensive nights out in exchange for cheaper grub, often called 'trading down'."
Morningstar analyst John Owens said people are certainly trading down to more affordable options like McDonald's. "It definitely shows they are recession-resistant," he added.
But Forbes says there is still good news for struggling Starbucks: The recent economic slump hasn't quashed Americans' tastes for gourmet coffee. From Peet's Coffee to McDonald's to Dunkin' Donuts, the market's awash in successful imitators, despite the downturn. Grocery store sales of premium coffee beans are growing at double-digit rates annually.
"No one wants Folgers," industry analyst Steve West of Stifel, Nicholas, told the magazine, citing an entire young generation of professionals for whom upscale coffee has become the standard.
The bad news: Fewer people want it from Starbucks. The company announced Monday that fourth-quarter profit plummeted to a penny a share from 21 cents a year earlier, with same-store sales slipping 8% in the U.S. Aside from costs associated with store closings, profit was 10 cents a share, below estimates and less than half of last year's result. The announcement came just hours after McDonald's said its October same-store sales rose 8.2% from a year ago, including 5.3% in the U.S. A McDonald's spokeswoman said the company does not release sales by specific product line, though coffee sales have been growing.
The tale of the two chains makes sense: An ongoing Stifel Nicholas survey shows that two-thirds of latte drinkers would opt for a quicker, cheaper version at McDonald's once it becomes available in mid-2009.
"McDonald's is cruising along, that's what happens when you can sell designer coffee at their prices," Howard Davidowitz, chairman of retail consultant and investment bank Davidowitz & Associates, told Forbes.
Investors in Starbucks, meanwhile, need to accept the fact it's now a cyclical company. Sales will rise and fall with the swings in the economy as borderline upscale coffee drinkers opt for cheaper versions. Scaling down from overexpansion should prove fruitful for investors once the market turns, West thinks. The question is how long that takes. The company is in the midst of closing 600 U.S. stores as it tries to reverse a 74% decline in its stock price over the past two years. "I am concerned about Starbucks for the next year or so," he said.
The driving force of a Starbucks bounce-back will have to come from resurgence in same-store domestic sales since surveys show that many European coffee drinkers remain resistant to the Seattle-based juggernaut. Meanwhile, sales of out-of-store products, such as packaged drinks and coffee beans, do not factor that significantly into the company's bottom line. Starbucks outsources its distribution business to Kraft, owner Maxwell House, getting a royalty on sales. To a degree, the supermarket business is largely a marketing initiative to publicize the brand and draw people to stores.
The company's misfortune, in addition to overexpansion, is that recent economic turmoil came right on the heels of cheaper alternatives that were already chipping away at market share. There is a bright side: So far, the economy has driven few people back to brewing coffee at home in the morning. The number of people who drink coffee at home is at its lowest point in 20 years, according to consumer-market research firm NPD Group, while the number buying it out is at a 20-year high.
"There has been increased demand for specialty coffee," NPD Group food and beverage analyst Harry Balzer told the magazine. "But everything with premium price is going to come under pressure for awhile."
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