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McDonald's 'cheap coffee' could be stealing customers from Starbucks when it needs them most

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McDonald's 'cheap coffee' could be stealing customers from Starbucks when it needs them most

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McDonalds is reportedly "stealing" customers and shareholders from Starbucks with its wider variety of food products and cheaper coffee. McDonalds is succeeding in winning over afternoon customers, rather than those who visit in the morning.

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McDonald's could be cutting into Starbucks' sales, according to a note from Bernstein analysts.

The fast-food chain seems to be winning over customers in the afternoon with "more food options and cheap coffee."

Starbucks has struggled to grow afternoon sales, killing its well-known Frappuccino Happy Hour deal that aimed to drive traffic after 3 p.m.

It's looking a lot like McDonald's is stealing Starbucks customers.

In a note to investors, Bernstein analysts said that McDonald's may be taking share away from Starbucks.

However, the fast-food chain isn't necessarily stealing the customers looking for a cheap cup of coffee in the morning. Instead, McDonald's is winning over afternoon customers.

"There is some evidence that MCD - with more food options and cheap coffee - is taking pm traffic from SBUX (and DNKN)," analyst Sara H. Senatore writes.

Negative afternoon traffic is Starbucks' biggest problem, Senatore says. Competition is more intense in the afternoon, and customers are less loyal and more cost-conscious.

McDonald's has recently been ramping up efforts to win over coffee drinkers who may otherwise visit Starbucks.

Over the last year, the chain has launched new espresso-based drinks at significantly cheaper prices than Starbucks' counterparts. Currently, the fast-food giant has a deal that allows customers to purchase any small McCafé drink for $2.

Starbucks has long set its sights on growing afternoon traffic. In years past, the Frappuccino Happy Hour has been a major sales driver after 3 p.m. in summer months. However, Starbucks canceled the deal this year, with executives saying it had not been profitable for the two prior years.

Instead, Starbucks brought back a new version of Happy Hour across the US in March. The new Happy Hour features a shifting range of deals, with customers being alerted via apps and email of the promotions of the day.

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McDonald's 'cheap coffee' could be stealing customers from Starbucks when it needs them most

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McDonald's may be taking share away from Starbucks, Bernstein analysts wrote in a note to investors. However, the fast-food chain isn't necessarily stealing the customers looking for a cheap cup of coffee in the morning. Instead, McDonald's is taking afternoon customers.

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Starbucks Abandons Plans for 1,000 Reserve Bars as McDonald's, Dunkin' Surge

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Starbucks Abandons Plans for 1,000 Reserve Bars as McDonald's, Dunkin' Surge

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Starbucks is reportedly "losing ground" to its competitor, McDonalds, and therefore has made the decision to scale back plans for expansion in 2019.

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( Starbucks' NASDAQ:SBUX) plan to open 1,000 high-end Reserve coffee bars has aged as well as a day-old cup of joe. CEO Kevin Johnson has largely shelved the grandiose scheme of the coffee chain's former chief executive, Howard Schultz, as being merely a goal the company could strive for, not one that is set in stone.
Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool recommends Dunkin' Brands Group. The Motley Fool has a disclosure policy.
Because Johnson also needs to achieve his own goal of growing comparable-store sales by 3% to 4% globally, Starbucks' plans for the Reserve chain are being scaled back dramatically. The company will open just six to 10 stores as a pilot program before deciding whether to build more. It's doubtful this luxe coffee experience will ever attain the grand sweep Schultz originally envisioned.

A history of missteps

Starbucks has a poor track record when it comes to straying too far from its regular coffee fare. The Starbucks Reserve concept -- which pairs exorbitantly-priced premium coffee beverages with an equally high-end bakery featuring the creations of Italian chef Rocco Princi -- goes well off the path of its core business.

Previously, Starbucks tried to tap into the juicing fad by purchasing Evolution Fresh juice bars for $30 million to cash in on the $50 billion health and well-being market. It eventually shut down the venture as it failed to catch on (you can still find Evolution Fresh juices in Starbucks coffee shops, however). It also bought its former baked goods provider, La Boulange, and planned to open as many as 400 cafes under that banner. That experiment also failed because it was "not sustainable for the company's long-term growth."

Then there was the takeover of tea purveyor Teavana, which also didn't work out as planned. The lofty expectations for a string of tea houses similar to Starbucks coffee shops came to naught as the Teavana specialty stores were shuttered in favor of selling tea and tea-based beverages in its cafes and at other retailers. The Starbucks Evenings concept -- where you could grab a late-night alcoholic beverage instead of a cup of coffee at certain stores -- was also discontinued.

With this history, it's not surprising that the Reserve coffee bar and cafe plan is turning out to be something less than originally touted.

Slow growth in the core business

Schultz has always touted coffee drinking as an experience. There can be a market for that, but it seems a hard sell to convince most consumers that coffee is of such craftsmanship that it's worth as much as $35 for a flight of three cups of coffee.

Johnson told The Wall Street Journal that the idea of opening 1,000 Reserve stores was simply an "aspiration" the company had, though he probably could have said it was a pipe dream of Schultz's.

Starbucks first needs to focus on its core business, which is suffering from a growth slowdown. That's probably why Starbucks made little mention of the Reserve concept at the investor conference it held last month. Instead the existing store base, growth in China, and expanded delivery options took center stage.

The slightly rising comps Starbucks experienced in 2018 were a result of higher prices, not more customer traffic. It is ( losing ground to McDonald's NYSE:MCD) and doughnut shop Dunkin', which have continuously invested in their coffee businesses and are seeing higher returns because of it.

McDonald's McCafe line of coffee beverages represents about 16% of total revenue, and also helps drive more visits from customers. After years of losing customers, McDonald's has now put together a string of quarters featuring higher guest counts.

Meanwhile, the ( Dunkin Brands NASDAQ:DNKN) chain has successfully expanded its afternoon menu, which could be siphoning customers away from Starbucks. Perhaps more importantly, Dunkin's coffee is seen as being of good quality and more affordable than that of Starbucks, making it harder for Starbucks to hit its ambitious sales goals.

Stick to its knitting...and coffee

Starbucks isn't killing off the Reserve concept completely. It plans a much more modest six to 10 test stores in the U.S. to give the concept a chance to prove that customers will accept high-priced artisanal coffee before committing to the growth phase, if it ever does.

So it's probably not correct to say that Johnson's vision for Starbucks is completely opposed to the one held by Schultz; rather he would prefer to have data in hand to support the expansion plans, while Schultz was seemingly willing to let his vision lead the way.

We can reserve judgment on whether the Reserve store concept will eventually prove it is worthy of further investment. However, Starbucks would still likely do better to focus on its strength, which is making a good cup of coffee without turning its stores into brewpubs.

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Starbucks Abandons Plans for 1,000 Reserve Bars as McDonald's, Dunkin' Surge -- The Motley Fool

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( Starbucks' NASDAQ:SBUX) plan to open 1,000 high-end Reserve coffee bars has aged as well as a day-old cup of joe. CEO Kevin Johnson has largely shelved the grandiose scheme of the coffee chain's former chief executive, Howard Schultz, as being merely a goal the company could strive for, not one that is set in stone.

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McDonald's new coffee 'better than anything Starbucks has ever come up with,' according to Twitter

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McDonald's new coffee 'better than anything Starbucks has ever come up with,' according to Twitter

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Customers are taking to Twitter to express their opinions about McDonalds' new iced coffee and frappe like drinks released in the summer of 2018. Some even stated it was, in their opinion, better than Starbucks.

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Next time you head out for a coffee run, the Twitterverse would like you to consider McDonald's.

The fast-food chain likely isn't the first place customers associate with a caffeine fix, but the golden arches are serving up two new coffee drinks the Internet can't seem to get enough of: Cold Brew Frozen Coffee and Cold Brew Frappe.
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The frozen coffee version is "a strong but smooth cold brew extract blended with ice into a cold, creamy frozen drink" and the frappe is the same, but comes with whipped cream and chocolate drizzle on top, per a press release.

According to Food Beast, the ingredients in McDonald's cold brew include: ice, cream, skim milk, sugar, cold brew coffee extract (water and cold brew coffee), water, caramel color, dipotassium phosphate, guar gum, mono and diglycerides, tripotassium citrate, disodium phosphate, and carrageenan.

While the list of extra ingredients might deter some die-hard coffee fanatics, others can't help but take note of the low cost. Both options are priced at only $2, which pales in comparison to some other major coffee chains.
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People are so obsessed with the new limited-edition beverages, some on Twitter are saying it's better than Starbucks.

Another, meanwhile, likened the taste of the drinks to the "coffee candies" she loved in her youth, so just a heads up for those who don't take sugar in their cold brew: They might not be everybody's cup of tea.

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McDonald's new coffee 'better than anything Starbucks has ever come up with,' according to Twitter

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Next time you head out for a coffee run, the Twitterverse would like you to consider McDonald's. The fast-food chain likely isn't the first place customers associate with a caffeine fix, but the golden arches are serving up two new coffee drinks the Internet can't seem to get enough of: Cold Brew Frozen Coffee and Cold Brew Frappe.

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McDonald's 'mirror of Starbucks' is revolutionizing the chain's business — here's how

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McDonald's 'mirror of Starbucks' is revolutionizing the chain's business — here's how

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In September, announced that it had added a new set of espresso-based drinks to the menu: a caramel macchiato, a vanilla cappuccino, and an americano.

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McDonald's 'mirror of Starbucks' is creating a nightmare for franchisees

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McDonald's 'mirror of Starbucks' is creating a nightmare for franchisees

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In September, McDonald's announced it had added a new set of espresso-based drinks to the menu: a caramel macchiato, a vanilla cappuccino, and an americano. Three franchisees said one positive aspect of the beverages was their similarity to those at Starbucks, with one calling them a "mirror" of the coffee giant's drinks.

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McDonald's new McCafe beverages are a "mirror of Starbucks," franchisees say - and that's causing some problems.

In September, McDonald's announced it had added a new set of espresso-based drinks to the menu: a caramel macchiato, a vanilla cappuccino, and an americano.

In a survey of 27 McDonald's franchisees released Tuesday by Mark Kalinowski, a Nomura analyst, only two franchisees said the new beverages were beating sales expectations.

Meanwhile, seven franchisees said the beverages were underselling, and 18 said they were selling in line with expectations.

Further, the franchisees said the new beverages were creating a long list of challenges. Here are a few of their complaints:

"Very time consuming, and competitors have a higher-quality product."

"Forced equipment purchases, awful sales."

"Getting them correct. There are too many ways to mess them up."

"Slow ordering time, slow make time, and therefore slow service time. Very labor intensive."

"Time-consuming products like this do not belong on McDonald's menu."

Three franchisees said one positive aspect of the beverages was their similarity to those at Starbucks, with one calling them a "mirror" of the coffee giant's drinks.

However, copying Starbucks creates a new set of issues.

Starbucks has been plagued with slower service times as it attempts to increase traffic to its stores while implementing new mobile-ordering technology. Some people, however, are willing to forgive some of Starbucks' fundamental flaws - like expensive drinks and slower service - because it has always marketed itself as being elevated above the average fast-food chain.

McDonald's, meanwhile, is the most iconic fast-food chain in the business. While it has attempted to boost its reputation over the past two years with various menu innovations, it doesn't have the same leeway as Starbucks. If the new McCafe drinks slow service or cost more, customers are likely to shop elsewhere - especially if McDonald's isn't able to compete with Starbucks' quality and consistency.

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McDonald's 'mirror of Starbucks' is creating a nightmare for franchisees

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McDonald's new McCafe beverages are a "mirror of Starbucks," franchisees say - and that's causing some problems. In September, McDonald's announced it had added a new set of espresso-based drinks to the menu: a caramel macchiato, a vanilla cappuccino, and an americano.

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McDonalds is leveraging their status and popularity as widely known fast-food chain to top coffee competitors. 

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McDonalds is leveraging their status and popularity as widely known fast-food chain to top coffee competitors. 

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McDonald's has made changes to their menu, including the addition of more gourmet items and all-day breakfast, which impacts their coffee sales. They've made themselves a one-stop shop for both food and coffee, impacting competitors who specialize in only coffee.

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Both Starbucks and Dunkin' Donuts recently reported earnings from the last three months of 2017 with a similar problem: They were losing customers in the afternoon, and were strong in the mornings.

RB's Peter Romeo detailed efforts by those and other chains to improve their business in the afternoon.

But my question is this: Why are they losing business in the afternoons and evenings, after they both spent so much time and effort improving noncoffee drinks and food offerings in a bid to make their shops all-day affairs?

Same-store traffic is a problem at both chains. Starbucks has struggled with it for more than a year. Dunkin' has struggled with it for longer.

Both do fine in the mornings, catering to their loyal customers while giving them rewards for their repeat business through loyalty programs. They haven't generated the same growth in the afternoons.

There are two possible explanations for this: McDonald's and overdevelopment.

McDonald's is an underrated but massive player in the coffee market.

If we assume that the soon-to-be-Chicago-based giant gets a third of its business from breakfast or breakfast items plus coffee drinks (which might, in fact, be an underestimate), then that alone is an $11.6 billion business.

That would make it the country's third largest restaurant chain, just after the rest of McDonald's business and Starbucks. It would be quite a bit larger than Dunkin'.

Essentially, McDonald's is a top-three coffee player in a burger chain suit.

McDonald's has been aggressively going after the beverage business in the past couple of years, but in 2017 in particular, with $1 drinks, $2 McCafe beverages, smoothies and slushie drinks in some markets over the summer. While these drinks might not be able to take away the coffee chains' powerful and loyal morning business, they could sap less loyal afternoon customers.

In addition, McDonald's added all-day breakfast in 2015 and expanded it in 2016.

Dunkin's traffic has fallen for 10 straight quarters, according to BTIG analyst Peter Saleh, a slide that coincides, perhaps coincidentally, perhaps not, with that all-day breakfast.

I think there's another problem in the form of development.

Both Starbucks and Dunkin' have aggressively added locations in recent years. In the past two years, Starbucks expanded its unit count by 13% and now has more than 14,000-quietly taking it past McDonald's to be the second largest chain in the country based on units.

Dunkin', meanwhile, has grown by 9% over that time, giving it just over 9,000 locations.

Both chains clearly have enough demand in the morning dayparts to handle the additional supply of locations.

But there's clearly not enough demand in the afternoon for all of these additional coffee shops, at least not with a strong McDonald's out there offering $1 coffee drinks and all-day breakfast.

There are other factors, to be sure. Dunkin' has problems in its key markets competing with convenience stores like Wawa that have aggressively targeted beverages and other drinks. Starbucks has problems in retail areas.

Both Dunkin' and Starbucks have suggested that traffic patterns and consumer changes are more to blame for their afternoon problems. "It's a competitive environment out there," David Hoffmann, president of Dunkin' Donuts in the U.S., said on the company's earnings call this week. "But traffic patterns and consumer behaviors are changing in the afternoon."

Starbucks CEO Kevin Johnson, meanwhile, dismissed suggestions that competitors could be taking away business.

He said that data shows Starbucks increasing customer occasions when it builds a new store in an area. And there's "little to no impact on Starbucks' traffic" in an area when a competitor builds a store nearby.

"It's evidence that we're not losing share to competition," Johnson said. "And it's evidence that we're not cannibalizing as we build new stores."

Still, it's difficult to ignore the chains' unit growth, and McDonald's, as Starbucks and Dunkin' lose business in the afternoons.

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Is McDonald's hurting Starbucks and Dunkin'?

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Both Starbucks and Dunkin' Donuts recently reported earnings from the last three months of 2017 with a similar problem: They were losing customers in the afternoon, and were strong in the mornings. RB's Peter Romeo detailed efforts by those and other chains to improve their business in the afternoon.

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McDonald's ordering  and purchasing processes have been simplified. 

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McDonald's ordering  and purchasing processes have been simplified. 

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McDonald's has recently integrated a self-ordering and payment process with their new kiosks, adding to organizations appeal as a quick and easy stop for coffee or food.

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As McDonald's seeks to modernize its business, the company is placing a big bet on mobile and other tech platforms.

McDonald's has been systematically adding self-service ordering kiosks and table service to stores as it works to "build a better McDonald's."

"What we're finding is when people dwell more, they select more," CEO Steve Easterbrook told CNBC on " Squawk on the Street" on Monday. "There's a little bit of an average check boost."

In fact, the company plans to upgrade 1,000 stores with this technology every quarter for the next eight to nine quarters.

"If you think about only two years ago, if you were a customer there were two ways you can get served at McDonald's," Easterbrook said. "You walked to the front counter and line up and take your drink and find a table or you go through the drive through. We're introducing many options. They can order through mobile, they can come curbside and we'll run it out as well as the existing traditional ways. You can pay in different ways and customize your food in different ways. I think we're trying to add more choice and variety."

Scott Olson | Getty Images

International markets like Canada, Australia and the U.K. are already fully integrated with kiosk service and mobile ordering. Locations in France and Germany, too, are almost completely transformed with this new technology.

"The U.S. is a little bit behind," Easterbrook said.

The burger giant has also been exploring delivery in the U.S. in an attempt to meet customer demand and changes in how consumers want to get their food.

McDonald's already has a large delivery presence in Asia, which accounts for 10 percent of system sales in that market, and is hoping to capitalize on the growing industry demand by offering delivery in the U.S. It is currently testing out several models, both in-house and via third-party providers.

The company has previously stated that 75 percent of the population in its top five markets - the U.S., France, the U.K., Germany and Canada - are within three miles of a McDonald's and 85 percent are within five miles of a chain.

WATCH: A look inside McDonald's new Chicago headquarters

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McDonald's to add self-order kiosks to 1,000 stores each quarter

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As McDonald's seeks to modernize its business, the company is placing a big bet on mobile and other tech platforms. McDonald's has been systematically adding self-service ordering kiosks and table service to stores as it works to "build a better McDonald's."

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McDonald's price points are significantly less than Starbucks.

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McDonald's price points are significantly less than Starbucks.

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McDonald's uses sophisticated brewing technology to compete with Starbucks equipment. These unique coffee blends are made to order and less expensive than a Starbucks coffee.

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Business Insider reveals that McDonalds is cheaper, faster, and has better food options

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Business Insider reveals that McDonalds is cheaper, faster, and has better food options

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Since I moved to New York City five years ago, Starbucks has been an almost daily part of my routine.

The Seattle-based coffee chain is so ubiquitous in Manhattan that I pass two in my short walk from the subway to work. Stopping in and ordering a coffee or mocha latte in the morning became part of my subconscious.

But recently, I discovered a better alternative - McDonald's.

The fast food giant started stepping up its coffee game years ago. Since then, the McCafe has become a significant revenue stream for McDonald's, with executives crediting the coffee and breakfast business for helping the brand's recent turnaround.

Here are a few reasons I started frequenting the Golden Arches for my caffeine fix.

1. It's cheaper

My large hot or iced coffee costs just $1. That's less than half the price of Starbucks brewed coffee.

McDonald's lattes are about $2 cheaper than Starbucks ($2.79 for a medium vs. $4.70.) That being said, I find the McDonald's mocha latte to be too sugary, so I would still stick with Starbucks for that.

But when it comes to every day brewed coffee, I think McDonald's is just as good as Starbucks, and actually prefer the lighter taste. Saving money is an added bonus.

2. It's significantly faster and more convenient.

Regardless of the line, I usually get my order in about three minutes at McDonald's. Once I order, I receive a receipt with a number. Once my number is called, I pick up my coffee and leave.

Starbucks' line is typically less efficient, with the whole process taking between 7 and 10 minutes.

There's also a confusing system where you pick up food at one part of the counter, custom drinks like lattes at another, and regular coffee at the register. This means I often receive my order in parts.

Many times, part of my order has been forgotten or misplaced. I've also had someone else mistakenly take my coffee at the register.

If Starbucks wants to compete in the food space, it will have to figure out how to streamline the ordering experience like McDonald's has.

3. McDonald's has a better food menu

While Starbucks has been making an effort to expand its food menu, it can't compete with McDonald's because it doesn't have a kitchen in-house.

McDonald's has great breakfast items like Egg McMuffins, McGriddles, and hash browns.

While Starbucks has some breakfast wraps on the menu, they are prepared and packaged in advance and lack the freshness of McDonald's.

Starbucks does have McDonald's beat in the pastry department, so if I'm craving a blueberry muffin I would still go there.

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I started going to McDonald's instead of Starbucks for my coffee - here's why

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The fast food giant started stepping up its coffee game years ago.

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McCafe offers a similar environment to Starbucks

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McCafe offers a similar environment to Starbucks

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Both McDonalds and Starbucks share similar color schemes and atmosphere

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McCafe offers similar product offerings as Starbucks

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McCafe offers similar product offerings as Starbucks

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Starbucks places their delicacies near the counter like McCafe.

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To appeal to the upscale Parisian trends, McCafe's appear in France to compete with other coffee competitors. More McCafes are expected to enter US markets.

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McCafe's are made to order and provides catchy advertising

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McCafe's are made to order and provides catchy advertising

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McCafe uses sophisticated and trendy marketing advertising methods that competes with Starbucks.