Premium Coffee Shops May Be Nearing Saturation Point

ALBANY — It's easy to get a good cup of coffee on Wolf Road. And it's getting easier.

The two-mile retail strip has two Dunkin' Donuts, one Starbucks, another planned, and an independent coffee house. The McDonald's sells a premium brew, as does the Borders. And the Barnes & Noble in the mall across the street from the Starbucks sells Starbucks.

The coffee cluster is great for option-oriented commuters such as Troy Mackey, who will grab a French Vanilla at Dunkin' Donuts only if he spies a short line though his car window. "I can jump in and jump out," Mr. Mackey said as he waited on line in his business suit. But it may not be as great for Starbucks, McDonald's, and Dunkin' Donuts as they compete in crammed commercial battlegrounds such as this one in upstate New York. So many stores crowded within eyesight of each other raises a question: Is it possible to have too many places selling premium coffee?

Analysts note that while Starbucks, McDonald's, and Dunkin' Donuts each offer so-called specialty coffees, they are not all competing for the same demographic. Starbucks is a place to linger over your latte after a barista fixes it to your specifications. McDonald's and Dunkin' Donuts compete more over convenience and price. While no one expects McDonald's to start offering cushy couches or Dunkin' Donuts to sell CDs, they have made forays into Starbucks territory in recent years. Dunkin' Donuts sells espresso drinks. The McDonald's here sells Newman's Own organic coffee, and the chain started to roll out drinks like lattes and cappuccinos.

The Wall Street Journal reported this month that McDonald's plans to add coffee bars with baristas.

McDonald's would not respond directly to a question about the Journal report, but released a statement saying the company was "encouraged" by its test of specialty coffee in more than 800 American restaurants. Meanwhile, analysts note that Starbucks is building more drive-throughs and has offered hot breakfast sandwiches.

"There's not a great deal of overlap in the customer bases, in my opinion. They're competing on the margin," a Morningstar equity analyst, John Owens, said. But he added: "The more these companies push, the more their customer bases will overlap."

But even if the companies are competing for the same slice of the specialty market, that slice is getting bigger. Specialty coffee sales have been growing for years. The executive director of the Specialty Coffee Association of America, Ric Rhinehart, said the specialty coffee retail market is at least $13 billion a year, and 90% of that is "cup sales."

Coffee is now chipping away at the soft drink market, he said.

Mr. Owens compared the current coffee market to the burger boom of the 1960s and '70s, when a number of chains opened shops near McDonald's. There was some shakeout, but he noted that chains like Burger King, Wendy's, Sonic, Carl's Jr., and Jack in the Box are still standing.

"More and more, people will continue to want to have better and better coffee," Mr. Rhinehart said.