Question

Do you believe McDonald's would be able to compete with Starbucks if they came up with more products to sell under their McCafe line?

Answer 1

Starbucks is the household name for coffee and McDonald's is the household name for burgers. Both the companies enjoy strong moats (durable competitive advantages) in their individual industries.

With both the companies enjoying incredible customer loyalty and brand value, it's a no brainer that their brands stand very strong against competitive threats in their respective markets.

It's also important to note that both companies are part of the same broader industry, i.e. food & beverages. So, how likely is it for McDonald's to succeed if they expand their coffee line and go in competition with Starbucks? Lot of established companies have tried to take their brands into newer markets and failed. Let's take a look at the crucial challenges that may make it extremely tough for McDonald's to challenge Starbucks in the coffee market:

• Differentiation: One of the main reasons of Starbucks's success in coffee business is their ability to create differentiation around their coffees and brands. Customer tastes and preferences are very rigid/established, and it's very challenging for a new player (even an established food brand like McDonald's) to enter an established market and create their unique differentiation when the customers already have existing tastes and brand preferences
• Inelastic perception of existing brands: We live in an era of specialisation where the perception of brands is as important, if not more, as the brand itself. When we think of coffee, we don't think of McDonald's and when we think of burgers, we don't think of Starbucks. These brands have existed for decades, such that their customers have perceived them in a certain way for a long time which is what gives those brands such value but also makes them inflexible and tough to successfully invade new business lines
• Learning curves in coffee market: It takes learning curve to succeed in any market. Starbucks boast of their ability to make 'personalized' coffees for their customers. McDonald's doesn't have the same learning curve in coffee business for customers' tastes and preferences, and when going against a dominant competitor like Starbucks, the margin of error is very low.
• Economies of scale: Starbucks has a dominating market share which gives them a scale of operations unlike other players in coffee business. This allows them to charge their fixed costs over a far bigger customer base and hence price their coffees at a much better price than what their competitors could for the same quality. McDonald's will not have same economies of scale in coffee market if they choose to compete in it
• Financial viability of the project: Even if McDonald's decides to take the enormous challenge of altering its brand perception to include the new coffee product lines, it is going to be an extremely expensive venture which is likely to make it extremely tough for them to generate high returns on capital even if they do end up snatching some market share from Strabucks. Therefore, it is not just about taking away market share from Starbucks, it is more about doing it with good financial returns.

Therefore, due to above factors Macdonald's is unlikely to be able to successfully compete with Starbucks if they choose to expand the McCafe line of products