McDonald’s: Breaching the Luxury Coffee Market
Daryl Coleman
Connie Gao
Heejae Kim
McDonald’s Corporation, the world’s largest fast food restaurant chain, owns and franchises more than 31,000 restaurants in 120 countries.1 McDonald’s owes much of its success to the standardization of its fast food products, which include the Big Mac and the Happy Meal.
McDonald’s has had a reputation of serving cheap, quick, and unhealthful foods. Recently, documentaries such as Super Size Me has tested that reputation and induced the corporation to adopt a more health-conscious stance by introducing healthier items such as salads and wraps to the menu. Nonetheless, McDonald’s revenues are steadily increasing,
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One aims to start an in-store line of espresso drinks fully integrated with the current menu, while the other calls for the creation of a completely different restaurant. Note: although McCafe is the name of the McDonald’s coffee and espresso line, here we will only refer to McCafe as the store.
Why Should McDonald’s Enter the Specialty Coffee Market?
There are still profits to be made. Starbucks’ revenue is growing, though its growth has declined in 2008. Due to the economic downturn, people are less willing to pay $4 for a drink at
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http://money.cnn.com/news/newsfeeds/articles/djf500/200903051645DOWJONESDJONLINE001045_FORTUNE5.htm http://findarticles.com/p/articles/mi_m3190/is_20_35/ai_74700848 5 http://seekingalpha.com/article/73378-mcdonald-s-q1-2008-earnings-call-transcript?source=homepage_transcripts_sidebar&page=-1 6 http://findarticles.com/p/articles/mi_m3190/is_23_39/ai_n13808203 4
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Starbucks than in previous years. Consumers are reevaluating the value of the product they are purchasing and are looking for substitutes. Due to the weakening of Starbucks’ grasp on the market, it is a prime time for McDonald’s to step in and offer a more affordable, mid-range quality substitute. Although most of Starbucks’ customers are highly loyal to the brand and are likely to dismiss McCafe products due to McDonald’s reputation as a fast-food restaurant, there will be a fraction of Starbucks’
Substitute Products – The threat of substitute products poses a potential threat to Starbucks as competitors with like products offer similar products to capture the market.
Starbucks has created a competitive advantage with their product quality by setting themselves apart from their competitors. “The Company has stayed with the upper-scale of the coffee market, competing on comfort rather than convenience, which is the case with its closest competitors, McDonald’s and Dunkin Donuts” (Mourdoukoutas, Panos). Consumers believe they are receiving a better product and experience when they purchase from a Starbucks as opposed to another large food service company that may sell coffee.
Within the coffee industry Starbucks Corporations has grown from a small shop to a leading coffee distributor, proving to have financial strength and determination to continue growth. With the weakening economy the continued success of Starbucks
McDonald’s has been in business since 1955. It has positioned itself in the market as a low-priced, fast food restaurant focusing on hamburgers and other convenience foods. The company is currently faced with competition from Chipotle, a restaurant which offers fast and healthy Mexican food in the fast-casual dining segment. Both restaurants are competing for customer dollars and while they both offer fast convenience there are differences in their food offerings. McDonald’s has always offered a fast, basic meal at a low price. In comparison, Chipotle offers fresh, quality Mexican food fast at a low price. Analyst have suggested that Chipotle would bring an end to the fast food burger chains that have long dominated the industry. McDonald’s must determine if Chipotle is a competitive threat and if so how to address the threat in the market.
Starbucks is known for their Frappuccino’s; unfortunately they are on a downward spiral in sales due to competitors such as McDonalds. In 2008 Starbucks admits to its losses due to their competitors. “Company executives now freely admit that such thinking is largely to blame for the woes that led to Tuesday’s announcement that Starbucks will close 600 U.S. stores and eliminate thousands of jobs. The coffee giant’s missteps have come at a spectacularly bad time, hitting as the economic slump deepens and consumers are seeing their discretionary spending eaten up by rising gas prices and grocery bills (Linn).”
Starbucks’ lead in the specialty coffee industry exemplifies the result of deftly executing a well-planned business strategy. Moreover, Starbucks is well positioned for what is expected to be a continuing rise in the popularity of specialty coffee products. The question before Starbucks’ leadership, however, is what avenues will lead to Starbucks’ goal of remaining true to its core, the highest quality coffee products while providing a “total coffee experience” for its customers?
Customers yearn for top notch coffee and pay willing high prices compared to others. Coffee drinkers, are not only paying for convenience, but know it is good coffee. Restaurants favor one of two business models: the standard retail business model or the franchise model. Starbucks is a standard model chain, which means it does not franchise out. The bulk of its profit come from locations the company owns. Sometimes this business model can hinder expanding. Starbucks beat the odds of this by going to high populated areas with lots of traffic. Meanwhile globalization is playing a role in how companies can
McDonalds has always been a company that shares in the happiness of a child. Recently after taking my own children to McDonalds, I have found that there is not a breakfast option for children. McDonalds should add a happy meal option to the breakfast menu. Current demands by consumers are to add a happy meal option allowing parents to purchase child sized portions of breakfast items. This option could help McDonalds to increase profits by attracting more consumers. Shareholder reports show a quarterly cash dividend per share increase of 15% and annual dividend of $2.80 per share. Comparable sales grew 5.6%. Cash by operations increased $808
With coffee consumption being transformed into a habit, with active market growth, with Starbucks being a North America market leader the distance between company and its competitors was reduced.
Starbucks is acclaimed for its superior value proposition in the early 1990’s by creating an experience around the consumption of coffee, a ‘third place’. The brand is positioned to offer the highest quality coffee, close customer intimacy, and warm atmosphere or ambience.
Starbucks is the world’s largest coffee roaster and retailer of specialty coffee in the world. We have enjoyed great dividend returns over the past 5 years, and our growth has been on the rise. We are currently saturating the US market, while the emerging markets of developing countries offer many possibilities for growth and increased revenues. In our US market we should look at offering more items on the menu that complement our long-standing tradition of pleasing our customers. Exotic Juices, and snacks served with the same service could add a nice margin to the bottom line. In addition, the ability to offer a drive through service for the consumer that loves fine coffee but does not have the time to stop
Starbucks Incorporated is a Washington based international business who had a total revenue of over $22 million in 2017. Starbucks’ employees near 254,000 employees within 2016. This company is known for their coffees, especially around the holiday seasons, all over the world. Majority of their profits come from the American market while they are trying to expand into the eastern world. However, their customer experience and support allows consumers in other markets to want to be a part of the westernized experience. Starbucks has the opportunities to grow within their grocery store sales and to expand their brand, both in more products and in more stores. Starbucks is also affected by local coffee shop competitions and economic conditions constantly changing which hurt their profits. Regardless, Starbucks proves that they have a strong business model that allows them to stay as one of the international beverage leaders.
The “Coffee Wars – The Big Three: Starbucks, McDonald’s and Dunkin’ Donuts” article focuses on the company analysis of the Starbucks brand and how its main competitors, McDonald’s and Dunkin Donuts, has affected their brand and driven competition higher. Even though there are many companies trying to enter the specialty coffee market, these three companies own the majority of the market share. With Starbucks’ top quality and above average prices they hold a different market than the fast coffee/food market of Dunkin’ Donuts and Starbucks; yet the competitive moves Dunkin’ Donuts has made over the years in order to compete with Starbucks and surpass McDonald’s has driven competition up between all three companies. The competition has stiffened ever more in the past ten years due to the changing economy. This led to “the big three” to come up with different techniques to gain competitive advantage over the other. Although the competition between these companies is to gain most of the market share, consumers are still loyal to a certain brand; this makes it difficult to gain each other’s clientele. McDonald’s continues to appeal to customers who want value and speed, Dunkin’ Donuts focuses on the middle-class, while Starbucks a customer who desires a higher quality product along with being recognized for using the brand.
Starbucks is and will continue to be one of the largest distributers of a cup of coffee today and into the future. The Starbucks mission to “inspire and nurture the human spirit – one person, one cup and one neighborhood at a time” directly correlates with the experience a customer has in each store. They have many ways to differentiate in comparison to competitors because they provide an experience while shopping for a coffee allowing them to charge a premium price.
Since McDonald’s is the most well know fast food chain in the world with a market cap of 69.35 billion, brand recognition is their biggest strength. The secret of McDonald’s success is its willingness to innovate and maintain consistency in the operation of its many outlets. In recent years McDonald’s has introduced Premium Salads, Snack Wraps, fresh Apple Dippers in the United States, and Corn Cups in China. Also, McDonald 's products are priced so low that economic conditions are almost insignificant.