McDonald's McCafe line exceeding expectations

March 23, 2009
McDonald's highly publicized rollout of its McCafe specialty coffee line is more than halfway to completion and winning over coffee lovers along the way. More than 7,000 — or a little more than half — of U.S. stores now sell the espresso-based drinks, and the chain expects to meet its mid-2009 deadline, said Danya Proud, spokeswoman for the company.
The McCafe products include hot mochas, cappuccinos and lattes as well as iced coffees and mochas. The next phase in the chain's specialty beverage rollout will come after the McCafe line is available in all stores and will include smoothies and frappes.
While McDonald's delayed the rollout of its premium Angus burgers in October as the economy soured, Proud said the specialty beverage rollout, including tests of bottled beverages is on track.
"What the economy is doing, though, is just making sure that we're getting these items right for our customers," she said.
McDonald's step into the specialty coffee arena is the company's attempt at its piece of the $60 billion coffee industry, Proud said. The company, long the breakfast leader, worked its way into the category with a 2006 upgrade of its premium roast drip coffee. That product upgrade helped boost coffee sales 30 percent in the company's second quarter 2007, according to the company's conference call.
By the second quarter of fiscal 2008, McDonald's CEO Jim Skinner said in that conference call that McDonald's goal was to become a "beverage destination."
McDonald's entered the specialty coffee category with the opening of its first McCafe coffeebar in Australia in 1993. Ten years later, McDonald's USA started testing the stores, with espresso-based beverages and specialty baked goods in a coffeehouse atmosphere. About 30 U.S. stores continue to operate a coffee bar in their stores.
While the McCafe coffee bars continue to grow in countries like Australia and Germany, McDonald's recognized in its third quarter 2007 that drive-thru convenience, rather than the coffeehouse experience, was the key driver in the United States.
After thoroughly testing operations and determining the necessary drive-thru improvements, McDonald's began rolling out its espresso-based specialty coffee line in the United States in January 2008, borrowing the McCafe name.
Drive-thru and lease-hold improvements cost about $75,000 per store, with McDonald's paying 40 percent. The specialty beverage equipment, which includes equipment for the specialty coffees and upcoming smoothie and frappe rollouts, cost about $25,000 per store, according to the company's third quarter 2008 conference call.
Seeing results
Operators, like Scott Frisbie, a 25-year owner/operator for McDonald's with 17 units in Orange County, Calif., are happy with the product and customer response.
"We're pleased with the amount of (coffee) units that we're selling," Frisbie said, noting that seven of his stores sell the coffee line. "The initial success is exceeding my expectations. I'm proud of this product, and I'm really excited to see how my people are getting excited about it."
Like many U.S. stores, Frisbie's restaurants promote the espresso-based coffees with free samples. The samples have helped the product line's success, with a high percentage of customers following the sampling with a purchase.
Staff training, including that of the "specialists" who make and serve the coffees, is essential. It's important, Frisbie said, that the entire staff also know what the beverages are and why they're an important initiative.
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"We've got to engage and excite and educate our own people in order to be able to make the experience the best it can possibly be," he said. With many of the crew unfamiliar with these types of beverages, "it's critically important that they are really up to speed, embracing what we're doing, being part of the experience because they're the ones delivering this to customers."
QSRweb asked McDonald's executives for an update on the progress of the McCafe line rollout, but none were unavailable for comment. McDonald's USA spokeswoman Danya Proud answered our questions.
QSRweb: Do you know how same-store sales at units with the McCafe coffees are doing compared to those without?
Danya Proud: I don't, but overall, you saw the earnings release that came out (earlier this month). Overall, our business continues to be strong, we're continuing to gain positive momentum, and we're very happy with how our restaurants are performing.
Q: How is the McCafe coffee boosting incremental sales?
DP: I don't know specifically. Currently about half of the U.S. restaurants are serving them, and with these strong business results that we're continuing to post, McCafe coffees are certainly playing a role in that business growth, as is our dollar menu. (Also,) we're continuing to remodel many of our restaurants, and we continue to grow the number of restaurants that are operating extended hours, either opening early or closing late or open 24 hours. So all of those things are having a role in our continued sales growth.
We do know that the coffees are bringing in new customers. When you look at our business overall, business continues to grow. So we're serving more customers today than we ever have. Certainly coffee is playing a role in that, whether it be existing customers visiting us more often for coffee or whether it be new customers that may have been going elsewhere that are now visiting McDonald's for coffee.
Q: Have you speculated how the economy could be affecting that increase in business?
DP: Value is an attribute that has been a fundamental piece of our business since 1955 when we first opened our doors. That today more than ever certainly plays a role in why we believe many of our customers come to us because we know people still want luxuries, but they want affordable luxuries. And the coffees that we're making available are in fact that — they're great tasting, and they're at a value that only McDonald's can offer.
Q: Starbucks has been the main player in coffee for some time and in recent times has been struggling. Is McDonald's capturing some of those Starbucks' customers?
DP: For us, it's about growing our business. The beverage industry is a $60 billion business, and we feel that we're capturing our share of the business.
Q: When the McCafe line first started coming out, critics were saying that McDonald's wouldn't have the cachet of a Starbucks. Has McDonald's addressed that criticism or done things in your marketing to address it?
DP: What we're trying to do with the inception of our coffees is create an overall experience at McDonald's, so it's not just about the coffee, it's about the experience and all the other things that McDonald's offers, including convenience, breakfast, our rest of day.
We already know that we own the breakfast category, we know that our customers are visiting us for this, and at the end of the day, we truly believe that tasting is believing, and certainly sampling has played an integral role in the marketing for those markets that do currently offer the coffees because we know that once people try the product, we know from their feedback just how happy they are with what we're offering and have said to us that they will be back to purchase from us.
McCafe Timeline
1993: First McCafe coffee bar opens in Australia 2003: U.S. stores start testing coffee bar concept 2006: Premium roast drip coffee upgrade 2007: Specialty coffee test begins, specialty beverage plan develops 2008: U.S. McCafe espresso-based beverage line begins rollout 2009: March, more than half of U.S. stores have completed the McCafe line rollout 2009: Mid-year, target for McCafe rollout completion and smoothie rollout launch
*Information from McDonald's quarterly conference calls found in Seeking Alpha transcripts.

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