Premium Coffee Wars

Starbucks gives it away as McDonald's debuts new brew

Published in CSP Daily News

SEATTLE -- Does consumer awareness raise all boats? About a week after McDonald's Corp. rolled out its Premium Roast Coffee chainwide, Starbucks treated America to the coffee bar's first National Coffee Break, inviting customers in for a complimentary cup of java yesterday from 10 a.m. to 12 p.m.

While the timing could be a coincidence, it looks like it might be yet another skirmish in the ongoing premium coffee war. Coffee offerings in the coffeehouse, quick-serve restaurant (QSR), convenience store and even grocery channels have steadily migrated upscale [image-nocss] ever since Starbucks' debut and establishment as a retail and cultural phenomenon.

Before the giveaway, Starbucks estimated that its baristas would serve more than 500,000 free cups of tall (12-oz.) coffee in its more than 7,500 U.S. stores during the two-hour event. Starbucks employees also took coffee to some who could not make it, using mobile-sampling Venti Vans and insulated coffee backpacks.

The Seattle-based company also launched its annual Brewing Sale, which showcases coffee makers, espresso machines and coffee making accessories. Customers who purchase brewing equipment will receive an invitation for a complimentary 1/2-lb. of coffee, Starbucks said.

And it launched the website. Visitors to the site can follow the journey of the Starbucks coffee bean from farmer to customer. Audio and video clips from farmers, roasters, tasters and baristas showcase the hands that take care of each cup of coffee, the company said.

In early March, McDonald's, which said it sells nearly one out of every 10 cups of coffee purchased outside the home in the United States, rolled out its Premium Roast Coffee, available in more than 13,700 restaurants nationwide.

McDonald's Premium Roast Coffee is a freshly brewed, exclusive blend that is whole-bean roasted. F. Gavi aa & Sons Inc., a McDonald's coffee supplier, has been in business for more than 135 years.

There are several vital processes that take place for a coffee bean to produce the type of coffee a customer will enjoy at McDonald's, said Leonor Gavi aa Valls, vice president of the family-owned coffee roaster. For McDonald's, Gavi aa supplies an exclusive gourmet coffee blend made only with 100% Arabica beans. We understand and are committed to ensuring that customers have the very best coffee experience.

Each year, approximately 108 million Americans spend more than $19 billion on coffee, the Oak Brook, Ill.-based fast feeder said. As a major contributor to the foodservice industry's role in coffee sales, McDonald's serves more than 500 million cups of coffee each year within its U.S. restaurants, it added.

The National Coffee Association's (NCA) annual trends report shows that overall coffee consumption in the United States is on the rise, McDonald's said. The survey found that the amount of daily coffee drinkers increased from 49% in 2004 to 53% in 2005, with 87% reporting drinking coffee for breakfast.

Data from the NCA's survey also reveals that, above anything else, U.S. coffee drinkers identify taste as their No. 1 criteria, said McDonald's. The use of sugars and artificial sweeteners is down from 37% in 2004 to 34% in 2005 and the number of coffee drinkers who prefer their coffee black grew from 32% of total coffee drinkers in 2004 to 39%, respectively.

Americans are taking notice of coffee like never beforeturning new attitudes into daily behaviors, said Robert Nelson, president and CEO of the NCA. Already enjoying a wider variety of coffee options to fill new roles throughout the day, consumers now seem to be making a good thing daily.

More than 70% of Americans take at least one coffee break per day, McDonald's said, citing a StrategyOne telephone survey that the QSR commissioned. The findings also indicate that half of America's coffee drinkers (50%) brew coffee at home six times a week or more. Of those coffee drinkers, nearly half (46%) believe that coffee purchased at a local coffee shop often tastes better than coffee brewed at home.

Meanwhile, a new report from Mintel shows that premium coffee is driving success for national coffeehouses, doughnut shops and QSRs, while causing a downturn in food, drug and mass-merchandise (FDM) sales of coffee.

American consumers are turning to premium coffee taste, while simultaneously turning off their home coffeepots. Coffeehouses have more than doubled their U.S. sales in the last five years to an estimated $8.3 billion. In another five years, the market is expected to reach $18.8 billion. As a result of this growth, store-bought coffee manufacturers are feeling the negative effects in their sales.

According to the NCA, the popularity of traditional coffee, described as consumer-brewed coffee, has been declining since 2004. With one coffeehouse for nearly every 14,000 Americans, coffeehouses are moving coffee sales away from FDM retailers.

Mintel consumer research shows that 35% of those who visited a coffeehouse in the last week purchased coffee beans there; more than 67% of coffeehouse visitors listed quality at the top of the needs list.

Consumers are moving away from traditional coffee in favor of premium specialty selections, said Billy Hulkower, analyst for Mintel, Chicago. People have developed a taste for inventive, upscale, premium-priced coffee. Starbucks and other coffeehouses have effectively attracted people to their shops, and further flavor and promotional innovations have the potential to continue negatively impacting traditional coffee sales.

Coffeehouses face potential competition from fast-food restaurants, Mintel said. McDonald's joins Dunkin' Donuts, Burger King and other food chains in capitalizing on the premium coffee success generated by Starbucks and its coffeehouse counterparts. Currently, these establishments present the biggest potential challenge to the coffeehouse market, the firm said.

People want to have convenient access to premium options, said Hulkower. Chain restaurants that serve breakfast are trying to present a better one-stop option for their consumers. In addition to building coffee sales, newer options are accentuating their current food offerings.

Pre-packaged, ready-to-drink (RTD) coffee beverages also offer future growth competition against the coffeehouse market, said Mintel. Manufacturers are turning their sights to increased product innovation to try to win consumers from the coffeehouse sector. Home brewing is also aiming for coffeehouse sales with the newly launched pod brewer, providing one-cup brewing for consumers, one of the most recent innovations to make its mark in the small kitchen appliance market.