Coffee War: Kraft & McDonald’s vs Starbucks

McDonald's McCafe coffee, now sold in grocery retailers by Kraft.  Courtesy of mcdonalds.ca

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.

Gevalia coffee - courtesy of commonsensewithmoney.com

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.

The evolution of Starbucks.  Coffee has not been their core focus since 2011.  Courtesy of  brandautopsy.com

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.

 

Advertisements

Newest Japanese Soft Drink: Hot Ginger Ale

Canada Dry Japan's Hot Gingerale - via huffpost.com
Canada Dry Japan’s Hot Gingerale – via huffpost.com

Japan has always had some interesting innovations with their beverages, ranging from soda flavors such as cucumber, green tea, and Cheetos.  At the root of it all, these quirky flavors (to Westerners) are an indication of how different a Japanese consumer’s taste preferences are.  The latest innovation in Japan’s carbonated soft drink category?  Hot Ginger Ale from Coca-Cola’s Canada Dry.  As this new product is gearing up for introduction in late October, many questions are left unanswered.  How is this can heated up?  Will soda manufacturers in Japan develop other heated soda beverages?  Will it make its way over to America?

While hot drinks are normally found in Japan, hot carbonated drinks are quite different.  Carbonation is typically lost when a soda is heated up, but Coca-Cola has managed to maintain the beverage’s carbonation despite it being heated up.  After four years of research & testing, their technology allows for the beverage to maintain carbonated when heated up without burning the hand.  The Gizmag has a feature piece on Hot Can, one of the companies that has developed self-heating can technology (article link here).  The can is multi-layered becomes heat-activated with the press of a button, some shaking, and about 20-30 seconds of wait time.  The can’s layers separate the beverage from the heat activation layer, and will add a predetermined amount of heat upon activation.  Therefore storage at room temperature is best – fridge-storage means the heating the beverage up won’t really make it that hot, while storing it in a already hot place will burn the hand.  The can has a heat indicator to safeguard against burning the hand.

Given that Japanese drinks have explored many new frontiers on taste, packaging, and now temperature, it likely won’t be the last area where they try launching new products in.  Apparently, Coca-Cola has already introduced self-heating coffees in Japan.  This goes to show that other heated drinks may not be entirely uncommon.  Should this Hot Ginger Ale product become successful, there is no limit to what other soft drinks will be introduced targeted for heated consumption.  Kirin Japan is already slated to launch their own heated soft drink a couple of weeks after Hot Ginger Ale hits the market – titled Kirin No Awa: Hot Hojun Apple & Hop.  Could Pepsi also be in the works to launch their own heated beverage soon as well?

So far, these heated soft drinks are primed for release in Japan and no other country.  However, the technology is more important than the soft drink itself.  While Westerners may find warm soft drinks hard to stomach, there may be other uses for this technology.  Heated coffee and tea sounds very plausible to penetrate the North American beverage landscape, and heated sport drinks and energy drinks may not be all that weird either.  And despite our perception of beverages being best served hot or cold, it’s innovations like these that really make you think about whether there is a different way to consume the beverage.

Starbucks Fixes Segment Blurring Problem

The three flavors of Starbucks Refreshers: Raspberry Pomegranate, Strawberry Lemonade, and Orange Melon. From blogs.starbucks.com.

Last July, Starbucks had a big media push when they launched their handcrafted Refreshers in their coffee locations with two flavors – Very Berry Hibiscus and Cool Lime.  These two flavors were also made available through their VIA line of at-home self-serve packages.  Most recently, they have followed up the handcrafted beverage offering launch by introducing three packaged sparkling beverages launch.  Joining the handcrafted and VIA Refreshers are: Raspberry Pomegranate, Strawberry Lemonade, and Orange Melon.  From their U.S. website, here is the product page for the Refreshers.  The launch of these packaged offerings created a problem for Starbucks and retailers alike: segment blurring.  Segment Blurring occurs when products within one segment encroaches on products from another segment.  Since the Refreshers are made with green coffee bean extract, should they belong in the coffee section?  Or does it belong in the energy drink section?

According to Kevin Reid – Director of Beverages – in an interview with Canadian Grocer these new beverages belong in its own section.  It appears that Starbucks anticipated the problem as a result of this beverage innovation.  By extracting the caffeinated energy content from coffee beans to make energy drinks, they understood that retailers would have difficulty fitting it into one section.  As such, the interview suggests that retailers create a specific area to group all the Starbucks products together in order to make it easier for the shopper to locate any Starbucks products.

A Starbucks branded supermarket endcap with the dark wood trim and faux-tile backsplash. From online.wsj.com.

Why should a retailer agree to a dedicated Starbucks section?  It turns out this makes sense in more ways than one.  Starbucks products are “destination” drivers in their own right given the coffee giant’s standalone retail locations.  Customers consciously choose to go to Starbucks coffee locations to purchase their Starbucks coffee.  Lending support to re-create this destination experience in grocery retailers is that customers expect to find all Starbucks products when they visit a Starbucks outlet.  Over the years, Starbucks has complimented their handcrafted beverages by stocking packaged coffee beans, beverage holders, and CDs in their branded stores.  Finally, Starbucks’ willingness to invest in décor for the grocer’s coffee aisle demonstrates their dedication to replicate the signature experience everywhere.  Starbucks understands that developing the Starbucks cafe experience requires a collaborative effort and has indicated they are willing to give the retailer Starbucks-type shelving.

Would the retailer be open to more Starbucks innovations in the future?  The Canadian Grocer interview reveals that retailers have been pleased with Starbucks sales.  And as long as Starbucks maintains its demonstrated collaborative efforts, retailers would certainly welcome more Starbucks products to help build grocery trips and baskets.

Starbucks Buys Teavana, Diversifies Beyond Coffee

Starbucks Logo Evolution

It appears that Starbucks’ recent purchase of Teavana has some analysts and coffee drinkers scratching their heads.  Considering that the coffee giant already owns a tea brand in Tazo, why would they want to purchase another tea brand?

The simple answer is that Starbucks is readying their continued evolution to a diversified beverage company.  Having changed their logo to remove the words of “Starbucks Coffee” shows their seriousness of extending their brand beyond just coffee, and beyond the Starbucks name. Their past acquisitions of Tazo (1999), Ethos Water (2005), and Evolution Fresh (2011) have been instrumental for expanding their beverage footprint in the consumer’s mind and physical purchase locations.  And while most of these offerings have been incorporated within the Starbucks coffee shops, other products have expanded their reach into grocery supermarkets and other consumer outlets.  Products like the bottled Frappucinos, Starbucks VIA Ready Brew, Verisimo system, Starbucks Refreshers, Tazo Tea, and Evolution Fresh juices and smoothies have all permeated other channels and have seen some form of success beyond the Starbucks coffee shops.

So what can we expect the Teavana purchase to do for Starbucks?  How is this product differentiated from Tazo Tea?  Will there be some form of cannibalization between the two tea offerings under the Starbucks portfolio?

Teavana Logo

The Teavana purchase will undoubtedly expand Starbucks’ reach outside their branded coffee shops.  Teavana owns and operates their own stores, which may soon incorporate select Starbucks products that fits into the Teavana theme and strategy.  For example, selling Starbucks coffee within Teavana shops may not be appropriate, but selling Evolution Fresh juices and smoothies and Ethos Water may be a possibility.  This cross-selling effort will certainly increase the reach of non-coffee beverages under their portfolio.  Also, considering that Starbucks has started to open standalone Evolution Fresh locations in the U.S., those locations may also incorporate some Teavana offerings as well.  Aside from the bricks and mortar stores that Teavana operates, Starbucks also acquires their online infrastructure where the loose leaf tea products are sold as well.  This also significantly buffs up Starbucks online presence and can provide an entirely new set of learnings and opportunities.  Starbucks has mainly existed as a bricks and mortar presence insofar to create that “third location” away between the home and office, but expanding their online presence gives them a chance to offer additional products to the consumer.  How about purchasing some VIA Ready Brew with that Teavana tea tin?

With regard to product differentiation, it’s commonly understood that the Tazo-branded products are bottled or tea bags.  The main opportunity does not exist in offering a different form of tea packaging, but the expanded consumption occasion.  Tea bags or bottled tea are typically consumed on-the-go or at the office, because the consumer is in a rush and does not have the time to sit and enjoy the beverage.  Teavana’s loose leaf tea allows Starbucks to reach the consumer in their relaxed state – at home or at the office – when they have more time to enjoy their beverage.  In that aspect, these two tea brands should be complimentary to the overall “tea consumer” rather than cannibalistic.  It would also make sense that Starbucks only minimally incorporates the Teavana products into their existing Starbucks establish (similar to Evolution Fresh) while maintaining the operations separately and at arm’s length.

At the end of it all, this acquisition bolsters Starbucks’ presence and further entrenches their beverage offerings into the consumers’ hands – be it at the office, on the streets, or at home.

This also signals a warning shot to the traditional beverage manufacturers (ie Coke, Pepsi, Dr Pepper Snapple Group) that the total beverage landscape is changing dramatically.  Consumers are increasingly turning away from the the sodas, to coffees, bottled water, and teas.   And Starbucks is leading the charge in this area.  If you don’t believe me, check out their video below.

Monster Java Original Phased Out?

Monster Java

Sources say that Monster Java Original is being phased out from their Canadian coffee line-up soon (when they sell off existing stock).  Can’t say that the flavor is going to be missed or not since I have not tried this flavor myself.  What I can say is that the coffee line-up is likely over-extended and too similar in packaging to other flavors.  With the exception of the Irish Cream, the other flavors’ packaging are all shades of brown, making it very hard to distinguish between them.  Even when the store employees restock these cans, they aren’t sure which flavor they are really restocking!  Phasing out the Java Original was probably the best thing Monster could do with their coffee portfolio.  However, this doesn’t mean they won’t be introducing another coffee flavor soon.  The Monster Nitrous were supposed to hit store shelves this summer and have yet to be seen in cooler or beverage aisles.  The Monster X-Presso Hammer has been rumored to be making a Canadian entrance.  At least those drinks will have different packaging so consumers can easily differentiate between the different flavors.

Another point of interest is the ready-to-drink cold coffee market has many players and Monster’s offerings are not competitive enough.  The leader cornering this category is Starbucks with their frappuccinos.  After that the category gets a little muddled with Rockstar, Monster, Master Cafe, and many smaller regional players.  Starbucks’s success on the frappuccinos are most likely a result of their specialty in coffee (what else do people know Starbucks to be famous for?), and Master Cafe is similar in their coffee specialty.  Rockstar and Monster are mainly energy drink brands, while their coffee portfolio’s price points, packaging, and formula are very similar to one another making it hard to tell them apart.  Monster clearly was a follower in this category, and has not put in enough resources to make this a good product or to heavily promote it to make it succeed.

And when you’re a follower with a less appealing product, you’re likely to meet the same fate as the Monster Java Original.  If the Monster X-Presso Hammer is going to be coming to Canada, let’s hope Monster does a better job with it than the Java Original.