(Bloomberg ) McDonald's Corp. (MCD) is counting on coffee to give sagging U.S. sales a jolt.
One of the chain's top priorities is boosting "coffee-driven visits," according to a document laying out the company's 2014 to 2016 U.S. strategy. In a Jan. 28 memo, U.S. operations chief Jim Johannesen and U.S. brand chief Kevin Newell exhorted franchisees to deliver "a gold-standard cup of coffee with every visit." Earlier this month, in a webcast for restaurant owners, McDonald's vowed to become the "envy" of rivals and said Starbucks Corp. (SBUX) was leading the "coffee wars."
McDonald's is battling fast-food chains, coffee sellers and even convenience stores hawking breakfast as cash-strapped Americans eat out less. Earlier this month, the world's largest restaurant chain said U.S. same-store sales fell 1.4 percent in the fourth quarter; profit barely budged.
The ramped-up coffee effort comes almost five years after the U.S. debut of the McCafe menu and strategy, which hasn't lived up to its original intent. Initially, the chain planned to transform thousands of restaurants into Starbucks-style cafes painted in earth tones and offering free Wi-Fi. While drip coffee has won a following, the company's hot espresso drinks haven't caught on and many franchisees balked at remodeling costs and buying $13,000 espresso machines.
"McDonald's is trying to look and feel more like Starbucks," said Howard Penney, managing director at Hedgeye Risk Management LLC, who has covered the industry for 20 years. "It's actually hurting them, not helping them" because the chain's competitive advantage is food not beverages and because making complicated coffee drinks slows down service.
Midday Struggles
In the webcast, the Oak Brook, Illinois-based company drew attention to struggles attracting diners in the middle of the day, when Starbucks is starting to get traction with a new line of baked goods. McDonald's comparable-store sales in its U.S. central division fell 1.7 percent at lunch last year through November, the webcast shows. Snack and dinner sales were down in that time, too, while breakfast sales rose 1.6 percent.
McDonald's shares gained 10 percent last year, compared with a 46 percent surge for Starbucks. McDonald's fell 0.3 percent to $93.94 at 9:31 a.m. in New York, while Starbucks slipped 0.7 percent to $73.34.
"As always, our priority is to provide our customers a great restaurant experience," Lisa McComb, a McDonald's spokeswoman, said in an e-mail. "Serving an exceptional cup of coffee along with great-tasting food has been, and will continue to be, a strong area of focus for us."
She declined to provide details of the renewed coffee push and said "stay tuned."
Overseas Foothold
In 2009, McDonald's called McCafe its largest U.S initiative since the Egg McMuffin's 1970s debut. So far, the strategy has fared better outside the U.S., in countries where McDonald's got a foothold before Starbucks arrived and expanded.
In Australia, where the company introduced McCafe in 1993, McDonald's sells sweets including apricot danishes and banana bread to complement its espresso drinks. In Europe, there are about 1,600 McCafe locations, typically separate areas inside restaurants that sell specialty coffees, desserts and snacks.
While McDonald's tried to mimic that success in the U.S., most U.S. stores weren't big enough or designed to have separate counters and display cases for coffee and bakery items.
"They basically now just hang a sign from the ceiling that says 'McCafe' over the espresso machine," Penney said. "It was rolled out very differently than it was first imagined."
Starbucks Echo
About two years ago, McDonald's took a page from Starbucks and began selling seasonal hot coffee beverages, including peppermint mochas in the U.S. In another Starbucks echo, McDonald's introduced pumpkin-spice lattes last year. This week the chain rolled out a new drink: McCafe chocolate-covered strawberry frappes, to be sold until late February. In Chicago, a medium latte from McDonald's sells for about $2.89, whereas the same-size drink from Starbucks is $3.65.
Terry Smith, who owns three McDonald's stores in Burlington County, Vermont, says Americans typically don't think of McDonald's for "specialty hot beverages -- the lattes, the hot mochas, the espresso drinks." Still, once they get a taste, they become "addicted," he said. Smith is glad the company is putting more emphasis on breakfast and stepping up its marketing of the McCafe brand.
A new advertising campaign encourages diners to "Make the most of breakfast with McCafe." The chain recently added drawings of red coffee beans and such slogans as "Smooth" and "Good Days Start Here" to its hot-beverage cups. McDonald's is also selling packaged ground and whole-bean coffee in grocery stores this year to spread the word that the the company is as much about java as burgers and fries.
Impulse Purchase
"By selling coffee in grocery stores and in other outlets, we're marketing the brand so a person is reminded to come into a McDonald's restaurant," Chief Executive Officer Donald Thompson said during a Bloomberg event in Chicago last year. "Coffee is an impulse purchase largely so we want to make sure we can capture that traffic."
In the U.S., coffee and snack-shop sales are projected to outpace that of fast-food chains, according to reports from researcher IBISWorld Inc. Fast-food restaurant revenue will increase 2.1 percent this year and 2.2 percent in 2015, compared with gains of 4.1 percent and 2.9 percent, respectively, for the coffee and snack category, the data shows.
Pushing coffee is "probably a good idea if they can get their customer to buy more of it," said Peter Saleh, a New York-based analyst at Telsey Advisory Group. "I don't think they're going to be attracting the Starbucks customer to go there -- I really don't."
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