McCafe: McDonald's Saving Grace or Desperate Cry for Help?

In an effort to boost brand awareness and sales, McDonald's announced it would begin offering free McCafe drinks to customers starting March 31 and ending April 13. Is this a brilliant marketing initiative or nothing more than a sign of trouble?

Apr 1, 2014 at 4:00PM


Source: Wikimedia Commons

From March 31 through April 13, McDonald's (NYSE:MCD), the world's largest restaurant chain, will begin offering customers small cups of its signature McCafe coffee free of charge. The restaurant giant initiated the nationwide promotional event to generate more foot traffic from both new and existing customers. 

However, what seems like a brilliant marketing move may be nothing more than a cry for help. At a time when other coffee companies like Starbucks (NASDAQ:SBUX), Keurig Green Mountain (NASDAQ:GMCR), and Dunkin' Brands (NASDAQ:DNKN) have been posing a significant threat to the company, it seems management might be making a last-ditch effort before admitting it has a problem.

McDonald's McCafe has been successful but still can't measure up
Since starting up its McCafe product line in 2009, McDonald's coffee sales have surged 70%. This growth rate is far greater than that of both Dunkin' Brands and Starbucks. Over the same time frame, Dunkin' Brands' sales jumped 33% from $538.1 million to $713.8 million. Starbucks, whose revenue soared 52% from $9.8 billion to $14.9 billion since 2009, did much better but still fell shy of McDonald's coffee sales performance. 

Probably the only major coffee contender that has performed better than McDonald's has been Keurig Green Mountain, whose top line jumped a whopping 443% from $803.1 million to $4.4 billion. With the creation of its K-Cup coffee packets and Keurig coffee machines, Keurig Green Mountain was able to grab a nice piece of the market.

Despite McDonald's gains over the years, the company still accounts for less than 13% of the coffee market share in the U.S. At first glance, this may seem impressive, but the company's market share is paltry compared to the 30%-plus market share controlled by rival Starbucks.

Coffee isn't McDonald's only problem!
On top of luring customers away from the competition and toward its brand, there is another purpose behind the company's move. Fast food has been increasingly threatened by the advent of fast-casual dining chains like Chipotle Mexican Grill and Panera Bread. So rival fast-food operators have worked toward diversifying their menus in the hopes of attracting more business.

One of the best examples of this is Yum! Brands (NYSE:YUM), the parent company of KFC, Pizza Hut, and Taco Bell. After seeing at least nine consecutive years of revenue growth, the fast-food conglomerate reported sales that dropped 4% from $13.6 billion in 2012 to $13.1 billion in 2013. On top of being hit by a 13% drop in comparable-store sales in China, the business reported flat comparable-store sales in the U.S. and just a 1% improvement in its international segment (excluding India).


Source: Taco Bell

In an attempt to maintain competitiveness, the company's Taco Bell chain recently launched its new breakfast menu that consists of goodies like waffle tacos and A.M. Crunch Wraps. Currently, McDonald's has the largest market share in the breakfast category, with an estimated 31% stake. But it's likely that the company's free coffee move has been engineered to draw customers' attention away from Taco Bell's initiative. Whether or not this proves to be successful has yet to be seen.

Foolish takeaway
Based on the evidence provided, it's not too hard to tell that McDonald's is facing increased competition from numerous directions. In addition to holding a less-than-ideal market share in the coffee market, the fast-food giant finds itself having to fight off companies vying for the breakfast crown. Moving forward, it will be interesting to see how the company's coffee promotion fares; but any sign that its impact is less than McDonald's hopes for could be an indication that management needs to rethink a thing or two.

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Daniel Jones has no position in any stocks mentioned. The Motley Fool recommends Keurig Green Mountain, 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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