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Two Lunches, Two Economies, One Message
April 16, 2000

Two Lunches, Two Economies, One Message

Allow me to introduce Comparative Lunching 101. Course materials include a lunch hour and some portion of your wallet. During our study we will learn that America has two economies and that one of them is doing better than the other.

Lunch #1: A few days ago I drove to the trendy "Miracle Mile" in Dallas--- an area of upscale shopping opportunities with a pervasive ambiance of comfort.

I went to the Empire Baking Company and bought one of their "Roasted Veggie" sandwiches and a chocolate macadamia nut cookie. The sandwich was $5.50, the cookie $1.50 for a total, with tax, of $7.58. Then I walked to Starbucks and ordered a Grande Mocha Frappucino.

I had just spent $11 for what some would call a brown bag lunch.

Regular customers are not deterred.

The only problem an Empire Baking Company customer can face is late arrival: go for a sandwich anytime after 12:30 and the sandwich you want is likely to be sold out.

And Starbucks? Always busy.

Lunch #2: On another day, I went to McDonald's where the Extra Value Meals--- which include a large French fries and a medium soft drink--- start at $3.09 for a McChicken sandwich and top out at $4.29 for a Double Quarter Pounder. Feeling expansive, I ordered the Big Xtra Crispy Chicken sandwich with cheese and special Santa Fe flavor sauce. (If you are one of those who feel protective of the natural wonders of The City Different, don't worry. McDonald's new flavor poses no threat to Pasquale's, the Pink Adobe, Café Sena, or Geronimo.)

The check was $4.76.

I could not have spent more without extreme effort. Basically, you can eat at McDonald's for $4 plus or minus fifty cents. If you are really trying to pinch your pennies, two people can share the two cheeseburger extra value meal for $3.29 plus tax. That's about $1.75 each for lunch.

Nor does that include the expansive secondary benefits of a McDonald's lunch. My paper tray liner carried a printed game schedule for the Dallas Stars and offered a 100 percent cotton Stars T-shirt for $11, postage and handling included. The French fries box offered still more: the possibility of winning a Gateway Profile 2 flat screen computer and two stamps for playing a game of Monopoly in which the top prize was $50,000 a year for 20 years. The second prize was a $200,000 family investment account.

A lifetime trust for Big Macs!

What's curious here is that although these two places are within a quarter mile of each other, they are worlds apart. While the Starbucks menu starts at $2.45 for a tall (their euphemism for small) café latte, the basic fact is that most of their drinks are $3 to $4.

That's what most of the complete lunches cost at McDonalds. While Starbucks knows that price resistance exists, the brute fact is that there are millions of Americans for whom $4 is a trivial amount of money.

It's not that way at McDonald's.

When the histories are finally written, the Great Burger Wars will rank among the longest mercantile conflicts in human history. Raise the price of an Extra Value Meal by a nickel and customers will check out Burger King or Wendy's. They might even bolt the world of burgers completely and head for Subway. Regular customers at the other places will be just as quick to explore McDonald's if prices at their customary places rise. For these establishments and their customers, $4 is not a trivial amount of money. Huge ad campaigns are waged over pennies.

It should come as no surprise, then, that the two stocks reflect the spending power of their customers. McDonald's has under performed the S&P 500 Index so far this year, in the last 12 months, in the last 3 years, and last 5 years. Starbucks has done just the opposite, beating the S&P 500 in each time period.

What Happened To a $10,000 Investment in McDonalds and Starbucks

Stock Year to date Last 12 months Last 3 years Last 5 years
Starbucks (SBUX) $15,490 $12,866 $25,837 $61,756
McDonalds (MCD) $   9,187 $   8,388 $16,064 $22,671

Source: Microsoft Investor website, April 6, 2000

Is there a message here?

I think so. For some, the last five years have been great. But we'll know that everyone is sharing in the boom when McDonald's can charge more for a Big Mac.

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