The story of McCafe: when competing on price can fail

US McCafe is failing, according to an article in Bloomberg today that quotes McDonald’s executives conceding Starbucks has them on the ropes. It also cites market analysts who say the attempt to move into coffee is hurting their burger business.

This is despite a McDonalds latte costing only around $2.50, compared to around $3.50 for a Starbucks latte. But that price is hurting them – McCafe in the USA is seen as too cheap, too nasty.

From that Bloomberg article:

“Pushing coffee is “probably a good idea if they can get their customer to buy more of it,” said Peter Saleh, a New York-based analyst at Telsey Advisory Group. “I don’t think they’re going to be attracting the Starbucks customer to go there — I really don’t.””

Why is McCafe unpopular? For the same reason people won’t buy a suit at KMart – because coffee is a social signifier.

Coffee is not just a drink over there. It is redolent of sophistication. And Starbucks is Louis Vuitton. It would be shocking if a celebrity was papped without at least one mermaid-emblazoned frappuccino.

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Frappucino Styles

If you think that there’s no prestige in something produced by a global chain, look in your cellar. See any Moet? Look in your wardrobe. See any Nikes? Just because in Australia we think we value independent coffee does not mean we can sneer at “masstige“.

But this is not just an American story or a business story. It’s a personal story. Melbourne is a coffee town. When McDonalds launched the McCafe in 1993, they launched it in Melbourne.

I remember when they opened a McCafe near my school. I drank their $1 cappuccinos, and it was good. There may not be a lot of quality there, but there was a lot of value. I have a soft spot for McCafe that I will never have for Starbucks.

And McCafe Australia is thriving.

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Wait! What? Why is McCafe succeeding here but not America? I thought we were the sophisticated ones!

Pradoxically, the success of McCafe in Australia is because of our well-developed market.

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I bought this McCafe latte today in the interest of research. At $3.55, it was too hot and overpriced. The longer I sat the better the coffee tasted – the beans were fine. But sitting in McDonalds – with the TV blaring and the bland-on-bland decor –  palled fast.

Latte-sipper was an insult once, a signifier of being a toff or a snob or a Vaucluse doctor’s wife. Now baristas are taking complaints that their latte ‘had shit mouthfeel’ from blokes with prison tattoos.

This is not despite, but because we have a more developed coffee culture.

They call it product life cycle. Something new starts off as being for just the few. A mobile phone, for example was once a sign you were or aspired to be Gordon Gekko. But if that product is good it will spread to all comers. They call that maturity, or saturation. The reason Australia can support both Seven Seeds (“carefully sourced single origins” $4+) and 7-Eleven (“freshly ground beans: $1) is that the market for coffee is … everyone.

Melbourne has had espresso for fifty years, since the first espresso machine was installed in Lygon St, at the venerable University Cafe.

Maccas has strived to keep themselves just out of the reputational gutter. In 2011 they issued a public apology for their coffee and pledged to train up baristas.

That depth of history means there is a strong bottom end as well as a strong top end in Melbourne’s espresso market. (But no room for a brand that peddles a unique combination of expensive and ordinary. In 2008 Starbucks announced it would close three-quarters of its 80 stores and it is still waiting to make an official profit.)

Not like America, where Starbucks is expanding into tea (and also expanding people’s body sizes. Starbucks offers a drink that, at 30.9 ounces, is larger than the human stomach.)

What American McDonalds needs to do is this:

Stick at it.

Eventually US coffee culture will mature. Espresso drinks will become a staple not a luxury. Then their years of offering McCafe will pay off.

As for me, after visiting a McCafe today in the name of research, I pledge to stick with Melbourne’s independent scene for the rest of my life.

Published by

thomasthethinkengine

Thomas the Think Engine is the blog of a trained economist. It comes to you from Melbourne Australia.

2 thoughts on “The story of McCafe: when competing on price can fail”

  1. The younger generation become snobby when they are not under parents umbrella and would not be seen at mac as. Just like the girls from the private school won’t be admitting to buying any clothing at stores such as Target, Kmart BigW and alike. Little snobs that live by perception and peer group…Pfft. They cut the labels off if they do end up wearing such an item. Lol

    Liked by 1 person

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