McDonalds MccCafe Team A2

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Presentation of Team A2 for the Competitive Strategy course at IESE

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  • DR
  • DR: - the food market in 1999-2001 was very volatile McD looked for alternatives McD had already a good coffee extension in Australia 2011 announcement: in Canada in all stores Foodservice definition: TBD
  • DR In 2011: this market was USD 71bn retail value of coffee Even when the economy was stagnating / we are in a recession: coffee market still grew
  • DR: overall low threats: example:drink is addictive, part of culture, many suppliers, buyers are fragmented and new chain entrants would need large capex But high competitive rivarly as there are many players: few big ones, many small ones
  • DR McD is large If they want to compete: 50% of stores, 1/3 of capex, 20% more cash than largest player
  • DR Key capabilities: high quality training programs, know local markets + can run effective local marketing campaign, proven experience in developing products that fit with customer taste + we can standardize the roll-out / production world-wide Thats why they can roll out with far less effort than anyone else
  • VR How did they enter the market: Cheaper than DD and SB (general trend) We can infer also lower COGS position than SB -> thus cost player: able to pull of lower prices with good margins
  • VR New product line: menu range became broaders Furthermore, McCafe SiS are designed more premium than standard McDonalds + product range is more premium
  • VR This translate into: more differentiated + more efficient (opex turnover increased) Two examples: second cup + Wendy’s McDonalds moves to the right because the revenues they generate from McCafe grow faster than the incremental opex
  • DR - In
  • DR
  • DR In 2008: about 1,300 McCafe’s worldwide, this means 40% in Germany
  • DR: decreasing variance of sales growth because: Coffee + complements sales are more spread out over the day Lower value items can target a larger segment Customers buy more complements
  • VR
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  • McDonalds MccCafe Team A2

    1. 1. McDonalds: beyond burgersCompetitive Strategy 14 March 2012Professor Marco Tortoriello Team A21
    2. 2. 8 1 As the consumer food industry stagnated, McDonalds had to look for alternative avenues of growth When the world consumer food industry was volatile… … McDonalds had an existing pilot Consumer foodservice value growth in project to provide a possible source of % growth World  McCafe was first introduced in Melbourne, North America 8 Australia in 1993 Western Europe  Early outlets with McCafe reported 15% 4 4 more revenues than the normal McDonalds 3 3 outlets 1  By 2001, McDonalds expanded to 300 stores worldwide 5 -1  McDonalds introduced McCafe as a product line across in stores in the US -3  By 2008, McDonalds increased McCafe stores worldwide to 1,300  Further expansions planned worldwide. In -9 2011 McDonalds Canada announced 1999 2000 2001 intentions of opening a McCafe in every outlet Source: Euromonitor, McDonalds Annual Reports 2
    3. 3. , 1 The coffee market is an attractive market with growth potential and good returns World-wide coffee market increased with Gross margin for coffee players is 51% on 2% p.a. average Million bags of coffee Gross margin in percent 58 Starbucks Caribou Coffee 56 132 54 132 130 130 52 Ø 51 128 127 50 126 +2% 48 124 123 122 5 46 120 119 119 44 118 42 116 114 113 4 112 111 2 110 109 0 0 2001 02 2003 04 2005 06 2007 08 2009 2002 2004 2006 2008 2010 2012 Source: www.ico.org 3
    4. 4. 46 1 The specialty coffee industry is characterized by low threats despite competitive rivalry  Threat of Substitutes - Low Drink with addictive character:  2.25 billion cups/day consumed Substitute are tea, juices,  energy drinks and milkshakes Culturally part of daily routine Suppliers Bargaining Power Bargaining Power of Buyers - Low - Low  25 million small producers of Competition - High  Fragmented buyers coffee beans  Monopolistic  Taste preferences and brand  Many providers of roasting  Price, quality and loyalty are important drivers facilities  Multiple customer profiles scale matters  Premium demanded for including convenience, price quality and organic products sensitive and connoisseur Threat of New Entrants - Medium Traditional Single store cafe’s have very Complements  limited barriers to entry  Merchandise – coffee Specialty coffee chains need cups, mugs, T- Shirts etc. scale and thus high capex  Cookies, donuts and short for prime locations eats Source: World Development Vol. 30, No. 7, pp. 1099–1122, 2002 4
    5. 5. , 2 McDonald’s can surpass Starbucks as the largest coffee retailer by bringing McCafe to ~50% of its stores McDonalds has two times the stores of Starbucks Thousands of stores world-wide Competitive advantage 35 McDonalds’ size allows it to cover Starbucks’ retail 30 McDonalds network at a lower cost:  Installing McCafe’s in 50% 25 of the McD stores will make the retail network 20 larger than Starbucks Starbucks  McCafe capex is one third 15 of Starbucks capex (USD 315k) 10 Dunkin’  McDonalds has 20% more Corp1 cash (USD 2.5bn) than 5 Starbucks (USD 2.0bn) on balance sheet to expand 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 1 Dunkin’ Corp is the parent company of Dunkin’ Donuts and Baskin Robbins (icecream) Source: McDonald’s balance sheet 9/30/2011; Starbucks balance sheet 01/01/2012; McDonalds annual report 2009 5
    6. 6. 2 McDonalds’ strong capabilities allowed it to roll out a coffee retail chain with less effort than competitors Infrastructure Broad retail network - 32k stores, translates into capabilities to scale up fast at lower costs (McCafe costs 1/3 of the USD 315K spent for a Starbucks store) HR High quality training programs to quickly re-train employees for new roles Technical Proven experience in developing products that fit with customer taste, Development ability to standardize products and operations on world-wide scale Operations and Logistics Marketing & Sales Services  Guaranteed access to quality  Established regional  Ability to draw on its supplies due to exclusive and marketing strategy and experience in fast long-term contracts with suppliers media relations would food to have faster such as Kraft result in a effective and service times for  quick campaign for new McCafe products Existing supply chain network products can be easily leveraged to better  Can reach a wider integrate and roll out new product  Strong brand recognition customer lines faster drives traffic and quick base through  adoption and increase of drive-through stores Franchised operations make it sales of new product and longer opening easier to increase stores with lines hours lower capital expenditureSource: McDonalds 2010 Annual Report, Business Week 6
    7. 7. 1% 3 McCafe has lower prices than Dunkin’ Donuts and Starbucks, and McDonalds overall has lower COGS Price of a medium latte coffee in Orange Cost of Goods Sold as percentage of sales 1 County Percent of sales in 2011 USD in 2011 McCafe 2.89 23% Dunkin’ 3.00 -0.36 20% -28 Donuts Starbucks 3.25 51% To increase demand for its McCafe products, McDonalds and DD have lower COGS than Starbucks McDonalds priced its products below competitors  Less costly raw materials (less specialized coffee)  Smaller assortment of exotic coffees 1 COGS based on COGS / sales from company financials; for McCafe: (paper + food) / sales Source: Analyst Reports; Industry Reports; Company; Company Financials 7
    8. 8. 3 Introducing McCafe increased McDonalds menu range and enabled it to access a broader customer base Premium – Up Scale The positioning rationale  By introducing McCafe, The Coffee Bean McDonalds is able to broaden the & Tea Leaf base of their target customer whilst sticking to their price Starbucks segment  McDonalds broadened its menu Dunkin’ YUM! BrandsLimited Broad range to keep the customer Donuts McDonalds longer in the store and spread theMenu MenuRange McDonalds + McCafe Range visits more evenly over the day Burger King  Main competitors - Dunkin Donuts and Starbucks – differ Wendy’s substantially in price  YUM! has the broadest menu range, but divided over multiple brands (Pizza Hut, KFC, Taco Bell). Thus, McDonalds has the No Frills – Low End advantage of a unique brand across all its productsSource: Company websites 8
    9. 9. 3 McDonalds is close to the leading edge of the productivity frontier; Dunkin is more differentiated Fast-foodDifferentiationGross profit / sales1 Coffee to go Drivers of Differentiation Coffee retail100  Second Cup increased gross margin by The Second Cup 90 increasing same-store sales with more than 30 different premium coffees 80  Wendy’s has lowest opex mostly because it Dunkin’ Corp has consolidated overhead in one center 70 YUM! Brands  Dunkin’ Corp is more differentiated 60 because it has: Caribou Coffee Company  A broad geographic distribution of its 50 ~10k points of sale Peet’s Cofee and Tea  A mix of value and premium items Starbucks McDonalds  A high willingness-to-pay for coffee to go 40 Kraft Foods  High margins and low COGS on donuts Burger King McDonalds 2001 30 Sara Lee  YUM! drives up WTP by having:  Multiple brands (KFC, Taco Bell, Pizza 20 Wendy’s Hut)  Large scale (35k retail stores) 10  McDonalds benefits from:  Large-scale purchasing capabilities 0  Broad geographic coverage 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18  Introduction of new product lines1 All data 2011 averages, except for Burger Opex turnoverKing 2010 gross profit / sales (1/(opex/sales) 1Source: Google Finance; Thomson One; Company Financials; Analyst Reports 9
    10. 10. 4 McDonalds adapted the McCafe concept to incorporate a lounge store-in-store concept… GERMAN EXAMPLE Factors United States Germany Annual to go coffee  100 liters/person  150 liters/person Market consumption factors Market phase  Young market  Developed #1 Competitor  Starbucks  Tchibo Product positioning  McCafe drinks as product  Store-in-Store concept extension Adap- Distribution  Drive-through  Lounge area in McD store tation Example product  Extra Large Soy Latté  Groß Milchkaffe Target customers  Transit  Young, social PhotosSource: Euromarket International 2010; Euromarket International 2011 10
    11. 11. 4 …and its scale and established local operations gave McCafe a competitive advantage GERMAN EXAMPLE McDonalds’ resources Advantages for McCafe  Large retail presence – 1,415 stores  Easy to roll out McCafe stores – 764 Scale  Significant market share – 27% stores currently  Tap existing customers with McCafe  Long market presence – 41 years  Knowledge of taste preferences Learning  Tested concept in a German-speaking  Austria served as a test market country Production/  Established supply chain  Easier to push new product Sourcing extensions to (franchised) stores  Remodeling existing stores to  Capital expenditure is a third of Design incorporate store-in-store concept Starbucks (USD 315k)  Strong supplier relationships  Strong supplier relationships Cost  Franchised set up leads to lower  81% of stores franchised capex costs for McDonalds group  Existing stores remodeled  Increased sales per square foot Utilization  Training of existing employee base  Pooling leads to higher utilization  Fast-food production efficiencies  Waiting time 32% below Starbucks Efficiencies  Standardized practices  Easy to introduce new productsSource: “unternehmen” www.mccafe.de 01 March 2012 “McDonalds.”Euromarket International. August 2011 11
    12. 12. 600 5 Since its introduction in 2006, McCafe has grown rapidly in number of stores and revenues GERMAN EXAMPLE McCafe store-in-stores grew 37% p.a. McCafe revenues grew 13% p.a. Number of German McCafe store-in-stores 1 Revenues in EUR million 600 +13% 578 800 764 545 740 550 +37% 700 500 462 600 450 540 402 400 500 5 350 400 300 293 250 300 200 214 200 150 100 100 50 0 0 2006 2007 2008 2009 2010 2007 2008 2009 2010 1 2007 and 2009 estimated based for 2006-2010 CAGR 1 Only yearly data available on Caribou Coffee: yearly sales uniformly distributed over quarters Source: Euromonitor 2011 12
    13. 13. , 5 The launch of McCafe boosted stock performance above competitors and decreased sales variance McDonalds’ stock price increased with 30% p.a. after …while decreasing the variance of McCafe introduction vs 20% p.a. for Starbucks and sales growth outperformed YUM! Brands at growth of 16% p.a. QoQ sales growth 2001-2006 USD standard deviation in percent 110 Starbucks McDonalds 100 YUM! Brands McDonalds 5 90 80 70 60 Starbucks 7 50 40 +30% 16% 30 20% 20 YUM! Brands 21 10 0 1998 2000 2002 2004 2006 2008 2010 2012 1 Only yearly data available for Caribou Coffee: yearly sales uniformly distributed over quarters Source: Thomson One; Company Financials 13
    14. 14. 6 The dominant strategy is to maintain current price status quo to increase industry profitability Starbucks maintains Starbucks reacts  The current status quo has a  Starbucks could probably react by reducing price differential between prices equal to McDonalds Starbucks and McCafe of 36 USD  This would take the price sensitive customer cents or 11% McDonalds back to Starbucks as it enjoys the perception maintains  Gross margin of McDonalds and of providing premium coffee Starbucks are similar at around  We believe that this scenario is unlikely as 45% McDonalds has the gross margin leverage and complementary revenue streams to react   If Starbucks were to reduce prices, McDonalds reacts McDonalds has already positioned itself as the lower-cost option and McDonalds will react to ensure that the will not react without a Starbucks price differential is maintained reaction  This outcome will not impact customer  Unlikely that McDonalds will patterns largely but may have some impact reduce prices if Starbucks maintains on overall coffee consumers as it will not bring them any further  We believe this will lead to lower industry benefit profits as the rest will have to follow suitSource: Team A2 analysis 14
    15. 15. 6 Establish a core McCafe product and develop at- home coffee solutions to mitigate competitor’s actions Competitor’s actions Impact on McDonalds Mitigation measures  The Starbucks and Dunkin  The broad menu range Donuts challenge in main distinction of nsure that core stream fast foods. McDonalds will be competency in food isMain diluted if the competition sustained with a strongstream Bacon and Gouda moves towards a similar focus on healthierand Artisan S/W product extension optionsproduct Starbucks strategyextension  Starbucks and Dunkin evelop campaigns to  Emulation by Burger King, Donuts already have a establish a core McCafe Wendy’s, Pizza Hut etc. presence in hot breakfast coffee product which is meals. as associable as the Big Mac (Frappucino for  The Dunkin Donuts and  At-home coffee Starbucks) Starbucks push towards at- solutions (beans, K- home coffee (beans, Cups) is aimed at getting powder, K-Cups) the customer accustomed evelop and market at-At-home to a particular blend and home coffee solutionsproducts thereby increasing the such as McCafe K-Cups resistance to change. and coffee blends to develop customer tastes and build brand loyaltySource: Team A2 analysis 15
    16. 16. 7 McDonalds should increase its profits by expanding the McCafe concept  A Roll-out more McCafe store-in-store concepts worldwide  Store-in-store increased sales with 15% in Australia  Need to increase time spent in store per customer and sales per customer  Decrease variance in sales overall and throughout the day  B Introduce McCafe at home products  Develop a McCafe taste which increases store-visits and same-store-sales  Increase revenue stream by adding a product line  Increase the brand recognition of McDonalds as a coffee producer  C Develop healthy complementary products for McCafe  Drive up sales per customer  Attract a different segment to McCafe because of its more healthier positioningSource: Team A2 analysis 16
    17. 17. Questions? 17

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