This Case situation is about 10 years old as it applies to Canada, so I would like you evaluate Questions 1 & 2 based on the case information only. The situation was very close in Canada except Dunkin Donuts was not a factor in Canada. Tim Hortons was a major competition then as now.Questions 3 & 4 relate to the current situation in Canada and are your point of view.
Questions:
1.Do you believe McDonald's trade-up strategy to the McCafe line of premium coffee products is a good deal for the franchisees based on the information in the case - why or why not?
2.What product advantage did McDonald's have when it introduced McCafe in Canada
3.Based on your own experience do you believe that McDonalds's McCafe is a "oranges and oranges" alternative to Starbucks? Yes or No and explain your point of view ?
4.Are the risks for the franchisees the same for Starbucks and McDonald's?
CASE 18 Mcdonald's Trading Up the Channel Members' Product Mix Mcdonald's has been a household name in the fast food restaurant industry since the br early 1960s. Starting out as a small burger joint offering only hamburgers, french-fries, mill shakes, soft drinks and apple pies, the company has over the years added such items as its famous Big Mac, Happy Meals, Chicken Mcnuggets, salads and a variety of break- fast items such as the Egg McMuffin and Hotcakes and Sausage. The most recent addi- tion to the Mcdonald's menu is a line of premium coffee beverages that includes cappuccinos, lattes and mochas introduced in 2007. Mcdonalds refers to its new line of premium coffee products as McCafe'. Competitive Environment Three primary competitors now lead the charge in the coffee beverage market: Starbucks, Mcdonald's, and Dunkin' Donuts. According to MSN Money, while Mcdonald's and Dunkin' Donuts were selling basic drip coffee for decades before Starbucks caught popu- lar attention, Starbucks was: responsible for a nationwide shift in behavior ... persuading young consumers to trade in Cokes for cafe lattes ... or elevating coffee standards to a point where even Maxwell House is now 100% Arabica bean. Ironically, those higher standards may have paved the way for rivals such as Dunkin' and Mcdonald's to compete with Starbucks on taste as well as price. Starbucks should also be given credit for teaching consumers in the United States to perceive coffee as an experience and not simply as a beverage. By waiting to enter the market, Mcdonald's took advantage of the coffee culture that Starbucks had already created. Mcdonald's has also unabashedly borrowed from the Starbucks' brand experience. For example, Mcdonald's, like Starbucks, calls the coffee making staff "baristas," and dis- plays the coffee-making equipment in the front of their stores instead of hiding it in the back with the "fryolators">.According to an article from Restaurants and Institutions, Mcdonald's learned from Starbucks and gas-station convenience stores that a cup of coffee can be a "des- tination" product. So, with this thought in mind, Mcdonald's realized that more cus- tomers might come into stores throughout the week, especially during non-peak hours, just for a cup of coffee if a larger selection were available. Not only was the company hoping to wake up store traffic during the morning, and in between times, but McDo- nald's also hoped to gain more customers during lunch and dinner hours with the ad- dition of better coffee options. With Starbucks and Dunkin' Donuts offering primarily breakfast food items, Mcdonald's hoped to be more successful after breakfast hours are over. Premium Coffee Arrives at Mcdonalds In 2007, Mcdonald's USA began an aggressive expansion plan aimed at placing pre- mium coffee products in 100 percent of its 14,000 U.S. stores under the McCafe' banner by the end of 2009." The speed at which Mcdonald's has been able to convert its stores, the favorable taste reviews by consumers, and Mcdonald's low-cost strategy during an economic downturn all contributed to early success. Luck was also on Mcdonald's side when Starbucks announced the closing of nearly 600 stores in 2008. Mcdonald's gained a further leg up on competitors by using a single machine that automatically steams the milk and combines it with the espresso, a time and money saver compared to Starbucks "hand-made" coffee drinks. Promotion and Advertising An article in Advertising Age points out that if McCafe's competitors were not feeling the heat already, Mcdonald's $100 million national marketing campaign, fanned out across TV, print, radio, outdoor (see Exhibit 1), Internet, events, PR and sampling, would surely make them take notice. The media blitz was the biggest launch in Mcdonald's history. In addition to the mass marketing campaign, Mcdonald's reached customers through coupons (see Exhibit 2) for premium coffees and a "McCafe Your Day" promotional contest that gave cash prizes to customers sharing stories about getting "McCafe'd"." Another article in Advertising Age states that competitors have increased promotions in 2009 to combat the McCafe frenzy. Dunkin' Donuts and Starbucks have each launched 2009 integrated marketing campaigns that span TV, Internet, print, radio, out- door and social media. Starbucks also offers different discounts to different types of `Hume, Scott. "Counter Attack." Restaurants & Institutions Dec. 2007: 34-41. Print.EXHIBIT 1 Outdoor Advertising for McCaf customers. According to an article in the New York Times, a Starbucks loyalty program offers regular coffee connoisseurs a 10 percent discount on food and coffee for $25 per year. Infrequent customers receive occasional promotions including a coupon for a free brewed coffee every Wednesday for eight weeks.11 Complementary Products McDonald's promotes complementary products directly through coupons for a free sandwich with the purchase of a coffee beverage. Indirect promotion can be seen in McCaf frequency cards and Free Mocha Mondays, which draw customers into the store in an effort to establish brand loyalty and sell complementary products. Starbucks has responded to McDonald's initiative by offering affordable breakfast op- tions. In March 2009, Starbucks began serving a new line of breakfast foods from a value meal called a \"breakfast pairing,\" which includes an egg sandwich, cup of oatmeal or cof fee cake with a coffee for $3.95. McDonald's and Dunkin' Donuts both offer breakfast combination meals starting at $2.95.12 So, apparently, Starbucks is attempting to make its breakfast meals inexpensive enough to draw in more frugal customers, yet fancy en ough to appeal to those who value quality over price. Exhibit 3 shows prices of four pope ular premium hot beverages at all three restaurants. Seattle Fost-Intelligencerj'Seott Eklund EXHIBIT 2 Samples of McCafe Marketing Materials and Starbucks' Counter-Marketing i'mlovin'it $1 OFF Bring this coupon to any participating m U.S. Mcdonald's and get $1 off any size McCafe Frozen Strawberry Lemonade, Frappe or Real Fruit Smoothie. Ahhhh... Expires 6/15/1 1. Valid only at participating U.S. Mcdonald's. Not valid with any other offer, discount, coupon or combo meal. Cash value 1/20 of 1 cent. Limit one coupon per person per visit. Coupon may not be transferred. auctioned, sold, copied or duplicated in any way or transmitted via electronic media. Valid when product served. May not be valid for custom orders. C201 1 Mcdonald's Trappe real fruit NEW Smoothies frozen strawberry McCafe lemonade McCafe McCafe This coupon is good for Mcdonald's Expires 6/15/2011 Courtesy of Bert Rosenbloom Source: http://couponkim.com/blog/2011-mcdonalds-printable-coupon/?gclid=CJCMnZrDOKsCFcZ- 5Qod3TwwUQ EXHIBIT 3 Competitive Pricing for Premium Hot Beverages Mcdonald's Starbucks Dunkin' Donuts Cappuccino $2.79 $3.35 $2.69 Latte $2.79 $3.35 $2.69 Hot Chocolate $2.89 $3.65 $1.79 Coffee $1.39 $1.85 $1.59 Note: Base on 16-once serving.McDonald's has had a reputation for breakfast since the introduction of the Egg McMuin in 1972, but the addition of premium coffee may change the way that the company views a morning breakfast. In a recent survey, 44 percent of McDonald's cus- tomers requested breakfast to be served all day. With a higher prot margin on breakfast foods and breakfast already accounting for one-third of the average $2.1 million in U.S. McDonrgd -unit sales, CEO Jim Skinner is investigating the protability potential of that request. Premium Coffee Trade-Up Strategy and McDonald's Franchise Channel Members McDonalds's strategic initiative to bring a full range of premium coffee products under its McCafe' banner to all of its 14,000 U.S. stores created a tremendous amount of excite- ment, not only in the restaurant industry but in the popular business press as well. Taking on the lofty coffee king Starbucks, as well as the more plebeian but formidable Dunkin' Donuts, was a once in a generation event that generated a great deal of interest and speculation about the outcome of the \"great coffee war.\" Would there be a clear winner? Would the \"snobby\" Starbucks get its comeuppance from \"plain vanilla\" McDonalds? Would Dunkin' Donuts emerge as the \"back door\" winner as McDonald's and Starbucks battled each other in a premium coffee fight to the nish? While the \"great premium coffee war\" was interesting and perhaps even fun for outside observers to watch and comment on, what really mattered to thousands of McDonalds' franchisees was whether the new line of premium coffee products would be a good thing for them. Winning or losing from the franchisees' point of view was all about whether the new McCafe' product trade-up strategy would bring more sales and prots to their stores. While McDonalds has been keeping its own estimates about how the new premium coffee products would affect its franchisees' top line and bottom line results, some information has worked its way through the industry \"grapevine": - The McCafe' premium co'ee products are expected to add an average of$125,000 in additional revenues per store. - Premium coee sales are expected to account for up to 6 percent of total store sales { up om 2 percent for previous coffee products). - The specialized equipment for the premium coee costs about $25,000 per store. The franchisees pay about 60 percent of that cost to McDonald's 40 percent. . Many stores needed upgrading to properly showcase the new premium co'ee products. Costs are between $75,000 and $125,000 for those that needed the upgrades, with McDonalds paying up to 40 percent of these costs. - McDonalds expects that the premium coee line will attract more ojf-pealc customers but it does not know how many. - Some concern has been expressed about cannibalization, especially for what some ob- servers have referred to as \"tired\" old milkshakes and super protable soft drinks being displaced by premium co'ee drinks that might be less protable. Because 70 percent of the premium coffee orders are expected to come from the drive- thru window, the potential for the premium coffee line to boost sales of other products may be very limited because more than two thirds of premium coffee drinkers will not be setting foot in the stores
