August 29, 2008
Starbucks and McD’s Should Cut the Coveting Out
Okay, there are no neighbors’ spouses involved here but Starbucks and McDonald’s are committing a business sin of the highest degree by coveting something that each has little to no chance of making their own.
The reference here is for Starbucks’ desire to grab some of McDonald’s impressive market share in the out-of-home breakfast category and McD’s belief that it can be a meaningful alternative to the coffee experience of Starbucks.
Up first is Starbucks. The chain, which had previously decided it was getting out of the breakfast business because the smell of eggs interfered with the aroma of coffee in the morning, has decided it’s going to offer breakfast after all. It’s hoping that a menu made up of healthier items, the only egg on the menu would be of the hardboiled and apparently less fragrant variety, will get more people stopping by its shops on weekends and on the way to work during the week.
McDonald’s is intent on perking up its bottom line by selling specialty coffees at the chain’s 14,000 restaurants in the U.S. Recently, McD’s franchisees have questioned this strategy and the expense associated with it. Initial results in some test markets such as Kansas City showed sales fell off within six months of the new coffee drinks being introduced.
Discussion Questions: Are Starbucks and McDonald’s on the right track with their breakfast and coffee strategies? Is the problem, if you agree there is one for either chain, in the premise or the execution?
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Like some others who have commented, I think this is just great. When I was brand manager for Kroger’s Spotlight Bean Coffee in the early 80s (I worked for their ad agency), coffee sales were solidly in the dumper. Then, Starbucks and others brought coffee back. Not too long ago Mickey D’s was going to be punished for fattening up our kids, but that’s all behind them now. Don’t underestimate these extremely aggressive and savvy competitors.
As one comment expressed, Starbucks and McDonald’s are not necessarily after each other’s business, but after more business from their existing customers. The idea that a significant number of commuters buy their morning coffee at Starbucks and breakfast at McD’s seems a bit farfetched. (Although, on Queen St. in Auckland, NZ, they are nearly side by side.) If nothing else, both of these initiatives will provide learning for their sponsors that can be applied elsewhere.
The fact remains that people who want a cup of coffee and the ambiance of a coffee shop are not going to run to McDonald’s over Starbucks. And people who want a filling breakfast know that Starbucks, no matter how hard they try, will never do a great job at serving food.
This continues to be about Wall Street and corporate greed. If Wall Street was not dictating the fact that revenues have to keep rising, Starbucks would be happy just being a great purveyor of coffee, and McDonald’s would continue to be a great provider of fast food. Neither chain would need to move beyond their core competencies.
While we can’t blame Wall Street for everything, they seem to be the reason that chains move beyond what they do best for simple reason of generating more revenues. Then, when the chains falter, the Wall Street analysts condemn the food chains for moving beyond their expertise. It is a no-win situation for most.
The “rivalry” between Starbucks and McDonald’s would be the same as having a rivalry between porcelain vs. plastic. Both serve defined purposes but serve different markets and different needs. Starbucks and McDonald’s each need to stay focused on what they do best, but in particular Starbucks. McDonald’s is doing a very smart thing by comparing its coffee to Starbucks, however, Starbucks needs to do its own thing and not worry about McDonald’s. Let’s hope that Starbucks doesn’t soon start offering clowns and kids coffee drinks in happy meals.
When a Starbucks seems essential
But your bucks are lonely and few
You sacrifice the Mocha Sunrise
And it becomes the lesser of who.
And McD gloats “I’m lovin’ it.”
I must be getting old, because I remember when McDonald’s first introduced breakfast to the menu, a lot of people thought they were ‘nuts’. As it turns out, the addition of the ‘first’ meal of the day was, and still is, a hit.
Yes, they tried pizza at one point, and it flopped. Starbucks first try at breakfast wasn’t a roaring success either. So?
When did it become standard fare to criticize chains for experimenting with new ideas and trying to expand both revenue and customer bases? Would we rather see these chains not evolve into a better version of themselves? I’d be much more worried about those chains who get stuck in the mud, never adding, changing or evolving. We have lots of examples of those ‘now defunct’ retailers.
Will gourmet coffee work at McDonald’s? Breakfast at Starbucks? I hope so, but if it doesn’t, they’ll find something else that will. It’s just part of the game they play so well.
Cardinal sin in the restaurant industry: underestimating McDonald’s.
We feel there’s room for both. The target customer and product being so radically different, they can both win. Better question may be “what the hell is BK going to do to respond to McD’s???”
With the disclaimer that we work with a significant competitor to Starbucks, Starbucks is riding uphill on this one. Whether they can climb is still undetermined but they have a lot of issues, not just with food but with their core coffee product, their oversaturation and their price point.
As long as the economy is tough, consumers on the periphery of their core audience are doing the math and realizing that a $1,000/year Starbucks habit does not always make economic sense. For those that want breakfast other than starches, MCD and Dunkin’ win and in the case of the latter, they have a proven coffee product, albeit without Italian nomenclature.
First, let’s recognize that in neither case will these strategies bring in new customers. The strategies must be viewed as selling more to the current customer. Starbucks has the upper hand as both of these strategies are for incremental business. If someone is looking for a fast breakfast they go to McDonald’s. If someone is looking for a coffee experience they go to Starbucks.
Many of us like coffee with our breakfast. And, some of us might trade up for a more premium cup at McDonald’s. However, those breakfast goers have been having the same cup of coffee for years (many, maybe more have Coke as a breakfast drink.) No one who is desiring one of the thousands or so combinations of “half caf skim latte no foam…” at Starbucks is going to make the switch to McDonald’s.
But, being led by their coffee desire, the chance is very good that they will purchase something to eat. If one watches the line at Starbucks, a very high percentage of coffee buyers purchase something to eat. While the sandwiches may interfere with the coffee experience, something of breakfast size substance will eventually work. Their new “healthier” strategy may be just perfect. Maybe I will stop buying the 480 calorie donut.
I’ve said it here before, and I’m sticking to my opinion. Chains expend a great deal of energy, time, and financial resources to develop a great brand. McDonald’s brand is great fast food at a great price. It’s quick, easy, and affordable. Starbucks brand is great coffee. It’s a little higher priced, but the dining area isn’t filled with screeching kiddies, so an adult can relax over that great cup of coffee.
I for one wouldn’t buy flavored coffee at McDonald’s. And I wouldn’t buy fast food at Starbuck’s, either. It’s fine to experiment with a change in strategies, but to try to metamorphose into another brand only hurts in the long run. Starbucks fare runs to a different level of taste than McDonald’s does. To compete directly would mean their having to cater to a crowd that generally afford, want, or need Starbuck’s, so why copy the menu. Adding breakfast style sandwiches to Starbuck’s menu would only work if the “right” ingredients were there.
That would make for a pricey meal compared to McDonald’s value priced menu. And besides, breakfast without eggs? What are they thinking? And as for McDonald’s coffee, they’ve a great product as it is with the Paul Newman line. Why steer loyal patrons away from it?
Coffee is 90%(?) gross margin. That’s where the profits are. McDonald’s wants the margin. Starbucks needs to protect the margin. Starbucks won’t make big $ from the food. Dunkin’ Donuts’ stores make all their profit from coffee, not donuts.
Look at other restaurants that make all their money from alcohol. Applebees didn’t build 1,600 restaurants from the food profits. Alcohol built those 1,600 restaurants. A bottle of wine that costs $5 wholesale has $30 worth of drinks when sold by the glass. 83% gross margin, just like coffee.
And just like alcohol, caffeine can be addictive. The most profitable marketers sell habits, not products. Alcohol, caffeine, nicotine, even music: they all can be addictive. Boiled or fried, eggs aren’t.