Here’s Why McDonald’s Is Increasing Focus On McCafe?

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Reports suggest that McDonald’s (NYSE:MCD) will reintroduce its McCafe concept next year, with a new campaign that will focus on special deals, seasonal beverages and increased marketing of its rewards program. Looking to compete with players such as Starbucks and Dunkin’ Donuts on the price advantage, McDonald’s is likely to introduce $1 drip coffee and a $2 speciality beverage deal for the first quarter of next year. The company believes that coffee can complement its food offerings and is an important piece in its strategy to meet customer requirements. We believe a McDonald’s/McCafe combination can attract families to its restaurants who do not prefer to visit Starbucks since the latter is not considered to be a family restaurant. According to the International Coffee Organization, coffee consumption in the U.S. increased 2.1% year over year in 2014. Most of this increase was due to consumers’ growing appetite for specialty coffee. A focus on coffee can ease the pressure on the company’s food sales and the price advantage can draw customers. This can lead to  higher spending at its restaurants, positively impacting the company’s valuation.

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Coffee Shops Are The Fastest Growing Restaurant Category

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According to Euromonitor International Data, in 2016, specialist coffee shops were the fastest growing major restaurant category in terms of global sales, with an increase of 9.1% from 2014 to 2015. This is significantly higher than the overall restaurant industry growth number of 5.7% and global fast food growth number of 5.8%. In 2015, McCafe was the top third speciality coffee shop by sales, recording $ 1.4 billion in sales from around 5,000 outlets, significantly lower than Starbucks (the top players) which generated nearly $21 billion in sales from more than 22,000 outlets. However, McDonald’s is now working towards increasing this revenue through both the expansion of McCafes and the upgrade of its espresso machines with equipment that creates more consistent-tasting drinks. While this focus on coffee can increase the average spend by a customer at its restaurants, we believe that, given the profile of customers frequenting the restaurant, it might not lead to a significant revenue increase.

McDonald’s is popular among consumers with young kids and middle and lower income families who are looking for a value meal. While the company is playing the price advantage to attract customers to its McCafes, this can translate into significantly higher revenues only if the company gets a huge volume of consumers for coffee. Customers may add coffee to their meals, increasing the average spend at the store marginally.  However, it might be tough for McDonald’s to attract coffee-only customers to its stores.

We believe a focus on coffee can complement McDonald’s food offerings and increase the average spend by customers at its stores. This move can also attract more customers to its stores. However, given the strong competition from established coffee giants such as Starbucks, McDonald’s might not be able to make this segment a key revenue driver in the short term.

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