McDonald's (US) to Expand McCafe Concept in Canada
26 Jun 2018 - Canada is being propelled forward by coffee drinkers in particular, a rapidly-growing segment of young “Gen Z” consumers
McDonald’s Canada is brewing up a new strategy in the country’s piping hot coffee wars as it extends its McCafé chain into streetfront locations that go head to head with Starbucks and Tim Hortons.
The veteran fast food chain, which reformulated its coffee a decade ago to great success, is opening two franchised McCafés this year that will serve an expanded lineup of regular and specialty coffee drinks, smoothies, sandwiches and upscale bakery staples such as croissants and muffins.
“We know that we need to create more access for the McCafé brand demand,” said Catherine Crozier, who leads the McCafé business at McDonald’s Canada. “The demand at our restaurants is phenomenal.”
The restaurant chain’s move follows its 2015 launch of two corporate standalone McCafés inside a downtown Toronto office tower and a commuter thoroughfare. The ultra-competitive, quick-service restaurant market in Canada is being propelled forward by coffee drinkers, Crozier said — in particular, a rapidly growing segment of young “Gen Z” consumers.
Canadians drink more coffee than they do tap water
Regardless, not all players are thriving. Same-store sales have fallen for the last two fiscal years at Second Cup Ltd. and industry heavyweight Tim Hortons has come under scrutiny after more than a year of brand hiccups and franchisee upheaval.
Same-store sales at the country’s biggest coffee chain have been weak for the last six quarters. While Hortons still sells the vast majority of brewed coffee in Canada, with a market share in the mid-70s, McDonald’s has managed to triple its drip coffee sales in the last decade and more than double its market share to a recent high of 13 per cent.
Servings of coffee at quick-serve restaurants rose 2.2 per cent in the year period ending January 2018, up 2.2 per cent from a year earlier, according to market research NPD Group.
A great deal of that growth has come from a spike in 18 to 24-year-old Gen Z consumers, says Crozier, among whom coffee consumption at quick-serve restaurants has soared close to 70 per cent between 2015 and 2017. Though Canada has about 12,000 coffee shops, she sees room for more.
“Young Canadians are going to coffee as their preferred beverage of choice,” she said, adding Canadians drink more coffee than they do tap water.
The newest streetfront McCafés offer at least double the seating of the first two standalone locations and offer a “more elevated,” relaxed café experience for customers who want to linger, she said. “It really is a place to take a time out, have a break, have a light meal and be a much more relaxed and comprehensive café experience than we currently offer.”
Robert Carter, executive director of foodservice at NPD Group, said McDonald’s is keen to expand its distribution model and try to siphon more market share away from its rivals.
“I expect the McCafés will expand not only to take share from Tim Hortons, but to mirror some of the trends that are happening at Starbucks,” Carter said.
Crozier did not give a timeline for when standalone McCafés will expand into other areas of Canada, but said its franchisees are excited about the opportunity to roll out the new concept as a unique chain. McCafé was incorporated into the bulk of McDonald’s 1,400 restaurants across Canada in 2011, offering specialty espresso drinks and pastries.
“McDonalds have been taking on Starbucks and Tims for years and this is the next logical step,” said Alex Arifuzzaman, partner in Toronto retail specialists InterStratics Consultants.
He noted most franchisee agreements contain geographical exclusions which prevent cannibalization from new stores within the network, but McCafés would be an exception to the rule because they are a different concept with a different menu that includes a lineup of grilled cheese and specialty sandwiches. “You could put (standalone McCafés) in areas where you would not put an existing McDonald’s,” Arifuzzaman said. “It is a way to grow McDonald’s footprint and potentially steal more share.”
He noted the company has made a remarkable transformation of its coffee’s brand image since it first reformulated its Arabica blend a decade ago. Over time, it added specialty coffees, fruit smoothies and higher-end pastries, which further raised its profile. The company further leveraged the brand by selling it packaged in grocery stores “and now we are expanding like crazy in Costco,” Crozier said.