1 Reason McDonald's Coffee Will Never Match Starbucks and Dunkin' Donuts

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After a quarter in which U.S. comparable sales declined 1.4%, McDonald's (NYSE: MCD  ) is renewing its push into the coffee category. This is just the latest in competition between quick-serve food chains and specialty beverage companies as each desperately searches for growth.

However, Dunkin' Brands (NASDAQ: DNKN  ) appears to be the only significant threat to Starbucks' (NASDAQ: SBUX  ) U.S. coffee business; McDonald's is not set up to compete with these specialty coffee chains.

Can't be all things to all people
In a conference call with franchisees, McDonald's listed coffee-driven visits as one of its top priorities. The renewed push into the coffee category comes as its initial foray with the McCafe line has yet to meet expectations

Unless McDonald's decides to become a coffee company instead of a fast-food chain, it is unlikely to seriously compete with the likes of Starbucks and Dunkin' Brands. Most retail food and beverage chains are designed to serve customers as efficiently as possible. Chipotle Mexican Grill's (NYSE: CMG  ) counter is set up to efficiently make burritos; Subway is set up to efficiently make subs; McDonald's is set up to efficiently serve burgers and sandwiches -- not to serve gourmet coffee with an endless variety of options.

Starbucks knows firsthand that a restaurant cannot be all things to all people. So far, the rollout of La Boulange sandwiches and bakery items has not gone as well as planned. According to Business Insider, which surveyed New York locations that have served Boulange pastries since last summer, the addition of food items to a store designed to efficiently serve beverages has been nothing short of disastrous.

The Boulange rollout requires employees to specialize in one task for the entirety of their shift. This results in miscommunication between the food employees and the beverage employees, leading to incorrect orders, unhappy employees, and dissatisfied customers. The Business Insider journalist said she had experienced problems ordering food and beverages at Starbucks recently, "once receiving an incorrect order, and another time receiving nothing at all."

McDonald's is unlikely to do any better than Starbucks. McDonald's McCafe has had success in Australia and Europe, where stores were built to serve both food and beverages. But its U.S. stores were never designed to serve more than fast food, making it difficult to become a place people go specifically for coffee.

Dunkin' Brands owns the price-conscious customer
McDonald's may be able to sell coffee, but it will never come close to replicating Starbucks' menu. McDonald's best shot at becoming a coffee destination is to go after the price-conscious coffee crowd, but Dunkin' Brands already serves that consumer segment better than McDonald's ever could.

Despite its name, Dunkin' Donuts makes most of its money by selling coffee. In 2013, 57% of Dunkin' Donuts U.S. franchisee sales were derived from coffee and other beverages. Over the years, its locations have been transformed to efficiently deliver beverages and move people through the line as quickly as possible. Unlike Starbucks, Dunkin' Donuts does not try to create a wonderful environment in which coffee drinkers can linger. Instead of spending money to spruce up its locations, Dunkin' Donuts passes the cost savings on to consumers in the form of lower coffee prices.

Dunkin' Donuts' combination of efficient service and low prices attracts the price-conscious consumer that is too stingy to go to Starbucks. This is the role that McDonald's wants to play, but its stores are not designed to compete with Dunkin' Donuts. As a result, Starbucks -- and Dunkin' Donuts -- are probably safe from McDonald's competition in the U.S.

Foolish bottom line
Most of the best companies in the world do not try to be all things to all people. Instead, the best companies offer the very best of a narrow range of products and services. They are good at a few things, and they concentrate on doing those few things above all else.

McDonald's is the best fast-food burger chain in the world, and Starbucks is the best specialty coffee chain in the world. However, neither company is good at doing anything outside of its core competency. As a result, Starbucks investors should not expect serious competition from McDonald's to ever materialize.

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  • Report this Comment On March 01, 2014, at 5:47 PM, bostontrip wrote:

    That is the Truth. Dunkins' coffee is the Best by far! I prefer it to Anything else out there. I look forward to the day when the People out West get a chance to try it out, if they haven't already. The Coffee McDonalds serves now could be free, and i'm not interested. Starbucks is Bitter and overpriced. An investment in Dunkin' is a smart move. Your Portfolio should be Runnin on Dunkin' right now.

  • Report this Comment On March 01, 2014, at 11:14 PM, EJSe wrote:

    Micky Dee's Canada is competing effectively with Tim Horton's because THI spends money to compete as a quick service player.

    And Tim's has yet to figure out how to get the coffee people turned around in a timely manner with a <pricier, inferior> regular cup a joe.

  • Report this Comment On March 02, 2014, at 1:15 PM, genetuck100 wrote:

    Cooper didn't mention that in 2007 Consumer Reports did a test taste on coffee from Burger King, Dunkin' Donuts and Starbucks, and ranked McDonalds coffee as the best. It's staff members were led by a professional taster as they sampled the various brands.

    Consumer Reports said McDonald's was the least expensive, at $1.40 per cup on average. Dunkin' Donuts was the priciest, at $1.65.

    When my wife and I think coffee, we think McDonalds. I can't comment on Dunkin' because we don't go there......McDonalds is usually more convenient, easier to find, and we know the coffee will be delicious as long as it's fairly fresh.

  • Report this Comment On March 03, 2014, at 11:43 AM, twcooper wrote:


    It's possible for McDonald's to match Starbucks and Dunkin' quality of basic coffee, but it will be difficult for it to transform into a place that most people go specifically for coffee; it just isn't set up to serve mass amounts of coffee. However, there is a fair share of people like yourself, who favor McDonald's coffee over others. It will be able to build a coffee business, but I don't think it will thrive like SBUX and DNKN.

  • Report this Comment On March 03, 2014, at 1:09 PM, dmawhinney wrote:

    "Dunkin' Donuts' combination of efficient service and low prices attracts the price-conscious consumer that is too stingy to go to Starbucks."

    Not even close!! I can't stand Starbucks over-roasted, over-brewed assault on the taste buds. if you took the time to ask Dunkin' customers, you would find the difference has nothing to do with price. Offer me a free cup of Starbucks, and I will take Dunkin every time, every day.

    I could take a shot at Starbucks drinkers by comparing them to the generation that asks "are we having fun yet?" but I do know there are folks that like their coffee burned.

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Ted Cooper

Ted Cooper is a value investor based in Texas. He does not ride a horse to work.

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