With McDonald’s moving to capture more of the coffee business and Starbucks shifting its strategy towards the premium market, are we about to see a clash of the titans?
With experts estimating the value of the US coffee market at anywhere from US$37 billion to $59 billion, it’s no wonder that brands big and small are fighting for their share. And like in any mature industry, market leaders are forced to innovate to stay relevant and successful.
Food industry research firm Technomic has identified as “upscaling the QSR (quick service restaurant) experience” as one way to do that.
Research has shown that companies in the quick-service food industry, including the coffee subsegment, are investing money and resources into the customer experience to set themselves apart from their competition, particularly fast-casual restaurants that are considered slightly more upscale.
“There’s always the element of wanting to do better than those before us,” says coffee industry veteran Spencer Turer, who is also Vice President at independent coffee lab and consultancy Coffee Analysts.
He references the coffee waves as an example, with Folgers wanting to put coffee in every kitchen, and Starbucks introducing consumers to and setting the standard for accessible specialty coffee.
Then at the start of the third wave, “in the mid-90s, we started to see a shift to higher quality and premium brands”, Turer explains.
With small, premium roasters showing the growing number of coffee connoisseurs that coffee can be “better”, Starbucks is finding itself needing to reestablish its position in the market. The chain has decided to do so by focusing on the customer experience with its high-end Reserve coffee line.
Reserve launched in 2004 as Starbucks’ higher-end, single-origin coffee. With smaller batches and higher prices, Reserve has long taken the back seat to Starbucks’ traditional, high-volume brews that the chain could more easily source for its growing number of store locations.
But over the course of 2017, Starbucks will put its high-end brand centre stage in 1000 Reserve coffee bars within Starbucks locations and 1000 Reserve-only cafés are planned through 2020.
The Reserve coffee bar is a new concept inspired by the Reserve Roastery and Tasting Room that opened in 2014 in Seattle. The 14,000-square-metre facility near Starbucks’ headquarters is an interactive, education-based café that only brews Reserve coffee and espresso.
Keeping with the high-end and education aspects of the Roastery, the Reserve coffee bars will be a dedicated section for the Reserve coffees and special brewing methods.
During the slightly lengthier process, the barista shares the story of the particular coffee, explains the brewing method and walks the customer through a proper tasting.
“We [wanted] to be more intentional about helping our customers have the same journey of discovery [that we had] as we explored new farms and regions [for our beans],” said Starbucks Senior Coffee Specialist Leslie Wolford in a 2014 release.
While being a large company with high-volume roasting and distribution worked in the second wave as Starbucks sought to open a café on every street corner, it doesn’t work as well in the third wave.
“There’s been backlash against Starbucks being so big, so how can its coffee be any good?” Turer says. “There was the expectation that large companies provide lower quality coffee. So Starbucks created the Roastery and Reserve bar concepts to reset the standard of quality and reestablish credibility in the industry.”
Regardless of whether or not this move will pull consumers from the likes of smaller roasters such as Blue Bottle and Intelligentsia, Starbucks’ size will give it the scale it needs to achieve its expansion plans.
“High-end cafés don’t have the reach that Starbucks does,” says Lauren Hallow, foodservice group analyst at Technomic. “Chains like Blue Bottle and La Colombe have a fraction of the restaurants that Starbucks has and operate in fewer markets, so there’s a lot of opportunity for Starbucks to reach upscale consumers in areas that don’t have many high-end coffee options.”
While Starbucks is trying to pull market share from the small premium roasters, McDonald’s is, in a way, vying for a piece of Starbucks’ traditional customer market with its McCafé specialty coffee beverages.
When the fast-food chain announced its plans to enter the specialty coffee space in 2009, franchisees balked at the high costs and sceptics didn’t think specialty coffee paired well with the burger joint’s core product lines.
But in McCafé’s first year, McDonald’s reported significant increases in sales at each of its more than 14,000 US locations attributable to the new beverage line.
This year, the fast-food burger chain announced it would be revamping and reintroducing the McCafé brand, supported by new beverages, increased marketing and new US$12,000 espresso machines that have better steaming technology, are easier to use and offer a wider variety of beverages. And this time around franchisees are unanimously on board, recognising an opportunity to capitalise on the booming coffee business without sacrificing their core business in burgers and fries.
According to Technomic, sales at coffee shops rose nearly 10 per cent in 2015, while those at burger chains only increased 3.3 per cent. Given that the McCafé brand only makes up 16 per cent of total sales – about $4 billion annually – McDonald’s sees potential, which could help offset recent weak traffic and sales in its other product categories.
“[In my opinion], it’s less about competing with Starbucks specifically than it is just trying to take advantage of the high consumer interest in coffee,” Hallow says, noting that McDonald’s prices and consumer base are actually more in line with Dunkin’ Donuts than Starbucks.
“I expect McDonald’s strategy will be more similar to Dunkin’s, which has rolled out more premium coffee drinks while continuing to offer low-priced classic coffees.”
It’s that value proposition (aside from being a fast-food burger joint) that keeps McDonald’s on an entirely different playing field than Starbucks. Where Starbucks can get away with charging high prices and even steadily increasing them, McDonald’s will have to continue to offer a value option in addition to its pricier specialty coffees or risk “backlash from customers who learned to expect affordable coffee,” Hallow says.
Turer echoes this sentiment: “They’re competing against each other simply because they’re both selling coffee, but they’re coming from very different perspectives. Both are trying to up their game but they’re doing so at different stages of maturation. Right now just happens to be the right time [for both of them].”
Compared to when Starbucks first hit the scene and told consumers what they should want out of coffee, consumers are now in control and they’re demanding higher–quality coffee and they’re willing to pay for it.
Their willingness to pay premium prices for premium coffee is indicative in the fact that retail coffee earnings increased in 2016 despite a slight decline in coffee consumption, according to the National Coffee Association’s 2016 “National Coffee Drinking Trends” report.
Turer, and many other experts, sees the coffee industry’s shifts driven largely by the Millennial demographic. As they’ve come of age and gained spending power, this consumer group has made it very clear that they want more out of brands; they’re looking for a connection and an experience, even if it takes longer and costs more.
“If this younger generation did not give retailers permission to slow down and raise prices for the sake of quality, they would not be successful,” explains Turer, which is why the premium, independent roasters that characterise the third wave are doing well. “They’re reaching a little bit higher for the customers who are looking for that.”