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.”
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.”
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.