What does McDonald’s entrance into the specialty coffee market mean for Starbucks and the rest of the café concepts?
McDonald’s specialty coffees challenge Starbucks and others
By Jamie Hartford
Two weeks ago, news broke that McDonald’s Corp. will add specialty coffee and other premium beverages to the menus at its more than 14,000 U.S. locations in 2008. Crain’s Chicago Business reported that the addition of lattes, cappuccinos, and other specialty drinks is expected to bring the chain more than $1 billion a year in sales, but the question is what will it take away from Starbucks and other coffee retailers?
For its part, McDonald’s has been reserved in public comments concerning news of the endeavor.
“To meet the changing needs of our valued customers, we’re testing a variety of beverage options, including specialty coffee,” reads a statement released by McDonald’s spokeswoman Danya Proud. “We’re encouraged by what we’re hearing from our customers. They’re telling us they appreciate the added value, convenience, and selection.
“It is far too early, however, to speculate about test results or specific product offerings. No final decisions have been made. To speculate beyond this, or comment on rumors, would be irresponsible and inaccurate.”
Starbucks, too, seems to be stepping around the issue, despite Crain’s declaration that the McDonald’s plan is a “frontal assault” on the reigning coffee king.
“We believe there is room in the coffee world for many different approaches and providers,” says Bridget Baker, with Starbucks media relations. “We’re focused on continuing to provide the coffee expertise and welcoming experience that customers can get nowhere else.”
But at least one expert says McDonald’s presents a significant threat to Starbucks and other quick-serve coffee retailers. We believe there is room in the coffee world for many different approaches and providers.”
“McDonald’s is already a strong player in the retail coffee market and has recently gained experience from its McCafé concepts worldwide,” says Andrew Hetzel, CEO of Cafemakers, LLC, a Hawaii-based specialty coffee business consultancy. “In Germany, for example, it is my understanding that they already lead Starbucks for specialty coffee market share.”
Hetzel says Starbucks is especially vulnerable at present as the result of many of the same factors the company’s CEO, Howard Schulz, addressed in the notorious memo lamenting the commoditization of the brand leaked earlier this year.
“I foresee that Starbucks will need to return to its roots to regain its competitive advantage,” Hetzel says. “The company has drifted away from its original ‘third place’ environment concept with drive-thru and store-in-store locations; their once skilled baristas have become pushbutton machine operators, and straight espresso was taken off the menu in favor of ‘pumpkin lattes’ … They should get back to focusing on coffee and the formula that made them successful in the first place.”
Joe Pawlak, a vice president at food industry consulting and research firm Technomic, has a different opinion. “I think it’s going to have a very limited affect on Starbucks,” he says of McDonald’s specialty drinks initiative, adding that consumers will see Starbucks as a different, more upscale option. “[McDonald’s] is going to bring specialty coffee more to the masses.”
Consumers, Pawlak anticipates, will see McDonald’s specialty drinks as more of an occasion for takeout. As such, the retailers that should be worried are chains such as Dunkin’ Donuts, which offer specialty coffees and blended drinks at a price point similar to where McDonald’s products will presumably enter.
One group of retailers that probably won’t be hurt is higher-end independent coffee shops. Contrary to popular belief, these types of retailers often experience a boom in business—sometimes as much as 20 percent—when a Starbucks sets up shop nearby, Hetzel says. The same phenomenon could presumably result from a neighboring McDonald’s selling similar beverages.
“I believe it’s only helpful,” Hetzel says. “It educates consumers on a better quality of coffee that exists. There’s so much more that the independents can do that it expands their market. When coffee tastes better…people drink more.”
In the end, however, it’s all speculation until McDonald’s actually rolls out the drinks. Crain’s reported that the move will require the chain to make the most extensive changes to its restaurants since it switched kitchens to a cook-to-order system for sandwiches in the late 1990s. Equipment needed to implement the program includes machines for making specialty coffees and smoothies, as well as cold storage for bottled soft drinks and energy drinks.