Interactive Strategies: Illustration 63 McCafé Versus Star

Interactive Strategies 207illustration 63mccafés Versus Starbuckssta

Starbucks coffee chain changes its strategy in response to McDonald’s challenge. Fast food chain McDonald’s has launched a worldwide challenge to coffee giant Starbucks with its new concept, McCafés. The McCafé concept emerged in Australia in the 1990s and typically operates within or next to regular McDonald’s outlets. McCafés use high-quality coffee machines and sell different blends of coffee according to local tastes.

By 2012, there were 1,500 McCafé outlets in the USA and 600 in Germany. McCafés are spreading rapidly across Europe. In the United Kingdom, McCafé products are still sold under the usual McDonald’s brand. Starbucks is the world’s largest coffee chain, with nearly 20,000 stores across 60 countries. Founded in 1971, Starbucks was bought as a small Seattle coffee shop chain by Howard Schultz in 1988. The original concept was good coffee, brewed in an intimate atmosphere by skilled ‘barristas’.

Schultz expanded rapidly, opening his first store outside North America in Tokyo in 1996. In 2001, Schultz retired as CEO, but performance flagged by 2007. Schultz returned as CEO, emphasizing quality and customer experience, and closed all stores worldwide for retraining. Starbucks improved its offerings by acquiring La Boulange bakery and relaxing its store format to incorporate local artifacts and broader varieties. Stores also offered free Wi-Fi to enhance customer experience.

McDonald’s responded by introducing free Wi-Fi as well. The quality and price of McCafé coffee are highly competitive. For example, in 2012, a McCafé frappé cost $3.99 for 16 ounces, compared to $5.45 for Starbucks’ frappuccino. A review by the Globe and Mail in 2011 rated McCafé as slightly superior in taste, criticizing Starbucks’ coffee as bitter and burnt toast. These strategic adjustments by both companies illustrate competitive positioning in the coffee market.

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The rivalry between Starbucks and McDonald's McCafé represents a compelling case study in competitive strategy within the fast-food and specialty coffee industry. Both companies have evolved their strategies to capture market share, enhance perceived quality, and optimize pricing. Analyzing their strategies through the frameworks of competitive positioning, differentiation, and market response reveals insights into how dominant firms respond to challengers and how market leaders maintain their position.

Starbucks, historically positioned as the provider of high-quality, ethically sourced coffee in a cozy, premium atmosphere, faced challenges of commoditization and declining differentiation by 2007. The encroachment of automatic espresso machines and cost-cutting measures had dulled its distinctive brand image (Schultz, 2011). In response, Schultz’s leadership reinvested in quality—closing all stores for staff retraining and acquiring artisan food brands like La Boulange. These moves reinstated Starbucks’ emphasis on quality and customer experience, aligning with the differentiation strategy that allowed it to command higher prices and maintain its premium brand perception (Johnson, Scholes, & Whittington, 2011).

Meanwhile, McDonald's approach with McCafé showcased an aggressive move into the specialty coffee market by leveraging its extensive global footprint. McCafé's strategy centered on offering high-quality coffee at prices lower than Starbucks, with the added benefit of convenience and speed, supported by its widespread network of outlets conveniently located in or near existing McDonald's restaurants (Cox & Stewart, 2014). The strategic use of local adaptation—selling McCafé products under existing brand names—allowed McDonald's to capitalize on its familiarity and reach without causing brand dilution. Crucially, McDonald's also adopted strategies to enhance perceived quality, such as investing in better brewing equipment and offering upscale beverage options, thus positioning itself as a formidable competitor in the premium coffee segment.

The strategic moves of both firms can be mapped on a matrix of perceived quality versus price. Starbucks, positioned at high perceived quality and high price, aimed to reinforce its premium brand. McCafé, positioned at moderate to high perceived quality but at significantly lower price points, aimed to attract cost-conscious consumers who seek quality but with value. The competitive dynamics suggest a market where price and perceived quality are critical axes, and firms continually adjust to maintain or improve their positions (Porter, 1980).

When considering a company like Costa Coffee operating in the UK where McCafé has not yet arrived, strategic recommendations must focus on leveraging existing strengths and identifying market gaps. Costa, already enjoying a significant share of the premium coffee market, should consider differentiating further through product innovation, customer experience, and pricing strategies. For example, Costa could introduce localized flavors, improve digital engagement through loyalty programs, or expand into emerging urban markets with targeted marketing (Barney, 1991).

Moreover, as McCafé’s entry indicates a significant threat to traditional coffee brands, Costa should consider proactive expansion to preempt encroachment, possibly through partnerships or opening new outlets in strategic locations. Capitalizing on its established brand loyalty, Costa can emphasize quality, local relevance, and advanced technology for a seamless customer experience, thereby defending its market share while exploring affordable premium offerings to lure value-driven consumers.

Overall, companies like Costa must balance differentiation and cost leadership, acknowledging that competitive moves by challengers like McDonald's McCafé can dramatically shift market dynamics. The presence of McCafé increases the importance of innovation, branding, and customer intimacy for existing players. Strategic agility and a comprehensive understanding of consumer preferences are essential for maintaining competitive advantage in this evolving landscape (Kim & Mauborgne, 2004).

References

• Barney, J. (1991). Firm resources and sustained competitive advantage. Journal of Management, 17(1), 99-120.
• Cox, E., & Stewart, D. (2014). Market entry strategies of McDonald's in the coffee industry. Journal of Business Strategy, 35(4), 56-65.
• Johnson, G., Scholes, K., & Whittington, R. (2011). Exploring Strategy (10th ed.). Pearson Education.
• Kim, W. C., & Mauborgne, R. (2004). Blue Ocean Strategy. Harvard Business Review, 82(10), 76-84.
• Porter, M. E. (1980). Competitive Strategy. Free Press.
• Schultz, H. (2011). Starbucks Coffee Company. Harvard Business School Case Study.
• Financial Times. (2009). Starbucks confronts McDonald's McCafé challenge.
• SmartMoney.com. (2012). Comparative analysis of McCafé and Starbucks products.
• The Globe and Mail. (2011). Review of McCafé versus Starbucks.
• Leahy, J. (2009). Volvo’s luxury buses in India. Financial Times.