McDonald's Shakes Up McCafe Brand: Should Competitors Worry?

McDonald's Corp. MCD is leaving no stone unturned to revitalize its McCafe brand. In this regard, the company is focusing on new cafe-quality espresso beverages, extended retail offerings and a branding overhaul to gain ground in the battle for the nation's coffee drinkers.

Inside the Headlines

In addition to recrafted lattes and mochas, the company has added a new set of espresso-based beverages to the McCafe lineup that are made with freshly-ground espresso and US-sourced whole or nonfat milk. The three new beverages include caramel macchiato, cappuccino and americano.

Notably, these new offerings along with all McCafe specialty beverages will be available for $2 for a limited time at the participating restaurants.  

Also, the company recently inked a deal with The Coca-Cola Company KO to bring a line of ready-to-drink McCafe Frappe beverges to groceries across the United States in early 2018. The bottled drinks will come in three flavors that include caramel, vanilla and mocha.

Currently, the fast food chain maintains a line of whole bean, ground and single-serve coffee in retail stores. Therefore, this will be McDonalds’ first foray into the nearly $2 billion ready-to-drink coffee category.

Apart from the coffee upgrades, McDonald's also announced a McCafe brand revamp with the introduction of a new brand logo and packaging that will change with the seasons. In fact, as part of its evolving Experience of the Future initiative, the company also plans to transform its in-restaurant McCafe presence with a sleek and contemporary look in 2018.

Furthermore, the company has brought in new coffee makers into its stores so that the new espresso-based beverages are handcrafted with a steady, appetizing flavor. The rollout to nearly all of McDonald's 14,000 restaurants is accompanied by new training for crew members.

Rationale Behind

With its refined new beverages and updated branding, the company aims to capitalize on the growing coffee culture among customers and meet their demand in terms of taste, convenience and value.
 
In October 2016, the company had stated that it would be buying all of its coffee from sustainable sources by 2020. Elevating its coffee business has thus become an essential part of its growth strategy amid escalating demand for the same and continual pressure on the food sales.

Markedly, McDonald's launched the coffee brand McCafe in the United States in 2009. Though McCafe generates nearly $4 billion in sales annually in the country, it has the scope to fare much better. In fact, this is just the start to its McCafe commitment with more transformations in store.

Moreover, by bringing bottled McCafe drinks to store shelves, the company aims to keep up with rival Dunkin' Brands Group, Inc.’s DNKN Dunkin’ Donuts that signed similar deal with Coca Cola last year, and coffee giant Starbucks Corporation SBUX, which sells its bottled Frappuccinos in partnership with Pepsico, Inc. PEP and has for long dominated the ready-to-drink coffee space.

Bottom Line

McDonald’s shares have gained 23.5% over the past six months, outpacing 9% growth of the industry it belongs to.

In fact, growing guest count remains McDonald’s top priority and it is undertaking various sales and digital initiatives to this end. The company has thus been simplifying menus, offering value meals, rolling out all-day breakfast in the United States, focusing on delivery to provide increased convenience and taking steps to meet consumer preference for quality food.

By elevating and leveraging the McCafe coffee brand, the company aims to further raise the bar for guests and convert casual diners to loyal customers.

Additionally, we note that ever since jumping into the coffee fray, McDonald's has gained from pricing its beverages far lower than its direct coffee competitors. Thus, the new drinks and expansion into retail is likely to add to McDonald’s top line and may perhaps prove to be challenging for its close competitors.

McDonald's currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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Coca-Cola Company (The) (KO) : Free Stock Analysis Report
 
Pepsico, Inc. (PEP) : Free Stock Analysis Report
 
Starbucks Corporation (SBUX) : Free Stock Analysis Report
 
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Dunkin' Brands Group, Inc. (DNKN) : Free Stock Analysis Report
 
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