McDonalds aims to grind down coffee competition with entry into home brew market

TORONTO – When McDonalds first charged into the Canadian coffee market with a new focus on the morning staple four years ago, it faced a country notorious for its loyalty to double-doubles and Timbits — but an influx of new options are giving coffee aficionados plenty of other ways to get their caffeine fix.

by David Friend, The Canadian Press

TORONTO – When McDonalds first charged into the Canadian coffee market with a new focus on the morning staple four years ago, it faced a country notorious for its loyalty to double-doubles and Timbits — but an influx of new options are giving coffee aficionados plenty of other ways to get their caffeine fix.

It began with a sweetness for premium-priced specialty brews — in particular those fancy candy cane and pumpkin lattes that spruce up the holidays — and continued with a revamp of the way people drink coffee at home with single-serve coffee machines.

Gone are the days when java lovers had three basic options: the local java shop, bitter instant formulas or the kitchen coffee pot.

In today’s coffee world, even a fast food giant best known for its Big Macs and Happy Meals has the ability to corner a segment of the market, and has quite successfully, with major publicity campaigns that included giving away its brew for free.

McDonalds will tap into another segment this week. Once again, its embarking on a free small coffee campaign, every day until Friday. The promotion is timed to coincide with the launch of McDonalds’ take-home ground coffee on Nov. 5, a product that will be exclusively available in Canada.

Each bag is priced at $6.99 for 340 grams, and is a shot aimed at its biggest competitors, Tim Hortons (TSX:THI) and Starbucks.

“They’re very successful companies and they’ve got great connections with consumers,” said John Betts, president and chief executive of McDonald’s Canada.

“We had to do something dramatic.”

In some respects, it’s the evolving at-home coffee market that serves up the most potential for growth.

Coffee drinkers average two cups per day and two-thirds of them are brewing some of their drinks at home, according to a report by the NPD Group released in July.

More than a quarter of Canadian coffee drinkers (27 per cent) said they sip coffee at home more than they did last year, and the same percentage stated they now consume the beverage less when they’re out.

The entry of McDonalds into the marketplace has been about as subtle as a triple-shot espresso. Since the launch, advertising campaigns have been splashed across billboards and television screens, while deeply discounted coffees and specialty drinks lured in cost-conscious drinkers.

The relentless publicity has been a pain in the side for Tim Hortons, which is still the dominant coffee restaurateur in Canada.

“You’re up against a competitor that can afford to use coffee as a loss leader,” said Kenric Tyghe, an analyst at Raymond James who covers Tim Hortons.

“It’s very hard to (increase prices) in a market where one of your largest competitors continues to give coffee away with some frequency.”

Tim Hortons launched a wider array of lunch options and specialty drinks in an effort to keep coffee fans coming through their doors after the morning rush, but the response has been mixed at best. The company’s traffic hasn’t grown at any significant rate, and sales transactions declined slightly during the most recent quarter.

This year, Starbucks also launched several promotions designed to get customers back in their stores more than once a day, or to upgrade their coffee orders to include food items.

“The competitive landscape in Canada has become that much more intense,” said R.J. Hottovy of Morningstar, based in Chicago.

“You’re facing competition at both ends and Tim Hortons is kind of getting squeezed in the middle at this point.”

“It’s about a love connection between you and the customer,” said Betts, explaining why McDonalds has decided to launch the coffee bags in Canada.

“If the brand is there in their home, I think it solidifies the relationship.”

Tim Hortons, which already sells both cans and single-serve bags of coffee, launched a line of coffees exclusively for single-cup Tassimo coffee machines earlier this month. Some analysts have suggested that as a leader in the coffee market the company should have made that move a long time ago, as well as launched K-Cups for the Kurig, another popular single-cup machine.

At McDonalds, Betts said the company is keeping its offerings simple for now. The restaurant has decided to sell only bagged coffee, and stay away from the single-cup market.

In the meantime, the company will turn its focus to building more McDonalds locations next year, after spending the past several years on renovating its 1,400 existing locations. About 30 new stores will be added this year, while Betts declined to say how many will open in 2013.




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