Here’s Why McDonald’s Is Relaunching McCafe
Recently McDonald’s (NYSE:MCD) announced that it is relaunching its McCafe experience with a new look, new café-quality espresso beverages, and an expanded retail offering. The new beverages including a Caramel Macchiato, Cappuccino, and Americano will be made with freshly ground espresso and U.S. sourced whole or non-fat milk. The company is also expanding its retail presence by introducing a line of ready to drink McCafe Frappe beverages in partnership with Coca-Cola. This relaunch is a key part of the company’s growth strategy as it looks to cash in on the coffee culture. While McDonald’s is known for its burgers and its recent efforts to move towards “healthier” food options have improved comparable sales and revenue growth, the company was lagging behind in the beverage segment. However, with the relaunch of McCafe and focus on high quality beverages, the company can attract more customers to its stores and increase the average spend per customer visit, which is a key value driver for the company.
According to our estimates, the average spend by a customer at a McDonald’s franchisee restaurant is around $ 3.60 and we do not expect a significant increase in this number over our forecast period:
However, through its efforts of enticing customers to add coffee to their orders of burgers and fries by relaunching McCafe, if this number increases to $4.00 by the end of our forecast period, there can be a nearly 10% upside to our price estimate. Coffee holds a strong potential for McDonald’s, especially with its value offerings. The average beverage spend per customer visit at Starbucks is around $6.00 (according to our estimates) and McDonald’s can gain customers who are looking for cheaper but high quality coffee.
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The “Ready To Drink” beverage market also holds strong potential for McDonald’s. According to Grand View Research, the ready to drink tea and coffee market is likely to be around $116 billion by 2024. Growth in this market is likely to be driven by consumer preferences for healthier beverages as they move away from sodas towards nutritional drinks such as flavored milk, tea, and coffee.
Restaurants are looking to cash into the trend of the coffee culture in the U.S., especially as consumers move away from carbonated soft drinks. Dunkin’ Brands is experimenting with a new brand identity by dropping Donuts from its brand name and calling the division just “Dunkin’” to signify a focus on beverages. Starbucks is the leader in the beverage segment, however, as customers look for alternatives which are cheaper and child friendly destinations for coffee, McDonald’s could fill this gap and the relaunch of McCafe can be a growth driver for the company in the long term.
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