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

McDonald's has been in the premium coffee business for five years and has yet to dent Starbucks' business. But that's not stopping the chain from continuing to push its McCafe brand.

Feb 4, 2014 at 9:52AM

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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Daniel Kline has no position in any stocks mentioned. The Motley Fool recommends Green Mountain Coffee Roasters, McDonald's, and Starbucks. The Motley Fool owns shares of McDonald's and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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