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McDonald's Coffee vs. Starbucks -- Can McCafe Make a Dent?

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The latest Coffee Business Statistics Report shows that specialty coffee sales are growing 20% each year. Jumping on a trend that Starbucks (NASDAQ: SBUX  ) pioneered and Dunkin' Brands (NASDAQ: DNKN  ) horned in on first has not been a winning strategy for McDonald's (NYSE: MCD  ) , however.

In fact, even after entering this lucrative new product category -- one that would seemingly allow McDonald's to add a Starbucks worth of sales to each store -- the fast food chain has struggled to grow. Though company-owned Starbucks locations average over $1 million a year, McDonald's overall sales increased only 2% in 2013. U.S. sales even fell 1.4% in the fourth quarter. Starbucks, which did not have the advantage of adding a facsimile of the McDonald's menu to its stores, actually grew same-store sales 7% worldwide.

A new priority
Though McDonald's brought its McCafe concept to the U.S. in 2008, its rollout has not been smooth. Many franchisees balked at the cost (around $13,000 for the espresso machine) and many stores simply lacked the floorspace to have a dedicated coffee counter/cafe seating area. In many cases, this has left the McCafe concept as not a variant on a Starbucks, but a McDonald's that sells lattes under a sign that says McCafe.

Despite these failures, McDonald's plans on increasing its efforts to find customers for its coffee products. Bloomberg reported that in a Jan. 28 memo, the chain's U.S. operations chief, Jim Johannesen, and U.S. brand chief, Kevin Newell, stressed that franchisees should deliver "a gold-standard cup of coffee with every visit."

McDonald's will never be a coffee house
Even before Starbucks, the coffee house experience was always as much about environment as it was coffee to at least some of the customers. Starbucks, despite being a giant chain like McDonald's, has managed to maintain the public perception of being a somewhat elite experience. 

Starbucks has carefully cultivated an environment that simply feels more high end than McDonald's. This is because no matter how many signs or seating areas a store adds, McDonald's still mostly exists to sell fast food.

The National Business Research Institute explained Starbucks' careful efforts to build an experience for the coffee drinker in a June 2012 report.

When Starbucks began their run to success in the early 1990s, many noted it wasn't simply about coffee, but that the company was focused on the following factors: Atmosphere, Quality Coffee, Customer Service, and Partner (employee) Satisfaction. Starbucks sought to be a place where people could lounge with a good drink and friends or maybe just a book. This atmosphere was created to establish a friendly and welcoming environment. Through their success they changed the mind-set of coffee customers worldwide: from a coffee shop being a place to buy a cup of coffee to a place to experience a good cup of coffee.

Young drinkers aren't coming
Goldman Sachs recently released a research report that includes a survey of 2,000 consumers' restaurant preferences. The results show that the under-34 demographic, which will soon be outspending baby boomers, is far more likely to buy anything from Starbucks than McDonald's — or any other food vendor. In a chart measuring brand equity among Millennials published by Quartz (based on the bank's data), Starbucks led the list while McDonald's placed 14th  (below Dunkin' Donuts, which came in at no. 9.)

It can still work
Though it seems unlikely that a chain with a clown mascot can attract the hipster market, there is still substantial growth possible for the McCafe business. Unlike Starbucks, McDonald's does not have to attract people with its coffee. Instead, the chain has to convince existing fast food customers that they want lattes along with their McMuffins. That may not be happening yet on the level that McDonald's wants, but it seems likely that a chain that could convince people to pay extra to supersize their already hefty meals should ultimately be able to convince a sizable percentage of its customers to add a McCafe beverage.

McDonald's does not need to displace Starbucks to succeed. It just needs to add to its slice of what is a huge market. According to the National Coffee Association's 2013 online survey (as reported by USA Today), about 83% of adults drink coffee in the United States. That percentage was up from 78% just a year earlier. This is significant because the U.S. is the world's biggest consumer of coffee, with consumption averaging three cups a day per person.

That's a lot of coffee to go around.

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Read/Post Comments (2) | Recommend This Article (2)

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 February 04, 2014, at 4:09 PM, fegroup wrote:

    Every time a MCD investor sees a TV commercial for McDonald's espresso drinks they should be angry that McDonald's is wasting their precious advertising budget on a product that failed in 2009. Drip coffee sells well at McDonald's because of their great drive-thru breakfast business. But espresso? ... the typical McDonald's doesn't sell enough to pay for the electricity to keep the espresso machine running all day. This fight is over, Starbucks wins, let's move on to food.

  • Report this Comment On February 07, 2014, at 4:43 AM, ChinaFinancial wrote:

    We know about MCD is a food store, if MCD wants to have a

    successful coffee business like Starbucks doing in China, I think they need to set

    up a completely new store, a comfortable place for customers to sit

    and enjoy coffee.

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Daniel B. Kline

Daniel B. Kline is an accomplished writer and editor who has worked for the Microsoft's Finance app and The Boston Globe, where he wrote for the paper and ran the business desk. His latest book "Worst Ideas Ever" (Skyhorse) can be purchased at bookstores everywhere.

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