CASE 18

McDonald’s
Trading Up the Channel Members’
Product Mix

McDonald’s has been a household name in the fast food restaurant industry since the
early 1960s. Starting out as a small burger joint offering only hamburgers, french-fries,
mill shakes, soft drinks and apple pies, the company has over the years added such items
as its famous Big Mac, Happy Meals, Chicken McNuggets, salads and a variety of break-
fast items such as the Egg McMuffin and Hotcakes and Sausage. The most recent addi-
tion to the McDonald’s menu is a line of premium coffee beverages that includes
cappuccinos, lattés and mochas introduced in 2007. McDonalds refers to its new line of
premium coffee products as McCafe’1.

Competitive Environment
Three primary competitors now lead the charge in the coffee beverage market: Starbucks,
McDonald’s, and Dunkin’ Donuts. According to MSN Money, while McDonald’s and
Dunkin’ Donuts were selling basic drip coffee for decades before Starbucks caught popu-
lar attention, Starbucks was:
responsible for a nationwide shift in behavior … persuading young consumers to trade
in Cokes for cafe lattés … or elevating coffee standards to a point where even Maxwell
House is now 100% Arabica bean. Ironically, those higher standards may have paved
the way for rivals such as Dunkin’ and McDonald’s to compete with Starbucks on taste
as well as price.2
Starbucks should also be given credit for teaching consumers in the United States to
perceive coffee as an experience and not simply as a beverage. By waiting to enter the
market, McDonald’s took advantage of the coffee culture that Starbucks had already
created.
McDonald’s has also unabashedly borrowed from the Starbucks’ brand experience.
For example, McDonald’s, like Starbucks, calls the coffee making staff “baristas,” and dis-
plays the coffee-making equipment in the front of their stores instead of hiding it in the
back with the “fryolators”3.

1
McDonald’s Corp. Notable Corporate Chronologies. Online Edition. Gale, 2009. Reproduced in Business and Com-
pany Resource Center. Farmington Hills, Mlch.: Gale Group. 2009. http://galenet.galegroup.com.ezp.lndlibray.org/
servlet/BCRC.
2
Tirella, Joseph V. “Dunkin’ Donuts War on Starbucks.” MSN Money. 29 Jan. 2009. Web. 3 Oct. 2009. http://
articles.moneycentral.msn.com/Investing/StocklnvestingTrading/dunkin-donuts-war-on-starbucks.aspx.
3
Passikoff, Ph.D., Robert. “You Want a Latte with That? McD’s Brews Up Coffee Strategy.” Chief Marketer. 14
Jan. 2008. Web. 3 Oct. 2009. http://chiefmarketer.com/disciplines/branding/burgers_fries_lattes_0115/#.
599
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600 Part 5: Cases

According to an article from Restaurants and Institutions, McDonald’s learned

from Starbucks and gas-station convenience stores that a cup of coffee can be a “des-
tination” product.4 So, with this thought in mind, McDonald’s realized that more cus-
tomers might come into stores throughout the week, especially during non-peak hours,
just for a cup of coffee if a larger selection were available. Not only was the company
hoping to wake up store traffic during the morning, and in between times, but McDo-
nald’s also hoped to gain more customers during lunch and dinner hours with the ad-
dition of better coffee options. With Starbucks and Dunkin’ Donuts offering primarily
breakfast food items, McDonald’s hoped to be more successful after breakfast hours
are over.

Premium Coffee Arrives at McDonalds

In 2007, McDonald’s USA began an aggressive expansion plan aimed at placing pre-
mium coffee products in 100 percent of its 14,000 U.S. stores under the McCafe’ banner
by the end of 2009.5 The speed at which McDonald’s has been able to convert its stores,
the favorable taste reviews by consumers, and McDonald’s low-cost strategy during an
economic downturn all contributed to early success. Luck was also on McDonald’s side
when Starbucks announced the closing of nearly 600 stores in 2008.6 McDonald’s gained
a further leg up on competitors by using a single machine that automatically steams the
milk and combines it with the espresso, a time and money saver compared to Starbucks
“hand-made” coffee drinks7.

Promotion and Advertising

An article in Advertising Age points out that if McCafé’s competitors were not feeling
the heat already, McDonald’s $100 million national marketing campaign, fanned out
across TV, print, radio, outdoor (see Exhibit 1), Internet, events, PR and sampling,
would surely make them take notice. The media blitz was the biggest launch in
McDonald’s history.8 In addition to the mass marketing campaign, McDonald’s
reached customers through coupons (see Exhibit 2) for premium coffees and a
“McCafé Your Day” promotional contest that gave cash prizes to customers sharing
stories about getting “McCafé’d”.9
Another article in Advertising Age states that competitors have increased promotions
in 2009 to combat the McCafé frenzy. Dunkin’ Donuts and Starbucks have each
launched 2009 integrated marketing campaigns that span TV, Internet, print, radio, out-
door and social media.10 Starbucks also offers different discounts to different types of

4
Hume, Scott. “Counter Attack.” Restaurants & Institutions Dec. 2007: 34–41. Print.
5
McDonald’s Corp. Notable Corporate Chronologies. Online Edition. Gale, 2009. Reproduced in Business and
Company Resource Center. Farmington Hills, Mlch.: Gale Group. 2009. http://galenet.galegroup.com.ezp.
lndlibray.org/servlet/BCRC.
Morningstar Equity Research. Profile of “Starbucks Corporation SBUX.” 8 Oct 2009. http://www.nasdaq.com/
6

MorningStarProfiIeReports/SBUX_USA.pdf
7
Passikoff, Ph.D., Robert. “You Want a Latte with That? McD’s Brews Up Coffee Strategy.” Chief Marketer. 14
Jan. 2008. Web. 3 Oct. 2009. http://chiefmarketer.com/disciplines/branding/burgers_fries_lattes_0115/#.
8
York, Emily Bryson. “Take cover! Marketing blitz for McCafé is on the way; McDonald’s massive $100M cof-
fee launch impossible to escape.” Advertising Age 80.16(2009): 1–2. Print.
9
Quinton, Brian. “McDonald’s Accents McCafe Launch with Gift-Card Giveaways.” Promo Magazine. 6 May
2009. Web. 3 Oct. 2009. http://promomagazine.com/incentives/news/mcdonalds-accents-mccafe-launch-0506/#.
10
York, Emily Bryson. “Java Giants Brace for McCafé.” Advertising Age 4 May 2009: 28–28. Print.

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 Case 18: McDonald’s 601

EX HIBIT 1 Outdoor
Advertising for McCafé

© Seattle Post-Intelligencer/Scott Eklund

customers. According to an article in the New York Times, a Starbucks loyalty program
offers regular coffee connoisseurs a 10 percent discount on food and coffee for $25 per
year. Infrequent customers receive occasional promotions including a coupon for a free
brewed coffee every Wednesday for eight weeks.11

Complementary Products
McDonald’s promotes complementary products directly through coupons for a free
sandwich with the purchase of a coffee beverage. Indirect promotion can be seen in
McCafé frequency cards and Free Mocha Mondays, which draw customers into the store
in an effort to establish brand loyalty and sell complementary products.
Starbucks has responded to McDonald’s initiative by offering affordable breakfast op-
tions. In March 2009, Starbucks began serving a new line of breakfast foods from a value
meal called a “breakfast pairing,” which includes an egg sandwich, cup of oatmeal or cof-
fee cake with a coffee for $3.95. McDonald’s and Dunkin’ Donuts both offer breakfast
combination meals starting at $2.95.12 So, apparently, Starbucks is attempting to make
its breakfast meals inexpensive enough to draw in more frugal customers, yet fancy en-
ough to appeal to those who value quality over price. Exhibit 3 shows prices of four pop-
ular premium hot beverages at all three restaurants.

11
Miller, Claire Cain. “Starbucks Addresses the Price Issue, and Breakfast.” New York Times 3 Mar. 2009, V158
ed., sec. B: 2–2. Print.
12
Site visit of McDonald’s and Dunkin’ Donuts in Harper’s Choice Village Center, Harpers Farm Road,
Columbia, Maryland, September 28, 2009.

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602 Part 5: Cases

EXH IB I T 2 Samples of McCafé Marketing Materials and Starbucks’ Counter-Marketing

Courtesy of Bert Rosenbloom

Source: http://couponkim.com/blog/2011-mcdonalds-printable-coupon/?gclid=CJCMnZrD0KsCFcZ-
5Qod3TwwUQ

EX HIBIT 3 Competitive Pricing for Premium Hot Beverages

McDonald’s Starbucks Dunkin’ Donuts

Cappuccino $2.79 $3.35 $2.69
Latte $2.79 $3.35 $2.69
Hot Chocolate $2.89 $3.65 $1.79
Coffee $1.39 $1.85 $1.59

Note: Base on 16-once serving.

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 Case 18: McDonald’s 603

McDonald’s has had a reputation for breakfast since the introduction of the Egg
McMuffin in 1972, but the addition of premium coffee may change the way that the
company views a morning breakfast. In a recent survey, 44 percent of McDonald’s cus-
tomers requested breakfast to be served all day. With a higher profit margin on breakfast
foods and breakfast already accounting for one-third of the average $2.1 million in U.S.
McDonald -unit sales, CEO Jim Skinner is investigating the profitability potential of that
request.13

Premium Coffee Trade-Up Strategy and

McDonald’s Franchise Channel Members
McDonalds’s strategic initiative to bring a full range of premium coffee products under
its McCafe’ banner to all of its 14,000 U.S. stores created a tremendous amount of excite-
ment, not only in the restaurant industry but in the popular business press as well.
Taking on the lofty coffee king Starbucks, as well as the more plebeian but formidable
Dunkin’ Donuts, was a once in a generation event that generated a great deal of interest
and speculation about the outcome of the “great coffee war.” Would there be a clear
winner? Would the “snobby” Starbucks get its comeuppance from “plain vanilla”
McDonalds? Would Dunkin’ Donuts emerge as the “back door” winner as McDonald’s
and Starbucks battled each other in a premium coffee fight to the finish?
While the “great premium coffee war” was interesting and perhaps even fun for
outside observers to watch and comment on, what really mattered to thousands of
McDonalds’ franchisees was whether the new line of premium coffee products would
be a good thing for them. Winning or losing from the franchisees’ point of view was all
about whether the new McCafe’ product trade-up strategy would bring more sales
and profits to their stores. While McDonalds has been keeping its own estimates
about how the new premium coffee products would affect its franchisees’ top line and
bottom line results, some information has worked its way through the industry
“grapevine”:
• The McCafe’ premium coffee products are expected to add an average of $125,000 in
additional revenues per store.
• Premium coffee sales are expected to account for up to 6 percent of total store sales
(up from 2 percent for previous coffee products).
• The specialized equipment for the premium coffee costs about $25,000 per store. The
franchisees pay about 60 percent of that cost to McDonald’s 40 percent.
• Many stores needed upgrading to properly showcase the new premium coffee products.
Costs are between $75,000 and $125,000 for those that needed the upgrades, with
McDonalds paying up to 40 percent of these costs.
• McDonalds expects that the premium coffee line will attract more off-peak customers
but it does not know how many.
• Some concern has been expressed about cannibalization, especially for what some ob-
servers have referred to as “tired” old milkshakes and super profitable soft drinks being
displaced by premium coffee drinks that might be less profitable.

13
Hume, Scott. “Counter Attack.” Restaurants & Institutions Dec. 2007: 34–41. Print.

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604 Part 5: Cases

• Because 70 percent of the premium coffee orders are expected to come from the drive-
thru window, the potential for the premium coffee line to boost sales of other products
may be very limited because more than two thirds of premium coffee drinkers will not
be setting foot in the stores.

Discussion Questions
1. Is McDonald’s trade-up strategy to the McCafe’ 3. In the long run, do you believe that Starbucks
line of premium coffee products a good deal for will be McDonald’s main competitor in the pre-
the franchisees? Why or why not? mium coffee products category? Why or why
2. If McDonald’s McCafe’ premium coffee trade-up not? How about Dunkin Donuts as a key com-
strategy turns out to be highly successful, do you petitor? Be sure to consider the implications of
think other fast-food restaurants such as Burger question #2 in your answer to the present
King and Wendy’s will pursue a similar coffee question.
trade-up strategy?

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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.