BK, McD's wake up to premium coffee

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Hoping to kick up coffee sales, McDonald's and Burger King are bowing to Starbucks and offering their own premium joe.

The two sleeping fast-food giants have woken up to the fact that America has become a coffee culture and their old-fashioned, weaker versions of the percolated pick-me-up will no longer do. "Coffee is the No. 1 item Americans consume at home or away from home," said Harry Balzer, VP at NPD Group's NPDFoodWorld. "It's understandable that the interest in coffee is high among all restaurants because Starbucks has told us coffee can be more than just a commodity."

"We weren't happy with our coffee sales and we weren't happy with the consistency of our coffee product," said Bill Lamar Jr., senior VP-chief marketing officer for McDonald's USA. He said that with customers' lifestyles and tastes evolving, "we need to have those kinds of specialty coffees, espressos, lattes and smoothies." So the world's biggest chain began rethinking its beverage strategy and last year changed its bean blend and equipment systemwide, including adding specialty coffee machines that make cappuccinos and lattes in some restaurants.

The marketer plans to launch a national marketing campaign for the coffee in November and has tapped roster agencies Omincom Group shops DDB, Chicago, and Del Rivero Messianu DDB, Miami; and Publicis Group-backed Burrell Communications Group and Frankel, both Chicago, to handle the effort. The company is also beginning a statewide test in Michigan of even bolder coffee blends and marketing tactics. If successful, those blends will roll out in additional markets.

Despite noting that coffee sales are just 2% of the company's total take, Mr. Lamar downplayed the notion that some consumers were buying breakfast at McDonald's but getting their morning jolt elsewhere. "There aren't any facts to support that," he said. "I would doubt that significant numbers of consumers would be making multiple stops for breakfast."

Yet, if McDonald's breakfast sales account for one-quarter of its total business, that 2% translates into less than 10% of sales at breakfast, said Andrew Barish, restaurant analyst at Banc of America Securities. "It's probably a smaller percentage than people would think, which is surprising."

The move is part of the product upgrades fast-feeders have been making. Coffee is "clearly a category that is seeing some growth and there's a lot of different ways to approach it," he said. According to Business Trend Analysts, coffee-shop sales will reach $7.7 billion by the end of the decade and fast-food sales of coffee will reach $14.5 billion in 2005.

"There's probably still a lot of coffee sold in convenience stores and places like that where that consumer may not move up to a Starbucks immediately," said Mr. Barish, "but if they're going through the drive-through at McDonald's and getting an Egg McMuffin, you want to make sure you're getting a good cup of coffee along with that."

For McDonald's the timing is critical as gourmet blends have created a black-gold rush for chains looking to improve sales across every day part, especially at breakfast. While 84% of coffee drinkers have their fix at breakfast, more people are drinking java during the later morning, lunch and afternoon hours, according to the National Coffee Association's annual National Coffee Drinking Trends survey (see chart). More consumers are drinking coffee away from home, too, with 40% of consumers-especially those age 25 and older-sipping coffee beverages at work, restaurants and on the go.


The Golden Arches is king at breakfast, but that hasn't stopped rivals from trying to get a piece of the action.

No. 2 Burger King also is testing its own premium blend under the name BK Joe, the marketer confirmed, declining to comment further. Last month it launched a premium breakfast sandwich called the Enormous Omelet that observers describe as a breakfast platter in a bun. Dunkin' Donuts, which sells more traditional coffee than any other chain, in January upgraded its breakfast offerings with a steak-filled bagel sandwich.

Last year, CKE Restaurants' Carl's Jr. tapped Channel Island Roasting Co. to provide its Arabica bean roast that hiked prices by 20¢ a cup.

Now, coffeehouse leader Starbucks is expanding its test of warm breakfasts to 100 units in Washington, D.C., with the hope of capturing larger average checks from consumers already there to get their morning cup of courage.

Although Starbucks is the biggest coffeehouse chain, just 20% of its beverage sales are from the unadulterated coffee cup, and the majority of sales come from blended and espresso drinks, analysts estimated. That puts Allied Domecq's Dunkin' Donuts at the top of the bean pile for plain-coffee sales by the cup, and makes it the chain with the most to lose if McDonald's and Burger King can lure enough consumers with their new brews.

Dunkin' Donuts is the largest seller of regular, non-flavored joe, according to Business Trend Analysts' Leading Edge Reports. The regional doughnut and coffee chain controls 17% of the market, compared to 15% for McDonald's and 6% for Starbucks. One reason for the doughnut chain's dominance in basic brew is its pocketbook-friendly prices, often 50¢ less per cup than Starbucks. Dunkin' also tends to locate its stores in blue-collar communities, where Starbucks is just beginning to target.

"Dunkin' Donuts has competed effectively with McDonald's and other competitors in the premium-coffee segment for many years," said John Gilbert, VP-marketing for the Allied Domecq-owned chain. "We're confident in our ability to compete for another 50 years."

Surprisingly, traditional coffee, the brew most-consumed by Americans, had been on the decline until 2005, as consumption spiked to 49% of consumers drinking daily from 44% the year before, according to the National Coffee Association's annual National Coffee Drinking Trends survey.

Fast-feeders hoping to become klatch players are viewing hot coffee as just one way to snare sales. Dunkin' Donuts also is testing music and Wi-Fi at Chicago locations, after years of being thought of as a "jolt" player, rather than an "experience" player. It's trying to shore up its position as the No. 2 cold-coffee contender with its Coolata smoothies, by adding a frozen coffee called Turbo Ice during June and July. Interpublic Group of Cos.' Hill Holliday, Boston, handles.

Berkshire Hathaway's International Dairy Queen holds the frozen/iced coffee crown after its June 2004 introduction of the Moolata coffee/ice cream blend. Michael Keller, DQ's exec VP-marketing and research and development, estimated Moolata's contribution to top-line sales ranges from 2.5% in some locales to 10%. "It's almost as big as the Blizzard. We're significantly ahead of our projections," he said. "Frozen, blended coffee is a $2.5 billion business and we have a shot at 10% of that or more."

enough room

"People are starting to look to coffee to fill different roles at different times of the day," said a spokesman for National Coffee Association, which has tracked coffee consumption since 1950. He said new data are pending, but initial results show a major spike in dual drinkers. Those who drink both traditional and gourmet coffee beverages jumped from 38% in 2003 to 54% in 2004. "That's a huge increase," he said.

"There's room for everybody," said John Quelch, marketing professor at Harvard Business School. "If anything, the upgrading of coffee options at McDonald's will actually stimulate demand for Starbucks because McDonald's customers who have not previously been to Starbucks or a similar boutique coffee shop will develop either a taste or the self-confidence to become discriminating coffee consumers."

Starbucks executives weren't available to comment. But Anne Bologna, president of roster agency Publicis Groupe's Fallon, New York, called the bubbling competition "the price of leadership" for the coffeehouse.

"Look at the people that come into Starbucks and it's everybody," she said. "So if anybody can walk into their McDonald's and get something they consider to be a high-quality cup of coffee, that will likely have an impact. There are those that will tell you there are certain segments of consumers that won't go into a Starbucks and it's easy to say that all the non-Starbucks customers are probably McDonald's customers and won't have impact on the business, but I think it's a bit naive."

contributing: jean halliday

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