McD's Grande Plan: Become Java Giant

Starbucks' Woes Turn Critics Into Believers That Arches Can Win in Coffee

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CHICAGO ( -- As little as two months ago, critics scoffed at the idea of high-end coffee drinks succeeding at McDonald's. But that was before Starbucks reported a bad quarter, posted its lowest share price in more than three years and brought back Howard Schultz as CEO. Now, those who laughed off the idea that the Golden Arches could actually take on Starbucks are waking up and smelling the beans.
McDonald's design prototype for the coffee bars it's testing; consumers can watch their drinks being prepared.
McDonald's design prototype for the coffee bars it's testing; consumers can watch their drinks being prepared.

"Starbucks is going to have to step up to the counter and do something about the brand and brand values and the experience, because McDonald's is going to be there with the coffee bar ready to go and consumers don't want to make two stops when [they] can make one," said Robert Passikoff, a branding consultant.

Naysayers could be forgiven for doubting the fast-food chain. "We haven't been thought of as a beverage destination," admitted Lisa Frick, director-McDonald's menu management. "But we hit a home run with premium roast."

That success gave McDonald's the confidence to go ahead and test lattes, mochas and cappuccinos in the Kansas City region and Michigan. Its premium-roast coffee, introduced in 2006, replaced the brew it had sold for years, and coffee sales have since soared 40%. Now the chain calls the launch a building block to establish credibility for the "combined beverage business" it plans to have nationwide by 2009. The new business is expected to add $1 billion to McDonald's bottom line.

Step up to the bar
Stores will be redesigned to include a coffee bar, not unlike those at Starbucks, directly to the left of the counter. Customers, however, will still have to stand in line to order, pay and receive their Egg McMuffin and vanilla latte. The coffee bar placement is designed to prevent delays at the drive-thru window, where Mickey D's does a substantial chunk of its breakfast business.

This convenience factor could be the biggest threat to Starbucks, which has 10,000 U.S. locations to McDonald's nearly 14,000. The two companies have generally catered to different customers, although that could change.

"There is going to be some difference, but there are going to be more similarities than you would expect," said Patrick Roney, director-U.S. consumer and business insights at McDonald's. "We have a strong breakfast business. If they're already here for breakfast, there's going to be a lot of overlap."

Ms. Frick added that while McDonald's is targeting a wide audience for its new beverages, it's expecting to find a sweet spot with young women. That's why the ads are pointed at them like a laser.

McDonald's national agency, DDB Worldwide, Chicago, will develop the creative for the new drinks, but the company's regional agencies will adapt the work to suit local markets. An early TV spot shows young, attractive women sipping lattes with the tagline "Take charge of your day, but not before you've had your latte." The spot also announces free vanilla lattes on Monday. Free-coffee Mondays added serious momentum to the Arches' premium-roast launch. Regional radio spots with female narrators talk about finding "the one" -- place for coffee, that is.

This could be a big year for premium coffee. Wendy's, which denied published reports that it's testing a premium coffee concept called Javaccinos, does acknowledge the possibility of new coffee drinks this year.

"We are looking at expanding our coffee lineup in 2008 with new flavors and options," said spokesman Bob Bertini. "Beverages overall will be a major force in the coming year."
Sweet spot: McDonald's TV ad entices young women with free vanilla lattes.
Sweet spot: McDonald's TV ad entices young women with free vanilla lattes.

As for McDonald's, its coffee drinks have been in the works for three years, and the launch will have strong backing from the company's $1.7 billion marketing budget.

Yet Mr. Passikoff said the real question will be to what extent McDonald's can hurt Starbucks, as the fast-feeder's customer base is closer to Dunkin' Donuts. Starbucks declined to comment for this story.

"Anyone studying brands today knows that it's not just about the product, which I am certain Starbucks will do a better job with regardless -- it is their reason for being," said Scott Bedbury, a former top Starbucks marketing executive. He noted Starbucks' penchant for customization, its ambiance, music, lighting, comfort, smell and other customers that you won't find at the competition.

However, former McDonald's Chief Marketing Officer Larry Light said these concerns were in mind when the plan was being formulated five years ago by former CEO Charlie Bell. "He said it was more than coffee," Mr. Light said. "Ambiance, presentation ... 'everything communicates' used to be his favorite phrase."

So who will win? Mr. Light said that will depend on which chain is able to shape the message. "If it's a price war, the me-too-but-cheaper will win," he said. "If it's an experience war, Starbucks has brand value that McDonald's won't [have]."
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