McDonald's Misguided Coffee Ambitions

While McDonald's (NYSE: MCD  ) has long served breakfast at its restaurants, the company's serious focus on coffee is more recent. Since introducing the McCafe line of coffee drinks in 2009, coffee sales have surged by 70%, and McDonald's is aiming to claim an even bigger slice of the coffee pie.

Through a partnership with Kraft Foods (NASDAQ: KRFT  ) , McDonald's will test McCafe-branded packaged coffee at grocery stores throughout the U.S. next year, with the aim of the effort to raise awareness of the McCafe brand and, ultimately, sell more coffee in stores.

This intense focus on coffee could backfire, though. As McDonald's has added an increasing number of items to its menu, efficiency has taken a hit, and the company runs the risk of sacrificing the competitive advantages it has in its core business chasing coffee sales.

A complicated menu
Fast food needs to be fast, but with McDonald's adding all sorts of new items to its menu, from complicated coffee drinks to wraps, efficiency at the restaurant level may be taking a hit. McDonald's is trying to appeal to a broad swath of customers with these new items, but the company may be alienating its core customer in the process.

Starbucks (NASDAQ: SBUX  ) has been very successful with its specialty coffee drinks, with customers willing to pay $4 or more for certain items. McDonald's has been introducing similar items, such as a Pumpkin Spice Latte and a Chocolate Chip Frappe, in an attempt to mimic Starbucks' success, but these complicated additions are causing problems for the company.

Wait times at McDonald's drive-through spots are at a 15-year high as employees grapple with these new items, and one in five customer complaints are related to customer service.

If you go to the McDonald's website and look at the menu, the number of options is staggering -- there are 14 different burgers alone. Compare this to the menu of a burger chain like California-based In-N-Out Burger. In-N-Out has a hamburger, cheeseburger, double cheeseburger, fries, shakes, and soda. That's it. This singular focus has allowed In-N-Out to achieve a near-cult following, something that McDonald's can only dream of.

Not exactly a premium brand
I'm going to be blunt here -- McDonald's is not known for quality. Speed and value are what differentiates McDonald's, and this foray into premium coffee drinks seems a little misguided to me. McDonald's coffee is cheap, but in terms of quality it just doesn't compare to most coffee chains. Unless the packaged McCafe coffee is significantly less expensive than the alternatives, I cannot imagine this partnership with Kraft benefiting McDonald's.

In other words, it's not a game changer. If anything, it's evidence that McDonald's is focusing on an area outside of its core competency. This should concern investors because McDonald's seems to be following a growth-at-any-cost strategy with these coffee products.

Kraft used to be partnered with Starbucks, but that partnership was severed when Starbucks wanted full control over the business. Starbucks ended up paying Kraft $2.7 billion for breaching this contract, ending a multi-year dispute between the two companies.

Coffee is big business for Kraft, with the company known for the popular Maxwell House and Gevalia brands. Kraft has stated that the McCafe brand will be marketed as a mid-range brand, above the budget Maxwell House but below the premium Gevalia. This offers the best chance of success, and prevents McCafe coffee from stealing away sales of other Kraft Brands. Whether or not it will be beneficial to sales of McCafe products in restaurants, however, remains to be seen.

The bottom line
While coffee drinks have certainly increased sales for McDonald's, the company is risking alienating its core customers. Blatantly copying Starbucks is not the answer, and coming up with beverages that appeal to the burger-and-fries crowd instead of the latte crowd would likely be a better long-term strategy.

I doubt that McCafe-branded coffee in grocery stores will have much of an impact for McDonald's. Starbucks has been successful on that front, but Starbucks sells a premium product. Investors in McDonald's should be concerned. 

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Read/Post Comments (3) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 29, 2013, at 5:40 PM, glenns45 wrote:

    How much doe's Starbucks earn per share compared to McDonald's, Mcd wins. McDonald's is a core holding.

  • Report this Comment On November 30, 2013, at 12:04 AM, genetuck100 wrote:

    "Not exactly a premium brand

    I'm going to be blunt here -- McDonald's is not known for quality."

    You sure got that wrong. I take it that you haven't been drinking McDonalds coffee. I have. And I haven't forgotten that Consumer reports did a taste test of coffee from McDonalds, Starbucks, Dunkin Donuts and Burger King. McDonalds won it easily.

    That's right, it even beat the high-priced coffee from Starbucks.

  • Report this Comment On December 02, 2013, at 8:26 AM, gbad00 wrote:

    Genetuck100:

    "Not exactly a premium brand" is exceedingly kind. It depends what you are used to drinking. I am spoiled in that regard. Compared to my own, I find Starbuck's to be good, and Dunking Donuts to be acceptable if I need emergency caffeine.

    It also depends on where you get the McDonald's coffee. I tried the local version. It was the vilest liquid I ever tasted, more like a cleaning product or paint solvent. I took a taste and threw it out.

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