The Coffee Line is Headed Toward…McDonald's

Articles
June 22, 2009

The Coffee Line is Headed Toward…McDonald's

The cash registers are ringing loud and clear at McDonald's serving its hip, hot McCafé® drinks. Although the exodus is slowing for Starbucks (28% last year, 20% this year), the other factor is the loss of its exclusive hold on the European cachet of finely brewed espresso drinks, hot and cold. Is it because lower prices in a down economy have enormous appeal or is it the finely honed skill of marketing? Both are definitely part of the picture. Everyone seems to be influenced by the economy although the younger audience at Starbucks seems to be faring slightly better than the older one that patronizes McDonald's. Cutting the "latte factor" is on every financial guru's "to do list" to stabilize budgets during these hard times, and listeners have taken that to heart. When you add up the two to four stops a day that some consumers were making, that's thousands of dollars per year. You can go just as often for a coffee break at McDonald's and cut the outlay at least 25% or go less often and reduce your output more than 50% without sacrificing quality or the feeling of a low-cost pleasure to balance the stress of harsh times. Some 44.2% of McDonald's drinkers are buying more generic brands versus 36.2% of Starbucks' customers, and more of McDonald's customers (72.7%) are focusing more on needs over wants versus Starbucks (65.7%.)

The cash registers are ringing loud and clear at McDonald's serving its hip, hot McCafé®
drinks. Although the exodus is slowing for Starbucks (28% last year, 20% this year), the other factor is the loss of its exclusive hold on the European cachet of finely brewed espresso drinks, hot and cold.

Is it because lower prices in a down economy have enormous appeal or is it the finely honed skill of marketing? Both are definitely part of the picture.

Everyone seems to be influenced by the economy although the younger audience at Starbucks seems to be faring slightly better than the older one that patronizes McDonald's. Cutting the "latte factor" is on every financial guru's "to do list" to stabilize budgets during these hard times, and listeners have taken that to heart. When you add up the two to four stops a day that some consumers were making, that's thousands of dollars per year. You can go just as often for a coffee break at McDonald's and cut the outlay at least 25% or go less often and reduce your output more than 50% without sacrificing quality or the feeling of a low-cost pleasure to balance the stress of harsh times.

Some 44.2% of McDonald's drinkers are buying more generic brands versus 36.2% of Starbucks' customers, and more of McDonald's customers (72.7%) are focusing more on needs over wants versus Starbucks (65.7%.) 

Some Starbucks customers are playing both venues, with about 48% visiting McDonald's at least once per week and more than half, 56%, choosing the iconic hamburger chain regularly. Compared to August 2008, that's a solid 51% increase in luring the Starbucks customer to the Golden Arches. Although 28% of its customers visited Starbucks less frequently last year, the reduction is now 20%.

In an effort to win back more customers, Starbucks is offering reductions in some drinks from 25 to 45 cents. However, more of their customers are ordering smaller sizes, less expensive items or ordering less often. Once they've changed this habit, will they return to their more extravagant ways?  If the marketing mavens of McDonald's have their way, getting value for the buck may become the new in thing to do, especially when hot and cold latte drinks are anywhere from 25 to 40% cheaper than Starbucks. McDonald's launched a $100 million campaign last month using traditional print, radio and TV media plus online and outdoor resources.

Certainly, McDonald's rainstorm of free and discounted coupons has sent a number of skeptics to 11,000 of its 14,000 locations nationwide, (they aim to have their McCafé® drinks in all their locations by year end.) The big question is, can McDonald's keep them coming back? If the trend continues, that answer could be a decided yes. And, with overall store sales increases topping 5%, this may indicate that all parts of the menu are attracting new or more repeat customers.

McDonald's introduced its McCafé® line two years ago in May 2007 and its market share was 3.3% to Starbucks' 9.8%. The recently released May 2009 figures indicate that McDonald's has risen to 5.4% and Starbucks has fallen to 9.2%. McDonald's figures have risen steadily with just a few downtrends while Starbucks jumped up to 11.2% in 2008 and steadily declined since then.

As for the quality wars, McDonald's has forged relationships with several prime coffee suppliers to match the regional tastes throughout the country including Gaviña Gourmet Coffee on the west coast, S&D Coffee on the east coast, Green Mountain Roasters,  and others to meet the demand. They report using coffees from Indonesia, South and Central America. Starbucks offers coffees from most of the 30+ countries in the world that produce coffee.

As of this writing, the stock market has reflected the change, too; shares of McDonald's are up and Starbucks' shares are down.

Added to this pot of sales figures is Dunkin' Donuts entry into the latte wars. The firm held a 4.8% share in 2007 which has been reduced to 4.1% in 2009. It, too, has reduced some of its coffee drinks 30 to 50 cents each in its effort to climb out of third place. This does not reflect their entry into the supermarket store as packaged coffee.

NOTE: Some information for this article is from BIGresearch,CIA-Trends and from Morgan Stanley & Co.