McDonald's Corp is set to launch coffee bars with baristas serving cappuccinos and lattes, moving into direct competition with global coffee chain Starbucks Corp., The Wall Street Journal reported on Monday.

McDonald's will install coffee bars at its 14,000 U.S. stores, incorporating theatrics similar to Starbucks' counters, displaying espresso machines and having baristas prepare drinks, the report said.

The report, citing internal documents from 2007, said the move will add $1 billion to McDonald's annual sales of $21.6 billion. McDonald's will also sell smoothies and bottled beverages, it said.

A McDonald's representative was not immediately available for comment.

Competition between the two companies has already been brewing, with McDonald's expanding its coffee offerings. Specialty coffee, along with breakfast items and lower-cost offerings have helped McDonald's outperform most other U.S. restaurant companies this year.

Starbucks, on the other hand, has been tempering its previous message that its perpetual expansion was resistant to blips in the U.S. economy. It has said that it plans to open 2,500 stores in fiscal 2008, down from a previous target of 2,600.

(Editing by Quentin Bryar)