Competition: How McDonald's Will Kill Itself Killing Starbucks

BY Chris DannenWed Jan 9, 2008 at 1:34 PM

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.

Topics:

Leadership, competition, McDonald's Corporation, Starbucks Corporation, Culture and Lifestyle, Beverages, Food and Cooking

Print Newsletters

Browse current issue ›

Subscribe to Fast Company ›

Recent Comments | 26 Total

January 9, 2008 at 4:10pm by Jason

Your arguments don't make sense.

You say that McD's is all about "fries and beef" and no one will want coffee. What about their breakfast business? What about the 4 million cups of coffee that they already sell EVERY DAY? Just because the McPizza failed (and the McLean, and the McRib) doesn't mean that McD can't expand beyond burgers. Their chicken seems to move pretty well.

You say that Sbucks and McD both "make their bread and butter on drive-thru sales." I can only remember maybe one or two Sbucks that I've ever seen with a drive-thru, so that will be one major advantage that McDs has over Sbucks.

You talk about the illogical and irrational ways we humans try to save time, and then you predict that people will logically rationalize the fact that McD's drive-thru will be longer and slower because they serve food. When was the last time your drive-thru FOOD order took more than 30 seconds to be shoved through your car window?

Then you position Dunkin' Donuts as McD's bigger threat. Dunkin' is a breakfast place, yet you failed to mention McD's breakfast business when you analyzed the "McMenu" and now you say that Dunkin' has all the food you need? Hello - Egg McMuffin?

And, in the same paragraph, you position McDs and Dunkin' as low-end with a "downright lackluster eating areas," and then you equate Dunkin' to Sbucks because both are "specialty stores?"

You can't see McD's market because you're too focused on burgers. McD does a huge breakfast business. If McD can upsell a coffee to even a tiny percentage of their daily traffic, they will sell millions.

Buying your next coffee is all about convenience. Why does Sbucks open stores across the street from each other? Because people will buy coffee that's in front of them, but they won't cross the street for it. If McD's markets this correctly, it'll be a huge success.