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McDonald’s Eyeing Retail Coffee Market?

Filed under Coffee

Coffee is a $2 billion-plus business for McDonald’s in the U.S., but the chain is signaling an interest in following Dunkin’ Donuts, Tim Hortons and others into the coffee-retailing business. On Sept. 18, 2012, a U.S. trademark registration was filed for the McDonald’s name specifically covering ground and whole-bean coffee.

Asked for comment on the trademark application, a McDonald’s spokesperson downplayed its importance, saying, “We register a lot of trademarks. That’s nothing new for us.”  Pressed on whether the chain intends to enter the coffee-retailing sector in the next 12 months, the response was, “Future plans are not something I can speculate on or confirm.”

McDonald's introduced Premium Roast coffee in 2006.

It may be that McDonald’s is merely protecting its name in this category. But it’s also true, as reported here, that last April the chain filed a trademark application for the term “McCruncher” and had a burger under that name in test markets within a month. Coffee represents a much bigger opportunity for McDonald’s than just the next burger LTO.

In 2010, then-McDonald’s President (now CEO) Don Thompson told analysts that coffee’s share of McDonald’s U.S. sales had grown from 2% in 2004 to more than 6%. That share likely has further grown in the past two years as the McCafé brand has expanded, but even if it has remained flat, coffee represents nearly $2.1 billion of McDonald’s 2011 U.S. sales of nearly $34.2 billion.

One strong impetus for McDonald’s to enter the retail-coffee sector is that it already has stronger coffee brand loyalty than either Dunkin’ Donuts or Starbucks, according to a study reported last year in the Wall Street Journal. It found that only 29% of McDonald’s coffee drinkers say they sometimes go to Dunkin’ Donuts or Starbucks for a cup. But 53% of those two chains’ coffee drinks say they occasionally cheat on their primary coffee provider.

Dunkin’ Donuts licenses its name for packaged coffee sold in supermarkets, and it clearly does well. According to its most recent 10-K form, “The Dunkin’ Donuts branded 12 oz. original blend coffee, which is distributed by Smuckers, is the No. 1 stock-keeping unit nationally in the premium coffee category. According to Nielsen, for the 52 weeks ending December 24, 2011, sales of our 12 oz. original blend, as expressed in total equivalent units and dollar sales, were double that of the next closest competitor.”

Dunkin' Donuts says it has the No. 1 premium coffee brand at retail.

The introduction of packaged “K-cups” for single-cup brewers such as category leader Keurig has revitalized coffee sales, as McDonald’s no doubt knows. During a Q2 call with analysts on July 26, 2012, Dunkin’ Donuts President-CEO Nigel Travis said, “K-Cups continue to be a significant driver of comps in Q2, representing approximately 40% of our total Dunkin’ U.S. comp increase. We continue to see strength across all regions for the product, but especially on a per-store basis in new markets, and of course that’s very important.”

Starbucks gets 75% of company-store sales from hot and cold beverages and just 4% of sales from whole-bean and soluble (Via instant) coffee. That represents $385 million of the $9.632 billion in company-store sales for the fiscal year ended Oct. 2, 2011, according to its most recent 10-K.

But the prospect of increasing its average unit sales by 4% through sale of packaged coffee has to be appealing to McDonald’s Corp., its franchisees and Wall Street.

Dunkin’ Donuts has about 5,800 U.S. stores; Starbucks has 6,800; McDonald’s has more than 14,000 and it has long considered ways it could use those locations to sell more than just food and beverages. That explains McDonald’s financial stake in the Redbox movie-rental kiosks (a stake it ultimately sold to Coinstar in 2009). Branded McDonald’s coffee would be an additional business without being, like Redbox, a fundamentally different business or one that would tarnish brand McDonald’s.

McDonald’s key supplier of the Premium Roast coffee it introduced in 2006 is Gaviña Gourmet Coffees in Vernon, Calif., a company founded by a family that left Cuba for the U.S. in 1962. To battle entrenched Dunkin’ Donuts, however, McDonald’s offers a proprietary blend of Newman’s Own Organics hot and iced coffee just in New England and Albany, NY.

© 2012

7 Responses to McDonald’s Eyeing Retail Coffee Market?

  1. This is interesting. One of the worst moves a QSR can make is to try to franchise a concept that could become a single menu item at McDonalds. McDonalds will wait and watch for the market to grow and then crush the competition by placing the successful concept on its menu – even if only for a limited time.

    What McDonalds is now doing is putting pressure on Tim Horton’s and Dunkin’ Donuts menu mix. If it turns out that coffee is the major element of the franchisee’s profitability, then both of those systems might be in trouble.

  2. Ken Goldberg

    I love this idea. The whole market has been shifting to what might be called “Branding beyond the Brand” in both directions and within both the retail and commercial channel. A few years ago, who would have thought that one day I would be having a cup of McDonald’s Coffee made right in my own kitchen. Who knows I might also be able to order a McDonald’s Coffee at one of my favorite upscale restaurants soon.

  3. Awad Paul Sifri

    McDonald’s regular coffee is the best tasting and best satisfying cup of coffee I have had anywhere.
    I drive every morning to McDonald’s, rain or sunshine, just to get a cup of coffee, even though we have the best brands one can buy at home. None satisfy like that I obtain from McDonald’s. I want it brewed at mcDonald’s. I also frequently buy something else when I go for coffee, such as Saussage McMuffin with cheese, or Big Breakfast.
    Is it addictive? I don’t know, but I do know that it is the best way to really start my day.

  4. Kortez

    As a coffee connoisseur I won’t go near any coffee bean that is not truly excellent, so McDonalds will likely not be targeting me as a customer. That aside, it is an interesting move by a smart business.

  5. I have to agree with Awad Paul sifri – I HAVE AT LEAST 4 CUPS DURING THE DAY – but have a problem getting them to make it fresh. It tastes bad when it has sat for awhile. We visit many McDonalds in a weeks time.
    Have to ask to make it fresh every time – because they will give you the old. It is too bad we have to ask every time for fresh coffee.

  6. Richard C. Harper

    The coffee used by McDonald’s in the early to mid
    1980’s was the best ever.
    When they changed brands around 1988 they became
    just another cup of coffee, nothing special and worth
    making a trip to.

    I live in NC, it was also used in VA.

    Wish I knew what brand it was, I would buy it.

  7. paul drake

    McDonald’s premium coffee is not very good. Dunkin’ Donuts customers are sort of cultish and they are not going to change anytime soon. Dunkin’ has not yet entered the California market.
    At the time of this writing dd is only a $5 billion company. Why doesn’t McDonald’s just buy DD?