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Does Going Upscale Make Sense for McDonald’s?

In an effort to revamp its image and attract new customers, McDonald's is going upscale. USA Today Monday got a sneak preview of a $1 billion plan to upgrade restaurants by installing flat-screen televisions, bringing in wooden tables and toning down the loud color scheme. That's pushing the chain into "looking less like McDonald's and more like Starbucks," as reporter Bruce Horovitz wrote.

Is this a good idea? Does it make sense to tinker with the formula that has achieved market saturation, global domination and positive results in good times and bad? Should McDonald's be trying to pull customers from more expensive chains? Can McDonald's really hope to turn itself into a coffee house? As my Daily Ticker colleague Aaron Task and I discuss in the accompanying video, getting into Starbucks' face and market space might be a dubious proposition.

Yes, the two iconic companies, both of which sell coffee and sugar-- or fat-laden breakfast foods -- have attained ubiquity and are central to America's food culture. But beyond that, they share very little. If you were to draw a Venn diagram of regular McDonald's users and regular Starbucks customers, they wouldn't touch. It's sort of like the overlap between Twitter users and owners of Bing Crosby vinyl records.

The two chains also exemplify the mutually exclusive differences between fast food and upscale casual dining. It's Starbucks fey vanilla scones vs. the McGriddle, the syrup-infused pancake sandwich. Both chains have a gross sausage/egg/muffin concoction. But while McDonald's embraces the Egg McMuffin in all its greasy goodness, many Starbucks stores no longer carry its breakfast sandwiches. Starbucks coffee cups are imprinted with lengthy messages that explain why paying $3 for a cup of coffee helps farmers in emerging markets and fights global warming. McDonald's coffee cups simply warn that the stuff inside can be very hot.

From the coffee cups to its design and its interesting history -- Ray Kroc and the Golden Arches are an installment in my collection of great business stories -- McDonald's is all about utilitarianism. Yes, McDonald's has branched out beyond burgers in an effort to get more members of the same family to eat; it offers salads and fruit so moms will eat alongside the kids. But above al,l it's a place where people can spend a few dollars to get enough decent-tasting food to fill their stomachs, and right quick. Hewing to this discipline helped McDonald's weather the recession. In April, McDonald's same-store sales were up six percent around the world and four percent in the U.S.

By contrast, Starbucks offers the customer a fundamentally different value proposition. It's a place to blow a few dollars on an expensive coffee concoction, buy an expensive backed good, and linger. You can get some work done, hang out while listening to the latest Paul Simon CD. It has become a sort of gathering place, a place for people to write, where real estate agents meet clients, a teen hangout. Starbucks faced a rare slump as customers realized that blowing $5 on a frappucino didn't make so much since during the deepest recession since the 1920s. But the chain has reflated along with the financial markets. Here's a two-year chart of Starbucks and McDonald's, and a five-year chart of the two stocks, which is much less flattering to Starbucks. (Starbucks CEO Howard Schultz last month appeared on the Daily Ticker to discuss how the company recovered its groove.)

To a degree, McDonald's efforts to go upscale are reminiscent of Wal-Mart's efforts to attract more-upscale shoppers by pushing women's fashion and building green stores. That didn't quite pan out for Wal-Mart. And there's reason to think it might not for McDonald's. As is the case with Wal-Mart, the chief selling point for McDonald's is price and convenience, not ambiance.

In addition, like Wal-Mart, McDonald's faces a certain level of cultural resistance as it seeks to expand its market.

For all its success and iconic status as a first employer, global comfort brand (I've eaten at McDonald's in, among other places: China, Israel, Germany, the U.K., even France), big trends are weighing down on McDonald's. There's the rising concern about childhood obesity and nutrition, the push toward local and sustainable agriculture, and a general pervading foodie-ness. (Kids, it may be hard to believe, but 30 years ago there was no Food Channel and there were no celebrity chefs.) Many children these days are socialized to believe that fast food is bad for you, that McDonald's doesn't measure up to the local diner or the gourmet burger joint. Think about the way the movie Rain Man turned "K-Mart sucks" into a catch-phrase and harmed the retailer's brand equity. The documentary Super Size Me, in which filmmaker Morgan Spurlock barely survived eating only McDonald's for a month, may have had a smaller but similar effect on the Golden Arches. If you're a yuppie like me, you may even have difficulty getting your own kids to eat there.

Daniel Gross is economics editor of Yahoo! Finance.

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His most recent book is: Dumb Money: How Our Greatest Financial Minds Bankrupted the Nation.