Starbucks' Empire Challenged by Unlikely Rival -- the Golden Arches

March 6, 2007 — -- When it comes to coffee, Americans want more than a plain cup of joe.

Starbucks used to be the gold standard in luxury lattes, cappuccinos and other coffee concoctions. Now, old standbys like Dunkin' Donuts and McDonald's are rolling out a host of fancy coffee drinks, including flavored lattes. And in a blow to the 'bucks, a new Consumer Reports survey rates the taste of McDonald's coffee higher than that of the high-end coffee chain.

But are coffee snobs taking the bait?

ABC's Bianna Golodryga asked New Yorkers whether they would go to a fast food restaurant for coffee. One woman said she'd pick the Golden Arches "if there wasn't a Starbucks around."

It's worth thinking about how many Starbucks will be around now that other franchises are jumping into the coffee klatch.

And last week, Howard Schultz, founder and chairman of Starbucks, sent out an internal memo voicing concern that as the company has grown, its small-cafe charm has faded.

Experts argue that Starbucks won't be shutting down anytime soon.

"I don't think that Starbucks has all that much to worry about," said Howard Simons, a strategist for Bianco Research. "The person who's looking to treat themselves isn't looking to go to McDonald's to treat themselves or Dunkin' Donuts to treat themselves. Those don't have the cache."

So what's behind the latest rush to capitalize on the coffee market? Coffee beans, one of the world's most traded commodities, currently sell for $1.20 a pound -- up 89 percent since 2001.

It would appear that Starbucks is cashing in on a wide profit margin, but in fact, maintaining its fancy equipment, staff and high-end image is costly. For each $4 latte sold, Starbucks pockets less than 50 cents.

"If you walk into a Starbucks you're being served by a barista, you have a fancy interior design," Simons said. "You go into a McDonald's, they have a plastic counter, bright fluorescent lighting. So a McDonald's can probably make a lot more money per cup by selling for a dollar than a Starbucks can by selling it for $4."