Latte with Fries? McDonald’s Takes Aim at Starbucks

Latte with Fries? McDonalds Takes Aim at Starbucks

The recession has been good to McDonald’s. As consumers trade down to
cheaper, faster food on the go, McDonald’s has kept up its growth during the
downturn. Same-store sales rose 4.3% for the quarter that ended March 29.
Profits were up 4%, to $980 million. In this economy, that’s an explosion.

So what’s next for the Golden Arches Try an all-out assault on coffee. Over
the past 18 months, McDonald’s has been steadily introducing lattes,
cappuccinos and mochas in individual markets across the country. Some
80% of the company’s 14,000 U.S. stores now sell these drinks, and this
week McDonald’s will roll out a national advertising campaign trumpeting
the McCafé section of its menu. The timing of the rollout just happens to
coincide with the struggles of Starbucks, whose earnings sank 77% this past
quarter, mainly because of charges related to store closures and falling
real estate values. McDonald’s will gladly kick a double-soy-latte-drinking
competitor while it’s down. “This is shock and awe,” says Steve West,
restaurant analyst at Stifel Nicolaus.

McDonald’s USA president Don Thompson insists the company has been planning the rollout’s
timing for over two years and that McDonald’s is not
specifically targeting Starbucks. “We don’t need to talk about someone else
to justify our business,” says Thompson. McDonald’s is just trying to grow, he says,
by capturing share in a high-margin sector — specialty coffee — that has shown
consistent growth. Whether you believe the company’s motives or not, the
bottom line is that McDonald’s seems positioned for success.

According to West, the new McDonald’s drinks are almost $1
cheaper than those at Starbucks. “Is it Starbucks quality” asks West. “I
would never say that. But they’re in the ballpark. And that’s where they
need to be.” The analyst also conducts bimonthly consumer surveys, and
found that over 60% of respondents said they will trade down to
McDonald’s coffee if the drinks are cheaper and made faster. Given the
company’s pricing history and the likelihood that the McCafé system will be quicker than
Starbucks baristas, consumer sentiment is trending its way.
Thompson says that, to date, the McCafé drinks have produced profits in the
test markets.

The new national ad campaign plays off the McCafé name. In one spot, for
example, a chore — ironing one’s shirt — becomes a much more pleasurable
“choré” with McCafé coffee in your hand. That’s kind of cute, but why don’t the ads highlight the company’s
one major advantage over coffee competitors: price With consumer
spending still weak, shouldn’t McDonald’s be explicitly broadcasting its
bargains “Here’s what everyone implicitly understands,”
Thompson says. “With our supply chain and the leverage we have, the products are
going to be more affordable than other coffee offerings out there. What is
less implicit is the taste. So what we are trying to do is help everyone
understand that, No. 1, it tastes great.”

customers don’t respond, however, Thompson promises they’ll be reminded of the value.
“We are not going to sweep under the rug the affordability aspect,” Thompson
says. “This is a long-term awareness campaign. You will see everything from
taste, indulgence, convenience and price point across the body of work that
will be presented over the next couple of years.” Yet the company has so far resisted franchisees that have been too explicit about price. Last year in
Seattle, a group of McDonald’s franchisees ran a billboard that read, “Four
Bucks Is Dumb,” a clear shot at Starbucks prices. After a talk with corporate headquarters, the billboard was taken down.

McDonald’s might want to stay aggressive, because Starbucks won’t go away
quietly. The company is introducing a grande iced coffee for under $2 this
summer, and the company has said it will lower prices on basic drinks in
some markets. Starbucks has also just launched print ads taking direct aim
at the quality of other coffee brands like McDonald’s and Dunkin’ Donuts.
“Beware of a cheaper cup of coffee. It comes with a price,” reads one ad.
“If your coffee isn’t perfect, we’ll make it over,” says another. “If it’s still not
perfect, make sure you’re in a Starbucks.”

At least one analyst, however, thinks the coffee war between
McDonald’s and Starbucks could be overhyped. “I think it’s a bit naive to
think that all of those Starbucks customers are running across the street to
McDonald’s,” says Sharon Zackfia, an equity analyst at William Blair & Co.
In a recent report, she noted that when McDonald’s rolled out local TV
advertising for McCafé in Michigan, Starbucks management told her that
Starbucks actually saw a boost in traffic. “The obvious
answer to Starbucks’ problems is that the economy is weak, and 30% of its
stores are in California and Florida,” says Zackfia. When the economy improves, Starbucks may
bounce back, with or without McCafé competition. “Just as Starbucks will
always be a beverage destination, McDonald’s will always be known as a food
destination,” Zackfia says.

Thompson of McDonald’s naturally disagrees. “We want to be a beverage
destination,” says Thompson. “For us, growing markets with great margins is
the place to be.” McDonald’s will always have the Big Mac. But does anyone
want a latte with their fries
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