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[22 comments]

Can McCafe become America's favorite coffee brand?

April 7, 2014

McDonald's recent announcement that it would be soon be handing out free coffee at its U.S. restaurants for two weeks set off wide speculation about how serious the fast food chain is about coffee, both at its own locations and in grocery aisles.

From March 31 to April 13, free McCafe coffee will be available during breakfast hours. "Make Friends with McCafe" sampling events are also being hosted at high traffic locations and transportation hubs in multiple cities across the country. A Twitter campaign is also involved.

Here is a sum-up of the three core theories about McDonald's coffee push:

Breakfast turf: Some see the free coffee campaign as foremost a natural response to ongoing breakfast wars. On March 27, Taco Bell launched TV commercials featuring various people named Ronald McDonald endorsing its new breakfast menu. Dunkin' Donuts has become a fierce competitor in the breakfast space. In early March, Starbucks unveiled four new breakfast sandwiches inspired by the La Boulange bakery it acquired.

Third-place: The McCafe lineup's arrival in 2009 — including drip, iced, espresso, and frappés — was seen by many as a direct thrust at Starbucks' all-day, leisurely-break crowd. Free Wi-Fi and earth tone colored walls were also added. In some locations, separate counters with display cases for coffee and bakery items arrived. The results in the U.S. have been mixed, with drip coffee taking off but espresso lagging.

Regardless, at an investor meeting last November, McDonald's listed enhancing its "coffee culture" as one of its primary goals, according to Bloomberg News. Noting that McDonald's still only has 12.8 percent of the "informal eating-out" coffee market, Kevin Newell, chief brand and strategy officer for McDonald's USA, said the chain is now "treating coffee quite frankly as critically important as we do our iconic fries."

Grocery aisle: Some weren't surprised that the promotion arrived amid reports that McDonald's partnership with Kraft Foods has begun testing bagged McCafe in retail stores. McCafe Premium Roast coffee has been sold in Canada's grocers since late 2012, but Burgerbusiness.com reported that a Wegmans supermarket in Mechanicsburg, PA was selling a wide selection of McCafe coffee, including Premium Roast, Breakfast Blend, French Roast and Decaf Premium, with ground priced at $7.29. Several varieties of McCafe K-cups were also being sold, with many expecting single-serve cups to drive the category in the years ahead. Mintel predicts the single-serve-pod market could account for 50 percent of coffee sales by 2018.

FINANCIALS:     [NYSE:MCD] [ ]

Discussion Questions:

Do you see McDonald's focus on coffee enhancing or interfering with its core brand identity? Do you see a greater opportunity for McCafe coffee at the chain's restaurants or in grocery stores?

While we value unfettered opinion, we urge you to show respect and courtesy for people or companies about whom you comment. Keep in mind that this is a public, professional business discussion. RetailWire reserves the right to edit or refuse the publication of remarks that we deem unsuitable. We may also correct for unintended spelling and grammatical errors.

Instant Poll:

Where do you see the greater opportunity for McDonald's to grow its coffee business?

Comments:

Many, if not most, people determine where they are going to buy breakfast by where they can get coffee that meets their flavor profile. In short, to own breakfast you need to own coffee. This is recognition on the part of McDonald's and other QSRs that they need to see drinks as a destination determinate rather than an ancillary sale to a meal.

It McDonald's wants to be successful in selling coffee in grocery stores, it has to be successful with coffee at its restaurants. Once it moves into the coffee section in a supermarket, it faces competition from many, many other brands which will limit the level of success it can achieve. My recommendation is for McDonald's to view supermarket sales as a nice plus but concentrate on building coffee sales at its locations.

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Steve Montgomery, President, b2b Solutions, LLC

As noted in the article, I view much of this campaign as a defensive move against its breakfast competitors. At the same time, America's palate for better (i.e., stronger) coffees, a byproduct of the Starbucks influence, will continue to have an influence on the QSR and fast casual businesses.

I do not see "third place" as a viable option for McDonald's. With its kids focus, hard plastic seating, playgrounds and "spokes-clown," it is probably not a desired adult destination for coffee.

I do see an opportunity for supermarket sales. No brand erosion here as McDonald's image is more supermarket than specialty food retailer oriented. K cups make sense, although this user may not necessarily be a McDonald's target customer.

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Richard J. George, Ph.D., Professor of Food Marketing, Haub School of Business, Saint Joseph's University

This is a tricky one. It may well interfere with its core brand identity, but that identity (fast food) is under fire anyway because of its lack of nutritional value. I think it's clear the company is changing and this sentence really says it all: "Free Wi-Fi and earth tone colored walls."

Since the days of Howard Johnson's, orange walls have been meant to keep the customer moving along - in and out faster. And I confess to befuddlement when McD's installed wifi in its stores. Doesn't go well with the orange decor. Now it all is starting to make sense.

Still, I think it's going to create a problem for the company. Going up-market is always really challenging, and I think Dunkin' Donuts might be better positioned. I'm a snob. I'd have a hard time hanging out in a McD's. And embracing their coffee. I can't be alone in that.

I wish the franchisees luck, but it's going to be a challenge.

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Paula Rosenblum, Managing Partner, RSR Research

This is a great way for McDonald's to be disruptive in the breakfast space. From my visits to the local McDonald's, I don't see the traffic that they probably hope to attract. With a medium hot coffee being $2 at Dunkin' Donuts, this isn't a bad value. I'm not sure you can convince a Starbucks goer to cross over, but there is plenty of share to steal. Funny - a McCafe ad just came on Apple radio as I write this. That would be pretty good recognition and I'm going to take it as a sign that this will be a WINNER!

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Robert DiPietro, GVP Product Strategy & Business Development, Affinion Group

You can't have it both ways - you want to be the coffee shop - but you don't want them to hang out there like several stories have shown.

Franchisees are already complaining of menu creep, which is affecting operations. Who the heck is McDonald's in 2014? If this initiative moves forward - they are really a drink company.

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Bob Phibbs, President/CEO, The Retail Doctor

Hey...very simple...McD's has great coffee. The coffee shelves are getting packed with popular brands - from the 'Buck to Dunkin' and more. The key for McD's is to balance the push and intro the non-addicted to the original flavor of McD's brand.

They will not cause any conflict with their core identity. That is fixed in place. They can expand with the coffee program and opening coffee and milk shake shops without kids playrooms.

Also. enhancing the massive # of drive thrus that they have so coffee is more of a focused area will help.

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Tom Redd, Vice President, Strategic Communications, SAP Global Retail Business Unit

I see it interfering with its core brand identity. They are a great hamburger king (no pun intended). I see this as just another promotional fad that McDonald's does once or twice a year. It will get a lot of younger adults with children to get back to them for a kids meal while mom or dad has a coffee. However, the lion's share of adults will continue to see Starbucks as the one and only place for their coffee fix each day and sometimes multiple times a day.

Once again, hats off to the marketing team at McDonald's, but time to start looking at their next promotion after the free coffee promotion.

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Frank Riso, Principal, Frank Riso Associates, LLC

Enhancing for sure. However, they are not going far enough. They need a separate register just for McCafe to create a store-within-a-store feel.

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Joel Rubinson, President, Rubinson Partners, Inc.

McDonald's focus on coffee will enhance their core brand identity. Anyone who regularly drives long distances can tell you two things about McDonald's:

1. They have a clean bathroom

2. They have good, cheap coffee

I think selling McCafe in grocery stores is a good idea. If Dunkin' Donuts can do it, so can they. Selling K-cups would also be a good move. Keurig coffee makers are a top selling item at Walmart. That's a sign of a good crossover demographic.

As for focusing on coffee in their locations, we shouldn't assume that you need a Strabucks-style chill out atmosphere to succeed. On weekday mornings, plenty of people hit the drive through window for coffee.

'tmlens'

McDonald's focus on coffee is a smart move to broaden its brand appeal in an era when its traditional brand promise is decreasingly valued by up-and-coming generations.

McDonald's has been vilified in recent years for everything from the questionable healthiness of its menu options to the homogenized sameness of its store-to-store consistency. And any Millennials who don't see the brand as "evil," generally regard it as irrelevant. Neither is a path to long-term success.

Focusing on coffee and taking cues the Starbuck's menu and ambiance could help McDonald's strike a relevant chord with discerning Millennials. By serving a menu of healthier and more relevant options, creating a more upscale atmosphere, and offering amenities like Google's easy, high-speed wi-fi, McDonald's with its massive global footprint could be a serious contender as a new "third space" for the under-30 set.

Happy Meal of the future: 

Free-range, non-GMO egg white omelette with an organic, fair trade cappuccino? It could happen... Right?

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Lance Thornswood, VP/Managing Director, inRetail

Coffee is entirely consistent with the brand and placing greater emphasis on coffee quality and appeal should increase visits throughout each day part. Personally, the McDonald's coffee is good quality, an alternative to heavier taste found at Starbucks and sometimes long morning drive-through lines at DD. And, the price is competitive.

McDonald's should focus on better establishing the brand at its own locations and will then be able to take the next step of sales through the grocery channel.

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Bill Hanifin, Managing Director, Hanifin Loyalty LLC

As a follow-up to Joel's comment...a store-within-a-store is exactly what McDonald's has done in Paris. Their McCafe is a cafe within a McDonald's. It is more French in the coffee they serve and the food they offer than American, which is served in the "hamburger" part. Check out the pictures. It may be the way they go.

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Gene Detroyer, Professor, Independent

McDonald's coffee quality was below the new standard in the marketplace. It was even below dinner coffee. They formulated a new blend, which is better, but is barely competitive. Most coffee is consumed in the morning with breakfast. Here again, the competition has raised the bar. McDonald's target market is children, but adults pay the bill. Sampling is as good as any method to create trial. Since their new coffee blend has not taken off, the issue is trial or product performance. If this sampling does not increase sales, it is time to re-blend.

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W. Frank Dell II, CMC, President, Dellmart & Company

McDonald's single greatest competitive advantage is its huge store portfolio, particularly across middle America. In many locations (particularly freeway locations) it is the primary choice, or the most consistently available one. Having a strong coffee offer is key to maintaining a high competitive barrier to entry on these locations. McDonald's needs to build a strong coffee offer to support its breakfast proposition and lock in these locations. This isn't about going head-to-head with Starbucks in city centres.

Rambaut Fairley, Associate Partner, OC&C Strategy Consultants

My take? I see McD's in the food business and not the coffee business. Yes, it is true that some people select their breakfast destination based on their coffee likes, but there are still many, especially with kids in tow, who will choose based on the amenities and the fun fast food. Both for themselves and their children.

Mom can get her coffee FREE with an Egg McMuffin. This mom isn't a coffee snob, she is all about time and money! Now that has some appeal. She can also let the kiddos run and play in the play land while she catches up on her messages and gets her day in order.

My suggestion to McD's is to continue to improve the food choices and let the coffee, while good, be a side attraction. Grocery store sales? Nice to have, but I'm not feelin' it and that's my 2 cents!

Lee Kent, Brings Retail Executives Together to Meet.Learn.Profit, RetailConnections

If it tastes good and is well priced, it will work. Have to say though that coffee and a donut go well for a snack...at McD's it will be coffee and a what? That's the other half of the equation. Look at what Starbies has for accompaniments for the coffee to make it a whole experience. Would you like fries with that coffee? ...Just isn't the same.

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Peter J. Charness, SVP America, Global CMO, TXT Group

I am a frequent visitor to MCD for the $1 iced tea. It is often an adventure. From the location back in DC that only sold sweet tea (no unsweet) to the location in Stockton, CA that had signs stating 'no sleeping bags... this McDonalds is not a shelter' to the now closed Tonopah, NV (who has seen a MCD go out of business before? Their failure rate is near zero) location that told me to pay with credit I had to use the drive through as the pinpads inside were all broken, to the various cups of watery tea I often wonder why I keep going back. Well, it is cheap, convenient, fast, and one positive is the Wi-Fi almost always works.

As far as coffee goes, I think the execution challenges and the atmosphere of locations hurts. They should market the drive through element as a competitive weapon on the espresso. I know many people who want espresso but do not always want to deal with a 10 minute Starbucks walk in. Some will drive the 10 minutes out of their way to one of the few Starbucks with a drive through.

'storewanderer'

Unlike competitors' breakfast day-part, McDonald's early morning hours are very profitable. There are consumers who only visit McDonald's during breakfast. The focus on coffee doesn't interfere with the brand identity, in fact it enhances the brands to consumers. It is a good product.

The opportunity for growth is in the grocery aisles. The promotional value -- of having the McD coffee brand in the store, for the breakfast menu alone will pay dividends. Also, with all the obscure coffee brands at the grocery aisle, I would think McDonald's coffee will have a better chance of success based on the familiar brand recognition.

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Carlos Arámbula, Managing Partner, MarcasUSA LLC

The McCafe coffee is below par among true premium coffees and will always be. It is just not possible to position anywhere above its own fast food brand. If they wanted to go higher, they should have used a different - non -"McD" brand for the premium non-drip coffee offering. If it is poured from a glass Bunn-style pot, air pot, or out of an urn, it is not going to be considered truly premium.

REAL coffee houses had better upgrade their drip offerings or do the smart thing and discontinue them, offering only an espresso based Americano.

Sid Raisch, President, Advantage Development System

It's interfering. Most consumers do not have time to stop at more than one location for a breakfast on the go. While the coffee is good, the variety and quality mixing condiments are not. McD's caters to a certain price conscious crowd and they are fully aware of who their customers are. McD's cannot compete, now, with the quality of the SBX coffee, the service, the healthy selection and the pastry selection. SBX has the healthy and pastry selections over DD as well. DD has a much more varied bagel selection, cream cheese flavor selection, and its egg sandwiches superior over McD's.

If McD's want to compete in the big boy coffee market, selection, variety and training has to change; this is currently not consistent with who they are.

Alan Cooper, Contract Trainer/Training Consultant, Independent/Freelance

McDonald's pioneered the breakfast segment for QSR's, so an enhanced focus on the coffee offerings will only serve to enhance its core identity. The bigger opportunity is in-store, as a way of continuing to build breakfast revenues (and protect market share from newcomers to the morning daypart such as Taco Bell), though the McDonald's brand will do very well with the K-cups brand extension.

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Jeff Hall, President, Second To None

I see this as an 8-year-old struggle being dressed up on "new challenge" clothing.

Swag Valance, CEO, Me

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