Could McDonald's and Kraft Beat Starbucks in the Coffee Business?

Traditionally, McDonald's (NYSE: MCD  ) has been known for its burgers and fries. To explore more growth opportunities, the company has been exploring opportunities involving coffee. Recently, McDonald's partnered with Kraft Foods (NASDAQ: KRFT  ) to test McCafe-branded packaged coffees at various grocery and retail stores in several U.S. cities. The release and distribution of these test products, which include packages of ground coffee, whole beans, and McCafe single cups, could be considered a competitive move against Starbucks (NASDAQ: SBUX  ) .

McDonald's coffee business expansion
The first McCafe was opened in Australia in 1993. When McCafe appeared in the U.S. market in 2001, there were already around 300 locations worldwide. The number of McCafe stores has since grown to 1,600. Thus, the strategic move to introduce premium McCafe-branded packaged coffees via grocery stores could further build momentum and increase brand awareness of McDonald's coffee products in its restaurants. In the partnership, Kraft Foods will be in charge of both marketing and distribution for McCafe. Kraft Foods' CEO, Tony Vernon, commented, "We want to work with McDonald's to help consumers enjoy McCafe premium coffee in the comfort and convenience of their own homes." 

Coffee could be a big business for Kraft
From 1998-2010, Kraft had partnered with Starbucks to sell, market, and distribute Starbucks coffee in its supermarkets. The business was quite successful, growing from $50 million to $500 million in sales. However, the relationship turned sour when Starbucks wanted full control of its consumer-packaged business, along with the supply capsules for Tassimo, Kraft's single-serve coffee machines. Eventually, the court allowed Starbucks to end the partnership unilaterally. Soon after, Kraft replaced Starbucks with Gevalia for its entrance into the premium coffee business. Recently, Gevalia has expanded into single-cup coffee by introducing a new single-serve café-style coffee with different varieties like Mocha Latte, Caramel Macchiato, and Cappuccino. Coffee contributed a significant portion of revenue for Kraft Foods; in 2012, nearly $1.47 billion in revenue was generated from sales of coffee-related products, accounting for 8% of total 2012 sales. The partnership with McDonald's could potentially boost the revenues of both Kraft Foods and McDonald's in the future.

Starbucks' leadership position is strong
Despite the competition from Kraft and McDonald's, Starbucks still showed its strong global leadership position. Fiscal 2013 was actually the best year in Starbucks' 42-year history. The company experienced positive comparable store sales growth in all regions: 8% in North America, China, and Asia-Pacific, 2% in Europe, the Middle East, and Africa. Thus, global comparable store sales reached 7%. Starbucks expects to grow revenue by at least 10% in fiscal 2014, driven by mid single-digit growth in local comparable store sales and ongoing improvement in channel development. 

My Foolish take
Income investors might like both Kraft Foods and McDonald's because of their decent dividend yields of 3.8% and 3.3%, respectively, while Starbucks offers a much lower dividend yield of only 1.3%. The expansion of coffee business for both Kraft and McDonald's could add some value to their revenue and profitability. However, with Starbucks' strong foundation and leading position, any new coffee-related business from Kraft and McDonald's would face significant challenges from the coffee giant. In the long run, Starbucks will keep getting stronger, delivering a lot of value to investors. 

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  • Report this Comment On November 14, 2013, at 2:07 PM, fegroup wrote:

    1600 McCafe stores? The McCafe line is served in nearly all 14,000 + McDonald's in the USA.

    Nevertheless, this Kraft program has a slim chance of working because McCafe is not a powerful brand. McDonald's does sell a lot of coffee but that's the drip coffee. They sell a lot of it because of their brisk drive-thru breakfast business. The typical McDonald's sells very few of the espresso based McCafe drinks. The more million$ McDonald's spend trying to make McCafe work the more Starbucks thrives.

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