Starbucks vs. McDonald’s: Coffee War Heating Up

Burger giant McDonald’s has the lucrative upscale coffee market dominated by Starbucks clearly in its sights. According to an AP report, McDonald’s Eyes Ballooning Coffee Market,

After the success of its upgraded drip coffee – which even managed to snag a thumbs-up from testers at Consumer Reports earlier this year – the fast food chain known for super-size meals is gearing up for a massive expansion into the world of lattes.

“We want to move from beverages as an accompaniment to being a beverage destination,” Don Thompson, president of McDonald’s USA, said in a meeting with analysts Tuesday. “Our speed, our convenience, the value that we can afford to customers without quality comprise [sic] will make us a formidable player.”

Restaurants will offer lattes, mochas, cappuccinos and espressos with a choice of different flavorings and milk. Industry watchers say the drinks cost about 50 cents less than at Starbucks.

Starbucks, meanwhile, is already feeling a bit woozy after its stock hit a 52 week low, as detailed by Chicago Tribune writer Mike Hughlett in New pressures grind at Starbucks). The picture isn’t entirely hopeless for Starbucks, though – neuromarketing research may hold the key to staving off the McDonald’s challenge.

Starbucks Neuro-Advantage #1. One of our most popular articles has been Sensory Marketing to Jolt Espresso Sales, which focuses on the efforts of Nespresso to overcome a consumer preference for coffee shop espresso. The firm’s own research showed that 60% of sensory experience of drinking espresso comes from the retail environment. While Nespresso is battling to improve the perceived quality of home-brewed espresso, the same issue could dog McDonald’s. Specifically, can McDonald’s create a sensory environment in existing restaurants that compares remotely to that of Starbucks, Seattle’s Best, Caribou, or any other quality coffee shop? Or will the lingering aromas of french fry oil and Quarter Pounders, along with the visuals of Happy Meal posters and indoor play areas, etc., be the deciding factor?

Starbucks has gone to great pains to create a pleasing sensory environment and a consistent experience. Indeed, the firm eschewed drive-through windows for many years. This focus on the shop environment could be of critical importance in staving off competition.

Starbucks Neuro-Advantage #2. The other factor working in favor of Starbucks is that consumers are willing to let their taste buds be influenced by their expectations of quality. In Wine and the Spillover Effect, we described how the behavior of restaurant patrons was influenced when they were served identical wine but were told that its origin was either California or North Dakota. Even though all received the same wine (Charles Shaw Cabernet Sauvignon, aka Two Buck Chuck), the perception that California wine was good while North Dakota wine might be suspect was quite evident. It’s reasonable to expect that some consumers might view McDonald’s espresso beverages as suspiciously as they might view North Dakota wine.

These advantages might not make that much difference, though, if many consumers start to view espresso drinks as commodities that are more or less interchangeable. This certainly isn’t out of the question, particularly in U.S. markets where consumers favor drinks like peppermint mocha lattes rather than straight espresso. By the time you mix the coffee with milk, chocolate, and flavored syrup, differences in brew quality are largely masked. To the extent that espresso beverages begin to resemble fountain drinks more than unique creations, consumers will opt for price and convenience. Nobody chooses Wendy’s over Burger King because their Coca Cola tastes better, and undiscriminating consumers won’t make a special trip to Starbucks if they can get a cappucino at the same time as they pick up an Egg McMuffin. And the commoditization of the market is of great concern even to Starbucks CEO Howard Shultz, who acknowledged the problem earlier this year.

Here are quick game plans for each coffee team:

Starbucks Game Plan

• Maintain or enhance coffee shop sensory experience.
• Use advertising to emphasize the sensory advantage.
• Use advertising to avoid commoditization: superior quality through worldwide bean sourcing, coffee roasting expertise, etc.

McDonald’s Game Plan

• Increase commoditization with taste tests like those at Consumer Reports.
• Emphasize convenience and price.
• Exploit full menu advantage.
• Improve in-store sensory experience.

It seems inevitable that McDonald’s will put a dent into the espresso drink market if they put forth a serious effort. If Starbucks exploits the advantages that it has, though, and uses its new national advertising program to set forth its differences, they should be able to retain their core customers along with many less committed ones. In addition, it’s likely that a major push by McDonalds could create millions of new customers for high-end coffee drinks, customers which Starbucks might be able to attract with their superior branding and sensory environment.