McDonald’s vs. Starbucks – the Coffee Wars

McDonald’s recently announced that it will be serving specialty coffees like vanilla lattes and caramel cappuccinos at outlets across the U.S., at a fraction of the cost of the same types of drinks at Starbucks.

Wow! As this plays out it will be a great economics case study. Can you compete on price? What value is there in a brand? Will consumers continue to pay more for something that they can get for less someplace else?

Well, it depends. And what it depends on is what it always depends on. What is McDonald’s target market and what is their goal/objective?

Here’s what Don Thompson, president of McDonald’s USA says: “This is an exciting day for McDonald’s and our customers. Our customers can now enjoy a premium quality espresso-based coffee with their favorite McDonald’s breakfast or at any time when they want to treat themselves to a great-tasting beverage at a tremendous value.”

Our customers. Thompson seems to suggest that the target market is existing customers and the goal is to sell more of a new product to those existing customers, rather than attempt to “steal” customers from competitor Starbucks.

Makes sense. It’s logical to think that McDonald’s customers who are likely to be more “cost-conscious” than Starbucks’ customers might be convinced to purchase lattes and other specialty coffees if the “price is right.”

It is not quite as logical to think that *loyal* (loyal, is the key word here) Starbucks customers will be convinced to give up all of the “psychological value” of what they’re purchasing when they hand over a $5 bill for a cup of coffee.

Starbucks is certainly feeling a pinch as worried consumers “cut back” on some indulgences -I’m one of them. But, when I do decide to “treat myself” to a latte, it’s more likely to be at Starbucks, than McDonald’s.

Why? I don’t know. Probably because like most consumers my actions are more psychological than logical. 

Segmentation. McDonald’s knows who their customers are. I’m guessing they probably also know who they aren’t. It will be interesting to see how this all plays out.

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