Competition: How McDonald's Will Kill Itself Killing Starbucks

McDonald's has nearly 14,000 stores nationwide, all of which will be equipped with full-fledged coffee bars and baristas by year's end. Having already begun adding plush seating, gentler lighting and subtler colors to their franchises, the big M is looking to steamroll the limping Starbucks on its own turf. Starbucks, however, isn't going anywhere; rather, it's McDonald's that will be maimed most by its own campaign to destroy the Seattle super-brand.

Admittedly, McDonald's is one of those monolithic brands that will likely have a longer half-life than radium -- but that hardly makes it invulnerable. By adding the "theatre" of a coffee bar (as one McDonald's VP has phrased it), the company has gained little more than the potential to alienate customers, confuse its menu and open up a black hole for capital.

If you haven't gotten the scoop on McDonald's big move, here's a useful summary from the Wall Street Journal:

Before I go on to detail the three ineluctable barriers to McDonald's success with coffee, let's first agree on a few things about the average coffee-buying American.

- When they go out for a coffee, they are going out simply to buy coffee. It's only recently that Starbucks has decided to upgrade its (over-priced and under-flavored) food menu, because frankly, they haven't had to. [Edit: Indeed, some people buy coffee with their breakfasts at McDonald's. But most coffee drinkers are not also McMuffin eaters. McDonald's new attempt is to capture the coffee-only customer, not its captive audience of breakfast customers.]

- Customers expect buying coffee to happen even more quickly than buying fast food, because, hey, it's a beverage and not a meal.

- Most aren't fiercely loyal to one brand of coffee or another. Some think Starbucks is too strong, and some think McDonald's is too watery, but most just want a caffeine fix that's brown and hot.

These principles given, here are the factors that will make McCoffee bomb.

The Carefully Proven McMenu
McDonald's has spent decades refining its menu and its accompanying drink selection. When you go to McDonald's, you step in the door knowing that the company's ubiquity was built on its reputation for hamburgers and fries. With hamburgers and fries, you drink cold soda. So it is written, and so it will stay.

Remember McPizza? Me neither. I've read it was neither better nor worse than Pizza Hut or Domino's Pizza, but it was a miserable failure. Why? Because when you go into a McDonald's, you're going to be bullied out of your pizza-eating mood (assuming you entered with one in the first place) by the sweet stink of the flagship fare. The place reeks of fries and beef. McDonald's has spent millions of dollars developing chemical aromas for its fries, burgers and chicken, and they are every bit as intoxicating as they were meant to be. You know that frustration you experience when you try to hum one song while another is playing on the radio? That very dissonance was the demise of the McPizza, and will claim McCoffee next.

When you step into a Starbucks, however, you probably begin to anticipate your coffee even more than you did on your way over. The place smells of beans, frothing milk, and pastries. That visceral impression will stay with you the next time you want coffee, but the visuo-olfactory confusion of getting coffee in a McDonald's probably won't initiate the same kind of conditioning in your coffee-loving brain.

The Drive-Thru Factor
Both Starbucks and McDonald's make their bread-and-butter on drive-thru and to-go sales -- Aha! The workaround for the last argument, right? Wrong. Even if customers step into McDonald's and don't experience the sensory dissonance I discuss above, they will be subject to another mental quiddity that will be bad news for McCoffee.

When you're opting for a drive-thru, you're opting to "save time." We all know, rational as we are, that human beings will go to incredibly illogical lengths to shave even 5 seconds off a trip or task; run a red light, apply lipstick on the highway, and so on.

That very compulsion to be as efficient as possible, the very one that brought you to use the drive-thru in the first place, will tell you that a popular place that serves food will have a slower drive-thru than one that serves only coffee. I don't have any statistical evidence to back that up, but then again, statistical evidence is impotent in the face of what consumers perceive to be their common sense. More people use McDonald's drive-thru's than Starbucks, and the products coming out of the window take more time to prepare. The savvy driver will almost always opt for the specialty store when time is of the essence, particularly if they're in search of a single product.

Think of an analogous situation in retail: Home Depot vs. Sherwin Williams. You know you need two cans of paint, and you know you can get them at either place. Home Depot will definitely be cheaper than the specialty Sherwin Williams paint store. However, you also know that parking at Home Depot is a nightmare, the store is large and time-consuming to navigate, and the lines are often interminably long. Maybe if you have all day, you'll opt to save money and go to the Home Depot. But if time is the least bit of a concern, most consumers will go to the specialty store every time -- even if they know they'll pay a couple dollars more. Likewise with Starbucks, where the drinks will inevitably cost more than those at Mickey D's; actual price matters little when the customer perceives that they'll get their desired product with less time spent and less stress suffered.

The Dunkin Factor
For some reason, the media coverage of the new McDonald's strategy (which McDonald's is calling, redundantly, the "Strategy to Win") has largely overlooked Dunkin Donuts as a competitor in the Coffee Wars. While they lack the branding sex appeal of SBUX and the sheer might of MCD, Dunkin Donuts is not to be overlooked, because it is likely to be the Perot to McDonald's George H.W. Bush.

Here's the problem, if you're a certain red-shoed clown: Dunkin Donuts is entirely too much like your franchise. Both stores are low on quality and nutrition as well as being low on cost. Both have serviceable, sometimes downright lackluster eating areas. They're the same class of competitor, even if their niches and products are slightly different. The worst part: they already have a terrific reputation for good, inexpensive coffee. Dunkin also benefits from a bit of the specialty-store image that Starbucks does, and offers about as much food as a coffee customer probably wants (donuts, bagels, muffins and breakfast sandwiches.)

Where McDonald's sees its market isn't entirely clear to me, especially with two good players already in the fold. That said, McDonald's does have a fighting chance at selling coffee if it can persuade existing customers -- ones who wouldn't normally buy coffee while at Mickey D's -- to replace cheaper sodas for more expensive coffees as their meal-side beverage. Considering the scale of the McDonald's experiment, that could have a broader effect on the way Americans think about the harmony of food and drink. I'll wait and see -- Venti Macchiato in hand.

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48 Comments

  • Rod Brock

    It wasn't that long ago that Mickie Dees came out on top in a consumer poll as to which outfit has the best cup of "straight" coffee. The consensus being that Starbucks had a "burnt taste." If I took mine black, I might agree - the stuff is gut-rot without cream, imho.

    However, I'm pretty sure that Starbucks isn't getting rich on the plain black stuff. The big money is on those frothy foamy sweet things, with more calories and less caffeine, which retail for $4.00+ a pop.

    For my part, it all comes down to price. I love my coffee, and if Mickie Dees can offer me a decent cup at a lower price than McDonald's, I'll go for it. Screw the atmosphere - I usually take it on the road, anyway. And who can read a book with jazz blaring out of the speaker above your table at Starbuck's? Screw their WiFi for pay, as well. I can snag a coffee on the way home, and drink it my very private backyard under a shade tree, in a chaise lounge, laptop and WiFi at my disposal.

    Well, in the spring and summer, anyway.

    P.S. - to the guy who's never seen a drive-thru Starbucks. My city has two (in addition to about ten walk-ins). Of course, I'm just north of Coffee-Mecca, the Emerald City of Java and suicides, Seattle.

  • Scott Milener

    you guys are all in the detail weeds with your comments. Its not about whether Mcd's used to have 15 minute signs, or used to have bad coffee. Three important trends: (1) high-end coffee drinks are now a mainstream purchase for Americans, thanks to Starbucks. So the timing is right for Mcd's. (2) Driven by that is more than ever, even down to junior high school kids, we're a caffeine-addicted population and its a daily consumable, unlike a hamburger, we've got to have it, (3) Mcd's has Drive-throughs all over the place and is already known as a breakfast location. Convenience is king and drive through coffee is the fastest growing segment of that market, so Mcd's is very well positioned to steer people from Starbucks who are commuting - the #1 time to buy the latte. As long as the quality and flavor are good, they can steal share from Starbucks.

  • Alain

    I remember Mc Donald's opening a few "Aroma" coffee bars in Switzerland, which were Starbucks rip-offs. All the outlets are now closed and the regular McD's restaurants feature an Aroma-branded automated latte and coffee maker (hint: it's awful).

    The pure Starbucks approach didn't work. We'll see if the beef scented cappucino will take off.

  • Minger

    Starbucks has commoditized away its premium. Meanwhile McDonalds is morphing towards warmer and cozier, and it and other chains like Panera Bread and Dunkin Donuts are claiming large swaths of the new cognitive map.

    With the new rational--and profitable--regime at McDonalds, perhaps you are ignoring market tests they have done on the caffeine delivery. McPizza failed famously but it was not something that was ever rolled out on a wide scale. My impression is that it failed in small scale market tests; I certainly never saw or ate McPizza.

  • Jeremy Pepper

    I think your argument has some wholes, but I understand where you are coming from, but here's why I think McDonald's will be fine and probably make in-roads to the coffee market.

    McDonald's is likely targeting those that want to be coffee snobs, but do not have the disposable income to be a Starbucks snob every day, every hour. And, with the economy it is right now, people are going to be looking for a better value of coffee (although history tells us that people tend not to cut back on frivolous items).

    McDonald's already has free WiFi at many of its stores, and is supposed to be rolling it out to more of its stores. That compares to the T-Mobile overprice plans at Starbucks. Starbucks positions itself as the place to hang out, drink coffee, and chat ... but wants to make you pay for some of the convenience.

    Starbucks has it's own aura, and it's own core customer base. The lower hanging fruit of theirs will likely leave, but they have one an advantage that they are all corporate owned stores. The franchises of McDonald's pose a problem, where there's no consistency across restaurants (some stores I can get a refill on soda, others I have to pay because the franchiser is a cheap idiot). That will cause problems for McCafe if they try to roll it out through franchises.

    Oh, and on the West Coast, a good number of Starbucks do have drive-thrus. But, I would kill for Dunkin' in SF.

  • Jackson

    No doubt STBK’s today are generally more pleasant than most US McD’s locations but the McCafe concept, properly designed and executed here, could easily change that. Many of us are put off by Starbucks - the phony culture (barristas, tall, grande, venti) and high prices (Seinfeld cleverly dubbed it “Four-bucks”) and would gladly visit a more reasonable alternative. Big Mac is not going to run Starbuck’s out of business but it will take a significant amount of ‘cream off their top line while bolstering its own margins considerably. As to the reference to McD's spending millions on developing chemical aromas on its beef, fries and chicken, that rings like more hyperbole than fact.

  • Hampton Brown

    I will agree with Dannen assessment. McDonalds’ is a fast food family outlet. Their proposed coffee strategy is taking advantage of their existing global distribution footprint. However, they have challenges. Do you remember the posted signs that seating was only allowed for 15 minutes? Hence, their focus is on fast, clean, in-and-out prepared simple meal menus. As for Starbucks it’s a social hideaway in which lingering is encouraged, Coffee and accessories are simply the vehicle or the excuse to allow social collaboration to take place. My guess is McDonalds’ growth will come from the low hanging fruit, C-Stores, not Starbucks. Their demographic customers are very different. As an after thought, perhaps McDonalds’ ice cream strategy may be give us some pause of what will be the outcome of the coffee hype Touted as the strategy targeting Dairy Queens, they were able to grow the business for all without diminishing their own business. Didn’t Warren Buffet buy into Dairy Queen thereafter?


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  • David

    My company has an office in Dublin, Ireland and on the way to the office there is a Mc Cafe.

    I am afraid to say, but they will absolutly kill Starbucks. From a quality perspective, there is no difference whatsoever. It does not have the atmosphere of smugness that I have come to love about Starbucks, or the homily peirced baristamaids, but I can pull myself away from that little guilty pleasure.

    I will say though, it is hard to imagine a Mickey D's clerk in the states serving up an espresso.

  • Andrew Lyde

    McDonald's may have huge success with McCafe, but not because of me. There probably will be success because of the factors, such as convenience, that you mention. A big missing factor for me is the ambiance. No matter how many hard plastic booths are converted into plush seating and no matter how fast and inexpensive the Wifi is, I will never sit in a Mickey D's and drink my coffee.

    Coffee is sometimes more than a quick caffeine fix. To me, it also represents a community gathering place. At my favorite local shop (and at the Starbucks strategically located across the street from it) it is often difficult to find a seat because families are hanging out together, students are studying, friends are catching up with each other, etc.

    Another issue is the attitude of the employees. I am genuinely surprised when I find a happy, smiling employee at McD's. On the other hand, I'm genuinely surprised when I find an unhappy employee at Starbucks. If coffee is an experience for me, do I want to buy my coffee from an unhappy employee who obviously hates his job or one who is unnecessarily peppy at 6:00 in the morning? As much as I sometimes want to gag the Starbucks guy, him loving his job rubs off on me and makes me want to come back.

  • Paul

    I have always waited longer for my coffee at Starbucks than my breakfast at McD's. I understand your post is based on certain perceptions and basic inferences - as are a lot of blogs - so here's mine: I suppose McD has already spent a lot on market research and test marketing before rolling out this kind of initiative. I also suppose that they don't expect to capture any "brand aware" business, but they do want to capture people to whom they can sell SBUX similar products a little cheaper and more conveniently. If you can get your full fat caramel mocha latte with whipped cream while picking up McNuggets for the rug rats that's a sale you will take from Starbucks. A lot of the McDonalds crowd (read eats lots of fast food and excess calories) is also the profitable Starbucks crowd (orders 800 calorie coffee drinks for dessert to stave off drowsies from the the 1200 calorie Big Mac lunch - these folks don't drink coffee, they drink dessert). My bet is they will have quite an impact on Starbucks.

  • Kai Wang

    McDonald's already has McCafe in China for several years and they've been doing fairly well. If Chinese who prefer tea more than coffee enjoy McCoffee, I don't see any reason McCafe will fail in the US.

  • Bob Prout

    A drive-thru Starbucks? Never seen one but can't imagine such a thing would be more efficient if the customers in line ahead of you were ordering any of Starbuck's more complicated drinks. At least in the stores they shuffle those people aside to wait.

    McD's coffee is one of the most consistently decent brews from store to store so why not build on that reputation with specialty coffee drinks? Sometimes innovation for the sake of innovation is necessary and it gives McDs something to crow about in their commercials

  • JPS

    What you must realize is that a strong customer base of McDonald's are children. As a parent this is a great way to have the kid's eat what they may want while we get something a bit more refined. I have been to a McCafe in the Del Mar California area and it is great. The kids eat Happy Meals and we get Latte's and Pannini's

  • Mike Brewer

    This comment is for the first comment response.

    What is the McMuffin but beef for the morning time. And hashbrowns? A different form of french fry. The point about being a burger and fry place is a valid one, I think.

  • Rebecca

    I think that where they are expecting to make the most inroads, and where they actually will, is when the customer who wants a "real" coffee - which McD's never qualified - finds that a McDonald's is closer than a Starbucks...which translates into more convenient. As many Starbucks as there are these days, they don't nearly compare with the number of McDonalds. When I was on road trips, I'd pick up a gas station cappuccino while tanking up my car then drive through a fast food place for breakfast. If McDonalds will serve coffee at least as good as the best of gas station cappuccino, they will definitely pull a noticeable share away from Starbucks.

  • Mc Oz

    When Mc Cafes started appearing here in Australia which has (from my own experience) a stronger cafe culture than that I saw in the US they were mercilessly mocked, but they are a success and the coffee is OK. At the time of their implementation McDonald's was also significantly redesigned and we haven't had a store that looks like that in the video for some years, they are all much nicer.

    Dunkin Donuts & Starbucks are also both prevalent here, but they occupy different market shares. We don't have drive through Starbucks which is when I have McCafe, however you always see parents sitting with a Mc Cafe drink watching their kids play on the playground or eating standard menu items, something neither Dunkin Donuts or Starbucks can offer and why I think it is a success.

    The Mc Cafe employees also are different, they are at a separate counter like a coffee cart and wear a darker green uniform than the main counter employees. Mc Cafe is more like a sub-brand based on the existing infrastructure, collecting additional revenues than a diversification 'upsizing' existing sales. I think you will be surprized with how it catches on.