McDonald’s Experiments With McCafé Strategy in Developed Markets

McDonald’s efforts at a strategic turnaround have so far focused on its core burger and fries concept, but the company is now placing some energy behind improving McCafé. Specifically, McDonald’s is looking for ways to compete more directly with premium coffee shops in major coffee shop markets like the UK and Australia. The company has been experimenting with ways to position itself as not just a price and convenience player, but as a true coffee-drinking destination—a difficult feat that, if successful, could help them tap into a lucrative and growing demand pool.

More dine-in traffic in the UK

The UK is one of the largest specialist coffee shop markets in value terms, at US$2.4 billion in sales in 2013; however just like in the US, McDonald’s sells McCafé products in the UK as a branded menu range, rather than through separate ordering counters or standalone outlets.  As a result, English McCafés have never competed fully as third-place destinations in the vein of Costa or Starbucks.

In the face of 6% value growth in specialist coffee shops in the UK, making it one of the fastest growing local categories, McDonald’s is looking to change that. No plans have been discussed to separate the McCafé brand physically within the outlet, but the company is taking other steps toward making restaurants more conducive to café occasions. Many UK McDonald’s outlets now offer consumers the option of ordering via touch-screen kiosks and perusing iPads in the dining room. Moving forward, McDonalds’ has promised to continue making changes toward this goal.

This investment in the in-store experience may help McDonald’s feel more like a coffee shop, but the competitive tides are rising all around it. Starbucks and Costa Coffee are both also taking steps toward making outlets more appealing and already seeing encouraging results. Starbucks recently turned a profit in the UK for the first time due in part to expanded breakfast and lunch platforms, outlet upgrades like localised décor, and stronger beverage flavours such as lattes with an extra shot of espresso to accommodate English preferences. Costa Coffee meanwhile has steadily grown its market share with more modern outlet décor, a focus on superior service, and steady menu innovation in hot and cold drinks.

A new test café concept in Australia

McDonald’s has also been experimenting more boldly in Australia, but with similar goals in mind. In late 2014 the company launched The Corner, a single-outlet test concept in a Sydney suburb, with minimal McCafé branding and an entirely new health-focused menu. In fact, the only evidence of its tie to McDonald’s is in fine print on the logo, reminiscent of the “inspired by Starbucks” outlets Starbucks Coffee experimented with in the US in 2009.

Like those outlets, the new McCafe concept won’t be rolled out nationally or even internationally; rather, it’s a “learning lab” designed to collect data about new menu items, décor and other strategic initiatives. The outlet serves premium menu items like barista-made coffee, quinoa salads, and a Chipotle-style sandwich, salad and rice bowl bar that allows customers to build their own meal from a range of fresh and healthy components. Together with McDonald’s’ design-your-own burger concept test in the US, this design speaks to what could be big strategic changes ahead for the brand. Specifically as it relates to McCafé, it could mean the company is ready to put more muscle behind the brand as a standalone specialist coffee shop, and even further, as a significant part of its future international growth portfolio.

Easier said than done

As with all attempts to grab share in developed markets, success will need to come from more than just plenty of resources and a clever new strategic plan. Echoing its struggle with fast casual competitors in its domestic market, McCafé’s moves in the UK and Australia suggest McDonald’s is attempting to stand out through imitating the competition rather than truly setting itself apart. Customers looking for high-quality coffee and a premium coffee shop ambiance have plenty of options in developed markets, and McCafé may find that simply bridging the gap may not be enough to bring about their desired results. Similarly, the specialist coffee shop landscape in major markets is steadily growing, diversifying, and stretching toward even premium new heights. While there’s an argument to be made that this could open up an opportunity for McCafé to compete at a lower-priced but still quality-focused tier, there’s also a real question as to whether anything the company does could simply be too little too late. Ultimately, the appeal of specialist coffee shops is in a combination of quality and experience, and no amount of surface-level upgrades will hold if the quality of the overall experience doesn’t measure up.

That said, there’s still plenty of room for McCafé to grow its appeal, and these steps could very well start them off in the right strategic direction. Specialist coffee shops has become a rare point of consistent value growth in most developed markets, the result of consistently siphoning traffic from more traditional beverage drinking channels. For fast food players that have come to rely on emerging markets to support their global portfolios, a stronger push into specialist coffee shops could potentially offer a way to turn a profit in high-income but difficult markets.  Finally, McDonald’s has the benefit of a very large and well established network of outlets in such markets, ready to be leveraged toward growth in the café channel in whichever way they choose. This, combined with a wealth of local market knowledge from decades of operation—and a history of unlikely successes—means McDonald’s can never quite be counted out. McCafé may not seem quite poised to become the next Starbucks or Costa, but McDonald’s has come out on top against longer odds before.