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McDonald’s Sees Huge Opportunity in the Coffee Business
Posted by: Live investor (IP Logged)
Date: November 16, 2013 01:27PM

McDonald’s (MCD) has some very interesting growth plans for the upcoming year. The Oak Brook-based company plans to optimize the menu, enrich customer experience and increase the accessibility of McDonald’s outlets. The fast food giant is expected to spend $2.9 - $3.0 billion for its expansion plan and open 1,500 - 1,600 new outlets across the globe. The company shall also remodel about 1,000 restaurants.

The quick service restaurant chain recently introduced beverages which include White Chocolate Mocha and Pumpkin Spice Latte. This directly puts McDonald’s in competition with Starbucks’s (SBUX) and Dunkin’’ Donuts (DNKN). McDonald’s is now not only restricting itself to fast food and competing with Yum! Brands (YUM) and Burger King (BKW). It is also focusing on offering coffee based drinks to compete with coffee brands in partnership with Kraft. Kraft was earlier a distributor of Starbucks, before their terms terminated in 2011.

There is more that suggests that both Starbucks and Dunkin’ are going to face increased competition from the maker of Big Mac. McDonald’s is also concentrating on its breakfast menu, other than just coffee.

An opportunity

Don Thompson, the Chief Executive of McDonald’s sees huge growth opportunity in both the coffee and breakfast business. “Anyone that stops off to get a cup of coffee anywhere, that’s an opportunity,” he said. The potential of coffee business is pretty strong.

Thompson realizes that coffee has the highest growth potential in the global drinks category. Though several other chains are complaining of a slow moving economy which is affecting their business growth, Starbucks and Dunkin’ happens to be those very few outlets witnessing fair growth. It is quite evident from the 8% same store sales that Starbucks reported in the last fiscal year. Dunkin’’s sales figure also rose 3.3% in the first nine months of the year in comparison to McDonald’s which witnessed a growth of only 0.2%. Also growth in China, one of the hot destinations of fast food giants, has slowed down after both Yum! and McDonald’s suffered from the chicken supply issue last December.

It is therefore essential for the fast food giant to include other items in the menu. McDonald’s is looking to become a bigger player in the coffee business. Undoubtedly McDonald’s would have to work pretty hard to match up to the level of Starbucks and Dunkin’ as coffee drinkers hold better perception for these old coffee players than McDonald’s, as per a finding of YouGov. Globally McDonald’s operates around 4,200 McCafes, which are either one section of the restaurant, or operates as a standalone unit. The company aims to open 350 to 400 McCafes next year.

The world’s biggest hamburger chain is experimenting with the sale of McCafe bagged coffee at supermarkets in 2014 in partnership with Kraft. While McDonald’s is trying to diversify and try coffee, both Starbucks and Dunkin’ are putting in effort to boost their fast food sales and increase their afternoon footfall and evening hours as well. To increase sales in the afternoon, Starbucks recently modified its sandwich and offered new salads and baked items to attract people during lunch hours. Also the baked offering would attract those who are conscious of putting on extra kilos and frightened of consuming high calorie burgers.

McDonald’s is very hopeful about the coffee business and believes that it would pull up its sales figure substantially. I believe there would definitely be an overall improvement in store sales, but how sustainable it would be depends on how people receive McDonald’s coffee in comparison to other coffee makers.


Stocks Discussed: BKW, DNKN, MCD, SBUX, YUM,
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