Why McDonald’s Free-Coffee Promotion Might Just Work

McDonald’s is stepping up its game, and investors should take notice.

Apr 2, 2014 at 7:00AM

Poor McDonald's (NYSE:MCD)--everybody from Burger King Worldwide (NYSE:BKW) to Starbucks to Dunkin' Brands is beating up on the company. And now, even Taco Bell of Yum! Brands (NYSE:YUM) is giving Mickey D's a jab in the ribs with its Ronald McDonald Taco Bell breakfast campaign. McDonald's only response so far has been two weeks of free coffee. I know, sounds a bit lame; but there are several reasons why it may just work.

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Source: McDonald's

Yoo hoo, over here!
We all know what this is really about. It's not about getting guests to "try" McDonald's coffee or breakfast. Most of its breakfast sandwiches have been around for decades. It would be a challenge for all of us to find more than a handful of people who have yet to try McDonald's breakfast.

This is about McDonald's distracting consumers from the hype over Taco Bell and its new breakfast menu, hoping to create some noise of its own. Anybody in the restaurant business will tell you that the first few weeks are usually the most vital. This honeymoon period draws the most crowds as curious, hungry guests sample the new restaurant or the new menu items.

Time to make some noise
The campaign is called Make Friends with McCafe, and it offers more than just free coffee. At high-traffic locations, McDonald's will have "a few surprises along the way, such as live musical performances, spontaneous comedy experiences[,] and more."

McDonald's will be, quite literally, making as much noise as possible to get the attention back on itself. It's about time the Golden Arches thought outside the bun.

The more McDonald's can distract people during this vital time for Yum! Brands, the better off it will be. After all, even its Mighty Wings flop caused a spike in sales at first. There's no question that Taco Bell's breakfast is going to cost McDonald's some sales, at least at first. But in an attempt to minimize the damage and reduce the converts, McDonald's use of this promotion is smart.

Free coffee may have worked for Burger King
This is the first time McDonald's has offered a free-coffee promotion, but the fast-food giant is certainly not the first to do so. In January, Burger King Worldwide announced a three-week promotion for the month that included a free coffee with the purchase of any breakfast sandwich.

Images

Source: Burger King Worldwide

The result?

January for McDonald's was the worst month for domestic same-store sales growth in memory. November saw a drop of 0.8%, December results fell by 1.5% to 2%, January plunged by 3.3%, and February slipped by 1.4%. While it's true that bad winter weather played a role, February was worse than January for most restaurants; it was the other way around for McDonald's.

This suggests that perhaps Burger King Worldwide took a bite that month of McDonald's breakfast share with the free-coffee promotion. If so, that would explain McDonald's holding a free-coffee promotion of its own after seeing Burger King Worldwide's success.

McDonald's normally has a 31% breakfast market share compared to Burger King's 3% to 4%; so it's certainly plausible that Burger King was able to snag a little more. When Burger King's results come out, don't be surprised if there's a material rise in its breakfast sales at the expense of McDonald's.

Images

Source: McDonald's

Foolish final thoughts
Given the likelihood that Burger King's soft approach to free coffee worked, even without entertainment, it just might work for McDonald's too. The two-week period might be just long enough for the initial Taco Bell hype to cool down. It will be especially interesting to see the same-store sales numbers for both McDonald's and Yum! Brands for the month of April.

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Nickey Friedman has no position in any stocks mentioned. The Motley Fool recommends Burger King Worldwide and McDonald's. The Motley Fool owns shares of McDonald's. 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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