July 22, 2008
McD’s Looks to Perk Up Coffee Biz
“People who want gourmet coffee are not going to Mickey D’s. You go there, you want good coffee that’s cheap. You don’t go there looking for Starbucks or Rockin’ Joe (local shop) coffee.” That opinion, straight from the mouth of the resident 19-year old looking over his father’s shoulder as he worked on this piece, may very well sum up the current dilemma at McDonald’s.
The chain has pushed an upscale coffee strategy with plans to have all of the company’s 14,000 restaurants selling lattes and cappuccinos by next year. Many of the franchisees of those restaurants, however, are questioning if the strategy makes sense when the chain is finding it more difficult to sell its mainstay fare in the current economic environment.
According to a Wall Street Journal report, McDonald’s own numbers suggest that the company’s plan to unseat Starbucks (which is doing a pretty good job of unseating itself at the moment) is not going very well. In six major markets where specialty coffee drinks were introduced, sales peaked after about three weeks and then began to fade.
In Kansas City, MO, weekly sales of specialty coffee drinks per restaurant reached 359 by early December. By the last week in June, sales of the drinks had fallen to 217.
A spokesperson for McDonald’s, William Whitman, disputed the Journal’s findings, claiming that sales in most markets where the chain has introduced specialty coffees are meeting or exceeding the company’s expectations.
Proponents of the program point out that McDonald’s has not even begun a large national advertising push to promote the drinks. Also, the company tallies iced coffee drinks separately from espresso so what may appear to be sales dropping off may simply be a switch from one beverage to another.
Even with explanations attached, a number of franchisees are balking at making major renovations, notably adding a special beverage counter to sell the specialty coffee line. “Nobody wants to spend the money on that,” a franchisee told the Journal.
Some franchisees have opted to only install the machines needed to make the new specialty drinks.
Discussion Questions: Is McDonald’s plan to add specialty coffee centers at its U.S. restaurants a good idea being implemented at a bad time, a good idea at the right time or just a bad idea for any time? Do you think the chain needs to modify its plans?
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The big issues for McD’s are 1) the capital cost of the new equipment, 2) the HUGE real estate cost of the new equipment, and 3)the labor required to make the new products. Now consider the opportunity cost of not using these resources more efficiently to make a product that operationally and strategically fits more comfortably into their current lineup. This sounds like a good way for McD’s to erode value.
The last time I was in McDonald’s at breakfast time I saw a group of seniors that seemed to like the atmosphere. Well, maybe it was the prices that they liked but they were all shooting the breeze, reading the free newspapers, getting free coffee refills, and spending a fair amount of time there. It looked like McDonald’s version of a “Starbuck’s experience.”
I think McD’s is wise to go after the premium coffee business at a competitive price point but not to market it as gourmet. I agree with the other opinions that gourmet and McDonald’s just don’t go together. It’s like they are trying to insult our intelligence, and who likes that?
McDonald’s has a huge market share of people who are not too discriminating in their food and drink choices. If they can raise their average ticket on drink purchases and capture market share, I don’t think it matters if their employees are coffee barristas or if their product is top notch (even if it is). They have the traffic and will do well in this arena. With Starbucks closing 600 stores, maybe the closest place to get coffee is the nearest convenience store or McDonald’s.
I think McDonald’s adding gourmet coffee is a bad idea. McDonald’s isn’t gourmet anything. McDonald’s sells high quality coffee at a fair price. In my opinion, McDonald’s appeals to an older clientele which appreciates the quality and price of McDonald’s coffee and wants to avoid the immature teenagers loitering at Starbucks. McDonald’s adding gourmet coffee is like Walmart selling upscale merchandise. It just doesn’t fit.
Where do you think they install the cappuccino machine? Beside the deep fryer or the McNugget maker? Can anyone associate high-end coffee drinks with the store you buy Quarter Pounders and Egg McMuffins at? McDonald’s should just be what it is and focus on ‘healthifying’ its current menu.
The two main important components are convenience and quality of product. Dunkin’ Donuts proved quality can be done in a less fancy, eclectic environment. McDonald’s is positioned for convenience and if the quality is good, the timing of this move couldn’t be better, with Starbucks closing 600 stores.
McDonald’s is well suited to bring “gourmet” coffee into a recession-acceptable price point. The tastes of US coffee consumers have changed and we want quality coffee, hot and cold, at a time when $4 a pop at Starbucks feels imprudent. With McDonald’s locations, high turnover, and fair pricing, this feels right on for penny pinchers. The real savers will go the next yard and remember how to make coffee at home for twenty five cents.
I will take the politically incorrect point of view that the Starbucks recession is not the result of McDonald’s serving gourmet coffee. I find it more to be a coincidence. McDonald’s still serves a very different marketplace than Starbucks, where gourmet coffee is concerned. Very few authentic Starbucks customers are content to go get their latte at McDonald’s.
Starbucks offers a totally different type of “experience” for a very different crowd. McDonald’s competes with C-stores and other fast low cost gourmet coffee. Starbucks simply over-expanded in the number of stores and locations and they have lost some quality control in the doings. The new (old) CEO is getting a handle on it and better days are ahead again for Starbucks, and McDonald’s too.
The current McD’s ‘premium’ coffee rated as the best not too long ago is neither ‘premium’ nor ‘gourmet’; it’s just a cup of coffee. That is, if you can get it.
I think someone really needs to define ‘gourmet’ here. It’s certainly not just regular coffee with a different label. It’s not that same coffee with some cream and ice cubes in it.
Gourmet as a description for a brewed beverage just doesn’t seem to be a label that fits. Maybe coffee flavored specialty drinks is a better label, but not ‘gourmet’.
Expanding into a declining market is never a good idea. Expanding something that you really aren’t all that good it is an even worse idea. Somehow, a 3-4 sentence coffee order like those at Starbucks can be sometimes, just doesn’t go with “would you like fries with that?” For a food retailer that really doesn’t do its core business all that well, I hardly see them becoming the first choice for a ‘gourmet’ coffee drinker. Bottom line is that it’s a bad idea, no matter what the timing.
Dunkin’ Donuts is doing pretty darned good with their cheap but yummy coffee–but they keep it simple. Perhaps McD’s needs to drop the upscale bit and focus on the same business opportunity–fast, good and inexpensive. They’ve never been upscale and never will be…why try to go there now? As noted above, it seems imprudent.
A “tasteless” flattening economy affects the pocketbooks more than the taste buds of its beverage enhanced constituencies. It’s true they still want “Vanderbilt” type coffee but if they feel they must slip into McD’s for their morning fix, they expect it to be priced not only for “Sweeney” but also still have the fashionable meeting place aroma of the Starbucks Palace, which McD’s doesn’t appear to have…and probably never will, since it is entrenched in “fast, tasty and cheap.”
McDonald’s wouldn’t dare sell Kobe beef burgers for $12 a pop because their loyal audience wouldn’t emotionally respond. Conversely, the Starbucks addicts aren’t too interested in sacrificing their perceived image as coffee mavens in burger heaven for a buck or two less. Perhaps, just perhaps, this is an East is East and West is West sort of thing. Let’s keep watching McD’s and see what happens.
Contrary to what most say, or even to some past results, I think it’s a good idea for value brands like McD’s or Walmart to continue to probe the higher reaches of their brand perception with top quality product. Why not? As long as you’re willing to admit your mistakes every now and then, it’s a good idea to test the boundaries of your product “triangle.” (All good assortments should be thought of as a triangle, with the point being just that; the top end).
My hat’s off to them both.
No doubt McDonald’s can do ‘quality’, but ‘gourmet’? Who’s kidding who? McD’s does a great job of providing quality everything (including service), but I can’t think of very many consumers who go there for the ‘experience’ (unless of course your kids are nagging you to go the the play area there!).
Starbuck’s is as much about the experience as it is the coffee. Howard has long billed it as your ‘third place’, with the first two being your home and office.
Anyone reading this ever go to McDonald’s just to hang out and relax with your friends lately?
Starbucks has bigger issues to concern itself with than this one.
The American love affair with Premium Coffee doesn’t start and end with Starbucks. Starbucks is as much a trendy cafe as it is a gourmet coffee spot.
The basic American taste for coffee has become more sophisticated, as evidenced by the brands and varieties found in the grocery store today.
That change in taste certainly applies to many (of course, not all) McDonald’s patrons. With the broad penetration of McDonald’s, it is likely that gourmet coffee at a reasonable price will appeal to enough people to make it a viable proposition.
In today’s world, it is the fast who eat the slow or the big who eat the small. It is the focused and the flexible who eat the unfocused and inflexible.
With that said, I think that McD’s is losing some of its focus. Yes, they should get into the upscale coffee business but I do not think their focus should be on the Starbucks gourmet coffee drink but on giving their customer a better cup of coffee and a better experience. There are more C-Stores out there that sell coffee than Starbucks. Let’s just go after the coffee drinking market.
Gourmet coffee at a fast food joint? Especially when a great formula is already a success? Are these guys for real? Retailers spend big bucks and tremendous amounts of time and energy to build a niche for themselves where they can be the top dog. Starbucks has coffee, Dunkin’ Donuts has coffee, Tim Horton’s has coffee. MacDonald’s has burgers and fries.
Too many retailers make the mistake that they have to compete against their competitors, and by trying to compete, they change the formula that made them number one in their own market. You change the formula of anything, you get a different result. Different results can mean failure. How often have we seen retailers cave in and fail because they have changed the formula that made them a success? Sears & Roebucks ring any bells?
This is a purely American dilemma. McDonald’s in France and elsewhere have raised the bar for the company and are a clear break from their plastic American siblings.
In the US, McDonald’s is heavily dependent on the drive-through customers who couldn’t care less about what a redesigned McDonald’s might look like from the inside. Couple that together with the myriad franchise owners who are too stubborn to reinvest to go after a new segment, and I can understand why so many of the above comments are in the pejorative.
Which really is too bad because the McCafés are actually on par with Starbucks but at a cheaper price. And those McDonald’s iced coffees have to be the hit of Summer 2008.
I feel that McDonald’s coffee strategy can’t stand on its own but needs to be a part of a larger strategy. As a mom of young children who frequents McD’s often, I desire better choices to fit my lifestyle and wellness goals. While their salads are a good start, they aren’t enough. They need an entire strategy focused on Mom’s–and coffee can be a cornerstone of that strategy. Their coffee is very good but seems incongruent with their market persona. A new strategy can create a new persona.
So McDonald’s acts like it wants to be a mini-Starbucks. But they want to charge you a fee to use the internet service they have?
I happen to find it a good idea but where they’re missing the mark is on price. Not all of us that go to Starbucks are too cool to go to Mickey D’s. Maybe consumers that are cutting back on the $4 and up offering would go if it was 1/2 the price. I checked it out and it’s about 25% cheaper in my market.
You don’t pay a price for a burger that’s the price of a more upscale restaurant so why not offer the coffee and a price you can’t resist or feel ‘smarter’ about purchasing. Coffee shops are almost always in any news story about how to save money in the face of rising fuel prices. They need to make their coffee the choice that a consumer doesn’t need to feel guilty about.
I think McDonald’s is wise to expand their coffee offerings, but let’s not think that anybody is ever going to confuse them with Starbucks, especially Starbucks’ customers.
It’s not either–it is both. Coffee is the second highest traded commodity behind oil for a reason–people never tire of it.
Since this issue is far more multi-faceted than any one article or comment can ever attempt to simplify with one answer, I’ll offer a few more thinking points to throw into the pot:
“Gourmet coffee”: Blame Starbucks for this one. A brand that couldn’t win “best of” in its original home town of Seattle when it was local, it was nevertheless worthy and successful in introducing mass America to the concept of a premium cup. However, through massive over expansion and the inevitable cost cutting and line extension stages that comes with maturation, entertaining barristas with true espresso machines went away, and the worst in my opinion, the product on the shelves of grocery stores, all facilitating the closed gap between what is “gourmet” and anything better than mom’s Maxwell House. Just look at that shelf today and see the effect: Maxwell House, Folgers, Eight O’Clock; hey, we’re all gourmet now. Why not Mickey D’s?
Starbucks vs. McD’s vs. Dunkin’ Donuts vs. Hampton Inn, etc.: See above. As for what those others should do in response to the wide open door Starbucks created, DD did the best and most obvious; make better coffee where it’s already wanted and expected with their daypart and product. McD’s can maybe extend their line with iced drinks and have some success; why not? Starbucks extended theirs so far that my 11 year old craves them for one thing; Strawberries & Cream Frap, maybe closer to a milk shake than a cup of coffee?
The one differentiation that Starbucks still has that none of those do, or will: it’s still a gathering, meeting, or loitering place, except maybe in the corner of Kroger’s, Target, in the middle of the airport concourse aisle, in the office building lobby, etc…. Keep it up, they’ll compromise that edge too.
Imagine if McDonald’s only sold coffee to 25% of their current customers. I believe they might be larger than Starbucks. Based on their unique and dominant market position the opportunity is to expand the market, not challenge Starbucks.
It’s easy for armchair quarterbacks to judge McDonald’s beverage initiatives as misguided or flawed. If Starbucks is your paradigm of success, you may scoff at McDonald’s proffering gourmet coffee drinks. However, McDonald’s has said that they did not single out Starbucks as a target. They believe that their customers want these drinks.
Sure, McDonald’s is about burgers and fries. They’re also about value and convenience, and having thousands of drive-thru windows across the country is a huge advantage. Dunkin’ Donuts has built a devoted following for its coffee; Why not McDonald’s? (Regardless of what Starbucks does.)
Wow, this article got everyone talking. Good on McDonald’s for differentiating, competing and giving it a go. Maybe the customers will talk about it too. McD’s may never sell ‘gourmet coffee’ but if it can convince its high traffic to spend a bit more on the perception of gourmet coffee then hats off to it. Effort, growth, customer service and differentiation is what it’s about.
Also McD’s has been modernising its stores, raising its game and becoming less plastic. It bounced back from its bad press. It clearly still has clout and scale to try a few things. What else should it do?
One scoffing 19 year-old isn’t a good argument against this. You can bet Mickey D’s is checking the sales numbers early and often. They’ll know if it’s a success or not.
As for McD’s not pulling off “gourmet,” of course that’s right…but what is really gourmet is changing. Who among us would have predicted 20 years ago that McD’s would be selling salads with edamame in them (and that they aren’t bad!)?
Besides, “gourmet coffee” is just a code word for fresh brewed 100% arabica. Of course no one expects them to be a micro-roaster. It’s just a signal to the consumer that the product has changed.
I’m not a regular Micky D’s customer. However, I went to one with a group of people this weekend and was very surprised to see the number of specialty coffees that were being purchased. If it is a profitable line for Micky D’s, why shouldn’t they run with it? I have always heard that the toughest thing for Micky D’s is to garner the adult consumer in the fast food niche.
McDonald’s has been known to cultivate customers from a very young age, so if a 19 year old (the core of their business future) thinks it’s a bad idea, why not listen? Kids that age tend to have beliefs not based on advertising but on peer opinion. So, they don’t get ahead of themselves.
100 coffees might have the same margin as 200 burgers. Almost the entire profit of a Dunkin’ Donuts is the coffee. For many restaurants, alcohol generates the entire profit, not food. Rental car firms often make their entire profit selling used cars, not renting cars. Many retailers make their profit from their credit operation, not the merchandise sales. Casinos often give rooms away so they can attract the high rollers. Movie theater profits come from the refreshment stand, not the tickets. So why shouldn’t McDonald’s push coffee? And what sane person over the age of 9 takes the word “gourmet” seriously?
As long as I can go to McDonald’s and get a good cup of coffee and not have to look at a clerk with 52 body piercings above the collar I will be happy with McDonald’s. I can’t recall seeing a news release about McDonald’s closing 600 stores.