From Motley Fool
FOOL PLATE SPECIAL
McDonald's Opens McCafe
McDonald's is opening its first "McCafe" in the United
States later this week, and it's definitely a new
direction for the company. While McDonald's needs
the diversification, it seems unlikely that its brand will
be effective in this market.
By Chris Rugaber (TMF Chris)
April 30, 2001
If you've grown tired of the
typical McDonald's (NYSE:
MCD) offerings -- Big Mac, fries,
and a Coke, yawn -- then never
fear, you may soon be in for
more variety than you ever
expected. Just imagine a nice
McDonald's tiramisu, or a hot,
frothy cappuccino. Yum!
Unfortunately for most of us,
such possibilities are still
probably several years away.
However, as reported in
today's USA Today, should the
company's new concept -- a
Starbucks (Nasdaq:
SBUX)-style coffeehouse called
"McCafe" -- fare well in its first
test run in downtown Chicago,
we should expect to see
perhaps 100 to 200 more
McCafes in the U.S. over the
next year. No word on whether the cappuccinos will be
referred to as "McCappuccinos."
The McCafe is new only in the U.S. The first opened in
Australia way back in 1993, and there are now about
300 in other countries around the world. While the
company has released few details about them,
presumably they've done well if the concept is going to
be introduced here.
Diversification makes sense for the fast-food company,
given that growth is clearly slowing for its core
McDonald's franchise. Whether the company can tackle
the upscale coffee market, however, is another
question. It should prove a fascinating test of how
brand identity works. Will the choice of the "McCafe"
name help or hurt?
A necessary move
While the concept sounds unlikely, McDonald's does
need new sources of growth, as it is probably reaching a
saturation point with its core restaurants. There are now
27,871 McDonald's restaurants worldwide, as of March
31st, almost double the total seven years ago. Most of
this growth has been overseas, since the company is
running out of room in the U.S. As of the first quarter of
this year, McDonald's increased its U.S. restaurants only
1.5% year-over-year, to 12,811, while international
McDonald's units increased 10.7%, to 15,060.
Nevertheless, all these new restaurants are reaching the
point of diminished returns, both in the U.S. and
abroad. Revenue growth is sputtering worldwide, not
just in Europe, where various cow diseases have
spooked the population.
In the U.S., comparable-store sales -- for those
restaurants open at least a year -- eked out a 1% gain
last year, while comp-store sales declined 2% in both
Europe and Asia, and dropped 7% in Latin America.
These figures are in local currencies, so they do not
include the negative effects of the strong dollar.
Other restaurants
As international growth slows, the company is showing
better results from its "other brands" category, which
reported $225.6 million in sales for the first quarter of
2001, as opposed to only $47.4 million in last year's
first quarter. This increase is largely due to the
company's purchase last year of the Boston Market
chain, but McDonald's also owns or has stakes in several
other growing franchises, including Chipotle Mexican
Grill, Donatos Pizza, and Pret A Manger in the U.K.
As Fool analyst Todd Lebor pointed out in February,
McDonald's is not the only fast food -- or "quick serve,"
as the industy prefers -- company moving in this
direction. Wendy's (NYSE: WEN), in particular, is
looking for other food concepts to boost its sales and
earnings growth. However, it may be tough for McCafe
to significantly contribute to McDonald's bottom line.
Poetry slams at McCafe?
According to a press release from McDonald's Chicago
regional office, the McCafe -- which will open in
downtown Chicago on Wednesday, after a ribbon-cutting
tomorrow morning -- will serve "high-end cakes and
pastries, gourmet coffee ... premium teas ... Viva
Tiramisu [and] New York Style Cheesecake. ... Food and
beverages will be served in fine china along with
stainless steel flat ware. The warm decor consists of
leather couches, chairs and bistro style tables with
accents of mahogany, granite, lace curtains and French
vintage posters."
That's a long way from formica tables and Happy Meals!
This raises an obvious question: Who is the target
McCafe customer? Let's face it, most consumers -- even
those (like myself) who are happy to patronize both
McDonald's and Starbucks -- may have a problem with a
combination of the two. Does the company expect
snooty gourmet coffee drinkers to flock to something
called McCafe, or does it expect people who might not
otherwise like upscale coffee and pastries to be
attracted by the McDonald's brand?
We shall see. Personally, I enjoyed visiting a Pret A
Manger during a trip to London two years ago, and had
no idea I was visiting anything associated with
McDonald's. Not that this necessarily would have
discouraged me, but there are times I'm just not in a
McDonald's mood. The company's other restaurant
concepts don't carry the McDonald's name, so it's
interesting to see them try it with this one. I doubt the
brand will help, though, and wouldn't be surprised to
see a name change somewhere down the road.
Chris Rugaber, he got a dog named "Blue," and he'll
betcha five dollars he's a good dog, too. His stock
holdings can be viewed online, as can the Fool's
disclosure policy. |
