No Two-Bit Cup of Joe
A lasting effect of the current recession may be a predisposition toward saving. Like the generation that emerged from the Great Depression, many consumers are expected to be cautious about spending.
Many brands are already feeling the pinch; reference the current battle for latte supremacy. Deutsche estimates McDonald's new-coffee sales at about $500M, 6-6.5% the size of Starbucks' total coffee sales.
The potential for high-margin sales drew McDonald's in to a 1,300 location latte platform in 2008. McDonald’s holds at least two competitive advantages over industry leader Starbucks: 1) with 9,000 drive-thru locations, growth, distribution and saturation potential are far greater; 2) their buying power results in 18% lower costs according to the Deutsche report.
These advantages must be evaluated along three dimensions of customer value. Starbucks is known for the quality of their coffee, and more so, the cafe experience. McDonald's clearly leads on price. Deutsche correctly gives McD’s the advantage on price-driven value. The question will be, what is the optimal mix of quality-, price-, and experience-driven value for on-the-go coffee consumers?
It's clear that a $4 coffee doesn’t deliver the same value it did 5 years ago. But, downward price pressure may accentuate the differences in customer experience. Watching this play out highlights the importance of knowing what your customers value. Today's price sensitivity could be tomorrow’s experiential preference.
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