McDonald's Going All In with Coffee

Posted on: 2017-03-30 10:16 AM

For the last year or two, we have been extremely critical of McDonald's turnaround. We feel as though the company has employed a series of Band-Aids that failed to address some of the major secular issues that the company is having and we really haven't been impressed with the decision-making from executives.
 
However, the recent initiative being tossed around to open up McCafé coffee shops is, we think, one of the better ideas the company has ever had.
 
Today, we wanted to provide a short write-up as to why this idea may work for the company, what the company's niche could be and what it means to the investment thesis.
 
First, it has been reported that McDonald's is going to be opening up a chain of coffee shops to take on coffee companies like Starbucks.  McDonald's has been notoriously lacking in the growth department over the last couple of years and executives have performed a number of financial engineering moves to try and stunt this decline, with limited success. This is really the first initiative that has come out of the company that we think has a chance to once again generate some organic growth, Benzinga reported.
 
McDonald's believes an area where it can grow revenues is in its McCafe segment, and it's rolling out new products to test this theory.
 
The fast food giant is testing several new McCafe drinks in California starting this week, as the chain continues its effort to cut into Starbucks' business.
 
The drinks are familiar varieties that you would find at a coffee chain: iced Caramel Macchiatos, French Vanilla Cappuccinos, and Americanos. The new items will be tested at over 170 locations, and restaurants will be adding equipment to enhance these types of beverages.
 
McDonald's sees coffee as a $30 billion opportunity that continues to grow year over year.
 
"Coffee remains a significant opportunity for us," Chris Kempczinski, president of McDonald's USA, told analysts in February. "There's so much more we can do with this."
 
At a time when restaurant traffic continues to decline, coffee chains averaged a 2.2 percent same-store gain in the fourth quarter. Starbucks sees a third fewer customers than McDonald's per day - yet the coffee chain's annual revenues are higher than McDonald's.