Please ensure Javascript is enabled for purposes of website accessibility

When It Comes to Coffee, Price Isn't Everything

By Daniel B. Kline - Updated Jun 27, 2017 at 2:04PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

McDonald's and Dunkin' Donuts are using low prices to lure in new customers.

In the market for people buying a cup of coffee outside their home, it's essentially Starbucks (SBUX 1.19%) and everyone else.

While McDonald's (MCD 1.12%) and Dunkin' Brands' (DNKN) Dunkin' Donuts both now sell premium espresso-based beverages along with other fancy coffee drinks, people don't view those brands the way they see Starbucks. The Seattle-based coffee chain exists in its own world, where it can sell out of $10 cups of whisky-barrel-aged coffee while it opens more than a thousand Reserve stores selling pricier drinks than its normal, already expensive beverage lineup.

Dunkin' Donuts and McDonald's don't have that kind of pricing ability because selling lattes and cappuccinos cannot change how consumers perceive their brands. Neither chain will ever be considered upscale no matter how many trendy items like cold brew they add. The companies do compete on price, but that isn't likely to affect Starbucks.

A McDonald's store

McDonald's has been struggling to compete in the coffee market. Image source: McDonald's.

A cheaper caffeine fix

In addition to Starbucks, McDonald's and Dunkin' Donuts compete for coffee customers with convenience store rivals that offer a Starbucks-like selection and chains including Tim Hortons, which is owned by Restaurant Brands International and has some 700 U.S. locations.

In the realm of pricing, Dunkin's challenge, according to CEO Nigel Travis, is that its store operate as franchises. With labor costs rising in many markets, some franchisees see raising prices as a way to pay for increased operating expenses. That's a strategy that may send customers elsewhere and the chain has been working to keep franchisees in line, the CEO said at a recent conference, Nation's Restaurant News reported.

"They've shown a great understanding of how over-pricing impacts the business," he said, according to the publication, noting that for the past few months franchisees have kept prices in check. In addition, the company is introducing national deals to reverse a slowdown in same-store sales growth over the past five quarters. These include offering its new frozen coffee for $1.99.

"We'll have national value in some form or shape the rest of the year," Travis said. "You're going to see a lot more value oriented pricing from us in the future."

McDonald's also uses a franchise model, but it has not had the same problems with franchisees raising prices. It has, however, had trouble building sales for its McCafe brand, which it has combated by periodically offering very low prices. That included a deal earlier this year when the chain offered any McCafe beverage for $2.

Will cheaper be enough?

McDonald's has used cheap sampling as a way to get consumers to try its coffee offerings. The problem is that while its existing customers may sample a $2 latte, they probably won't buy a full-priced one.

Dunkin' has the same issue as its customers may indulge in the occasional cappuccino or frozen coffee, but mostly they want a regular cup of joe (or an iced coffee). Dunkin' Donuts and McDonald's might keep pushing prices lower to fight rivals, and that would be good for customers who want their coffee, but they simply aren't premium brands and their discounting won't impact Starbucks. Their share will come from the bottom end of the market not the top.

 

Daniel Kline has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool recommends Dunkin' Brands Group. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Dunkin' Brands Group, Inc. Stock Quote
Dunkin' Brands Group, Inc.
DNKN
McDonald's Corporation Stock Quote
McDonald's Corporation
MCD
$262.18 (1.12%) $2.90
Starbucks Corporation Stock Quote
Starbucks Corporation
SBUX
$88.31 (1.19%) $1.04

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
400%
 
S&P 500 Returns
128%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/14/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.