McDonald's and the McCafe Coffee Initiative

Looking at McDonald’s Canada from a resource-based view (please refer to the appendix), I believe that McCafé will succeed in Canada. McDonald’s has a plethora of valuable resources in its disposal. Among them, arguably the most important is brand equity. The “Golden Arches” are instantly recognizable to just about everyone in the planet, and that level of brand awareness will play a big part in McCafé’s entry to Canada. Furthermore, McDonald’s, being a major player in the fast-food industry in Canada, has a considerable amount of cash and infrastructure.

This ensures that McDonald’s will have the means to market and distribute McCafé’s products respectively. Another valuable resource that McDonald’s has access to is its large network of competent franchisees. A large percentage of the McCafés in Canada will be add-ons to currently existing McDonald’s restaurants. Therefore, McDonald’s can be assured that the management of the McCafé initiative in the individual restaurants will meet the high standards that the corporation already imposes on their franchisees.

McDonald’s blends the “best of both worlds” and has the potential to take market share from both types of competitors. It will be in a different league all by itself.

The major factor detracting from McCafé’s success is McDonald’s poor reputation for coffee in Canada, as seen in the SWOT analysis (please refer to the appendix). It is important to note that despite McDonald’s poor reputation for coffee, the coffee itself is made from premium ingredients (100% pure Arabica beans). For McDonald’s to succeed with the McCafé initiative, reversing this negative image is absolutely crucial. Furthermore, coffee is a staple in modern Canadian breakfasts, so having a strong brand of coffee on the menu can help revitalize McDonald’s breakfast sales.

McDonald’s poor reputation for coffee can very well be the reason for its recent loss of market share in the breakfast industry. Thankfully, the market for retail coffee in Canada is experiencing significant growth, so if McCafé becomes popular, it can make a sizeable contribution to the company’s profits. McDonald’s must find a way to change the negative image of its coffee by using the resources available to the firm. In order to change the negative perception of its coffee in Canada, I recommend that McDonald’s give away free samples of the coffee for a limited time. Although McDonald’s will initially make no revenue from the coffee, it will give Canadian coffee consumers a convincing incentive to try it out and potentially “switch sides”.

With the large number of store locations that McDonald’s has in Canada already, the free coffee will see wide-scale distribution, meaning that a large percentage of the nation’s population will be able to taste the coffee and judge it accordingly. Marketing this campaign is absolutely essential to its success. McDonald’s has used television advertisements to great effect in the past, and it should be no different for this campaign. Word-of-mouth communication will inevitably take place and more people will get a chance to taste the coffee. With all that being said, McDonald’s must implement measures to prevent customers from taking advantage of the free coffee.

For example, it can limit the free coffee to the small cup size and implement a one-cup-per-customer rule. Furthermore, McDonald’s must set a precise time period for the campaign. Customers shouldn’t come into McDonald’s expecting free coffee after the campaign is over. Proper use of McDonald’s brand equity, cash and infrastructure is the key to the success of McCafé in Canada. Although the McDonald’s brand is well known, it is important to note that the McCafé brand is just beginning to grow in Canada. For this reason, I recommend that all McCafé locations start off as extensions of existing McDonald’s restaurants rather than stand-alone restaurants.

Once the McCafé brand becomes popular enough in its own right (likely after the free coffee campaign mentioned in the paragraph above), stand-alone McCafés can be established. As of right now, taking the stand-alone route is much too risky. Finally, I recommend that all McDonald’s locations which will take on the McCafé extension receive an upgrade to its interior design. Since McCafé will be acting as a pseudo-competitor to sophisticated coffee retailers like Starbucks, design changes must be made to reflect the transformation.

For example, bright colours like red and yellow must be replaced with warm, inviting colours like cream and mocha. Moreover, some of the standard four-seat tables should be replaced with sofas and loveseats. The addition of soft, contemporary music in the restaurant would also help in conveying the image of an upper-class coffeehouse. With my given recommendations, I strongly believe that McCafé will be successful in Canada. If you have any questions regarding my report, please feel free to contact me.

Regards,
Sanger (Sung-Young) Yoo
Appendices
Resource Based View of McDonald’s Canada
ResourceValuable?Rare?Inimitable?Substitutable?
Tangible Assets
CashXX
Number of store locationsXX
Strong managementX
Strong franchiseesXX
Existing product lineXX
Global presence (121 countries)XX
Intangible Assets
Good reputation in fast-foodXX
Depth of supply chainXX
Brand equityXX
Customer loyaltyXX
Organizational Capacity
Fast customer serviceX
Product developmentXX
Consistency of qualityX
Appeal to all agesX

SWOT Analysis of McDonald’s Canada
(Regarding McCafé)

StrengthsWeaknesses
-Powerful supplier “partners” including Coca-Cola, Disney and Nestlé -Good quality coffee (100% Arabica-brewed coffee)
-Combines affordable coffee with sophisticated environment-Bad reputation for coffee -Declining market share in breakfast sales
OpportunitiesThreats
-Potential merger with another company (similar to Starbucks and Chapters) -Explosive growth in retail coffee consumption in Canada (Growing market for McCafé)-High levels of competition