How Can McCafe’s Aggressive Expansion Impact McDonald’s Stock Price?

McDonald’s (NYSE:MCD) has had a couple of rough years, with a stagnant revenue stream, negative comparable store sales, and declining customer traffic, in almost all the geographical regions. Stiff competition among the quick service restaurants in the U.S. has negatively impacted its comparable store sales. In the fiscal 2014, the company’s U.S. comparable sales declined 2.1% and comparable customer traffic declined 4.1%. ^[1]

Over the last few years, the competing companies in the U.S. restaurant industry have been focusing aggressively on increasing their breakfast morning share. Companies such as McDonald’s (NYSE:MCD), Restaurant Brands International (Burger King and Tim Hortons), Starbucks (NASDAQ: SBUX), and Dunkin’ Brands (NASDAQ: DNKN) have been revamping their menu to attract the early morning office going demographic. However, one thing that has really impacted the breakfast market is the coffee segment of these chains.  McDonald’s has been trying to expand its coffee portfolio, with its McCafe brand, as the company believes that coffee is one of the fastest growing beverage categories.

We have a $96 price estimate for McDonald’s, which is in line with the current market price.

See Our Complete Analysis For McDonald’s Corporation

While the Trefis estimate for the MCD stock is in-line with the current market price, we estimate the net revenues for fiscal 2015 to be roughly $28 billion, which is 10% above the general consensus, as well as expecting higher than expected expenses. ^[2]  However, there is one scenario that can significantly impact the company’s stock price.

• McCafe’s Expansion: Focus On Asian Markets

Over the last few years, McDonald’s has been giving a lot of attention to the expansion of its coffee portfolio, by increasing the presence of McCafe in McDonald’s stores. With more than 11,000 stores in the U.S. having McCafe coffee stations, the U.S. customers are already well aware of the brand. However, its popularity is not as widespread as that of Starbucks’ coffee or Dunkin’ Donuts’ coffee. The reason behind this disparity is the perception of McDonald’s among U.S. customers. McDonald’s has been considered as a typical fast food chain, which serves on-the-go fast food items and hamburgers, whereas chains, such as Starbucks, are premium coffee restaurants, with their main focus on coffee service.

However, McDonald’s has been trying to change this common perception by expanding the number of McCafe coffee stations, as well as by introducing McCafe to retail stores. In August 2014, McDonald’s and Kraft Foods Group (NASDAQ:KRFT) announced a deal to expand the manufacture, marketing, and distribution of McDonald’s McCafe brand in the U.S., with effect from early 2015. ^[3] Shortly after this deal, Kraft Foods entered into a  multi-year licensing, manufacturing, and distribution deal with the Vermont based K-Cups maker, Keurig Green Mountain (NASDAQ:GMCR). After its plans for introducing McCafe in the U.S., the company decided to expand the reach of its coffee product in Canada, which is its fifth largest market in terms of number of restaurants. We have discussed more about this deal in our prior article. (See: McDonald’s McCafe to face stiff competition in Canada)

The company hasn’t provided  recent data regarding the number of stores installed with McCafe coffee stations. However, we can say that there is a lot of scope of expansion outside North America, especially in the Asian markets. Japan and China are two big markets that the company might aim at initially. Japan is a lucrative market for coffee companies, as it is the third highest coffee consuming nation in the world, after the Unites States and Germany, as of 2013. ^[4]  It is also the fourth largest importer of coffee in the world, with an import amount of 400,000 tons annually. Coffee trends have changed in the country, as coffee is no longer just a social drink to be consumed in coffee shops, but a regular thirst-quenching beverage.

According to Trefis estimates, in 2014, the average spend per visit in a McDonald’s restaurant was $3.84 in a company-operated restaurant and $3.34 in a franchised restaurant. Now if we take conservative estimates and divide this average check into separate contributions from each item, we estimate that beverages contribute roughly $0.80 to $1.00 to these figures. Now, customers mostly opt for soft drinks and other smoothies, whose price ranges from $1 to $1.50 per item.

Now, let’s take a scenario where the company aggressively expands its coffee portfolio, and opens McCafe stations in almost all the restaurants worldwide by the end of 2017. Taking an estimate that 80% of customer traffic opts for coffee as a beverage option; the average check might jump close to $4.04 in company operated restaurants and to $3.54 in franchised restaurants by the end of 2017. Moreover, coffee is a comparatively expensive item and might improve the margins to some extent. If the company operated EBITDA margins improve to 20% and franchised restaurant EBITDA margins improve 90 basis points to 91% by the end of 2017 due to this scenario, in addition to improvement in average check, we might see an upside of 10% to the Trefis price estimate.

This probable scenario might not only improve the company’s financial situation, but also might help the company in regaining its customer traffic and market share in the industry as a whole.

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap

More Trefis Research

1. McDonald’s fiscal 2014, 10-K report [↩]
2. Reuters: McDonald’s [↩]
3. McDonald’s USA and Kraft Foods Group Bring McCafé Coffee to Retail Outlets Nationwide in 2015 [↩]
4. Inventories of Green coffee at the end of the year, International Coffee Organization [↩]