December 2, 2013 Leave a comment
Ever since the 2011 break-up with Starbucks, Kraft had been looking for a beverage partner to package and distribute premium coffee. Enter McDonald’s McCafe. The quick service restaurant has been looking for growth opportunities outside of burgers & fries, recently turning their attention to premium coffee. They have even started selling bagged ground coffee within the restaurant. However, most coffee drinkers still enjoy their first cup of coffee at home, and gaining distribution to the traditional grocery channel is critical to McDonald’s expansion efforts. While this partnership benefits to McDonald’s, how will it benefit Kraft? How will it affect their current coffee brands: Gevalia, Maxwell, and Tassimo? And what about Starbucks – how will this impact their grocery coffee business?
Kraft Benefits Greatly With a Strong, Already-Built Beverage Brand
It is much easier to leverage a well-known brand rather than build your own. This is what Kraft is doing. Even without specifically knowing about McCafe premium coffee, McDonald’s itself is a well-known household name. McDonald’s has also worked hard to change its image as a destination with unhealthy food options. This has culminated into their successful, award-winning “Our Food. Your Questions” campaign (read about it here). As such, consumers are more open and knowledgeable about McDonald’s healthier options like snack wraps or fruit smoothies. Kraft is able to leverage on McDonald’s name to help them gain some shelf space in grocery retailers.
Before ending their partnership, Kraft had helped transform Starbucks’ grocery business from an initial $50 million to nearly $500 million in annual sales. With Starbucks wresting full control of their coffee business from Kraft, they were forced to refocus on Maxwell House, Gevalia, and Tassimo. Maxwell House was a value offering, and competed against store-brand coffee. Growing this brand would only serve to devalue the category. Tassimo single-serve at-home units were expensive (and still is), not to mention ahead of market trends and did not have a strong market presence. Growing this would take a considerable amount of investment and still not fill the void left by Starbucks’ premium coffee. Gevalia was Kraft’s best bet, and still they had to build this premium coffee brand. You can see from the clip below that they fully intend on competing against Starbucks head-to-head. And if you haven’t heard about Gevalia, then you’re not alone. It still has work to do before achieving high enough awareness levels to penetrate the shopper’s consideration set when it comes to buying ground coffee in the grocery aisle.
With McDonald’s McCafe coffee part of their portfolio, Kraft now brings another strong and well-known coffee brand to retailers. However, it only partially fills the void created by Starbucks. Tony Vernon – Kraft’s Chief Executive – says McCafe is considered a step above Maxwell House, but still below their premium coffee Gevalia (story link here). That said, Kraft expects McDonald’s McCafe to fill a mid-tier coffee segment and regain lost shelf space, but they still expect Gevalia to be their premium brand to compete against Starbucks.
How Will This Affect Starbucks?
At this point, this partnership is something to monitor but not react. Within the coffee segment, Starbucks consumers are highly loyal and may not interact much with McCafe coffee. Considering where McDonald’s McCafe coffee are priced, Starbucks’ similar offerings figures to be priced at a 20% premium – at least. Consumers also buy Starbucks because it is considered an “affordable luxury” item while McCafe is considered a broader appeal item. Unless coffee drinkers suddenly change their taste preferences, McCafe will not steal away many Starbucks coffee drinkers. Within Kraft’s portfolio, Gevalia still remains Starbucks’ top threat yet the brand itself has some work to do. Gevalia still has to gain awareness and cultivate a rich premium coffee history.
And while coffee still remains the core component of Starbucks’ business, they have been moving to expand their own portfolio. They have smoothies. They have tea. They even have yogurt and baked goods. They plan on having their own soda line at some point in the future. What was a company that only attracted coffee drinkers has morphed into one that attracts any thirsty (or hungry) consumer.
So as Kraft finds a partner to fill a gap in their coffee business, Starbucks has branched out to other beverage segments. Coffee is a large part of the beverage market and one where a few manufacturers compete in. It’s a good thing that despite the size of this segment, all three companies – Kraft, McDonald’s, and Starbucks – are diversified and have other focal points to turn their attention to.