McDonald's Follows Starbucks Into Grocery Stores

McDonald's tries to give retail coffee a push, but it comes at a bad time.

Aug 19, 2014 at 6:16PM
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It could be lousy timing or a case of misusing a caffeinated kick, but McDonald's (NYSE:MCD) is hoping that its coffee can woo retail shoppers next year. The world's largest burger chain is teaming up with Kraft Foods (NASDAQ:KRFT) to sell packaged bags of its McCafe ground and whole-bean coffee through supermarkets by early next year. It will also offer up its java blasts as pods for single-serve machines. 

As you can imagine, the decision to follow Starbucks into consumer packaged goods is being met with more than a little derision. It's going to be potent late-night comedy chatter. 

McDonald's serves a lot of coffee in the morning, but that's because it is cheap, everywhere, and convenient for morning commuters who need an infusion of joe but don't want to have to get out of their cars. 

"Gee, I wish I could make this at home," said no McDonald's coffee sipper ever. 

Starbucks succeeded in its push for bagged coffee and eventually K-Cups because it's a beloved brand. Folks pay a premium for it. Obviously, the same can't be said for McDonald's. Folks pay a buck for a 12-ounce serving off the chain's Dollar Menu & More, and customers will expect to buy bags of McCafe for less than perhaps even house brands.

One lump or two?
Bulls will argue that it's incremental to the business, but even that doesn't seem right. If McCafe fails at the packaged retail level, won't that tarnish the coffee brand? If McDonald's and Kraft fail to price the beans aggressively, won't it convey the wrong value message to consumers? McDonald's is already smarting at the store level. After a decade of consistently positive same-store sales growth, it's coming off three consecutive quarters of negative domestic comps. Even the company concedes it has strayed from its value message by pushing premium sandwiches and beverages and rewording its Dollar Menu last year so it can include items that cost more than a buck.

What does it stand to gain? That's not the question to ask. What does it stand to lose? Let's say that there are McCafe fanatics that would choose a McDonald's K-Cup for their Keurig machines over the hundreds of other current choices. If these are the people who typically hit the drive-thru window on the way to work in the morning, pairing up a McCafe with a breakfast burrito or Egg McMuffin, won't they bypass Mickey D's entirely? They've brewed their coffee. Are they really going to queue up at a McDonald's for an Egg White Delight?

In another odd twist, McDonald's won't initially be selling this at its restaurants. It's only aiming to hit supermarkets, warehouse clubs, drugstores, and mass merchandise retailers during the launch early next year. Why? Is it because this is aimed at non-McDonald's customers? Is it because the company is afraid it will lose repeat business? 

It's easy to kick McDonald's when it's down. It's a giant in a world where everyone roots for the underdog. However, this has all of the makings of a classic business blunder. McDonald's isn't a brand that folks associate with quality, so why would it knowingly enter stores where the playing field is as level as the shelves? A Consumer Reports poll of tens of thousands of fast-food eaters rated the quality of a McDonald's burger dead last among the 21 leading chains. The McCafe brand has more appeal, but that may not be the case by the time the last beans are brewed.

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Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends McDonald's and Starbucks. The Motley Fool owns shares of 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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