Second Cup president says McDonald’s will hurt push-button coffee carriers most

McDonald’s has invested plenty of advertising dollars and hype into their new coffee line, but Second Cup Coffee Company Inc.’s CEO says the burger giant is attracting customers more accustomed to low-priced “push-button latte machines,” and isn’t stealing business from the higher-end coffee retailer.

McDonald’s has invested plenty of advertising dollars and hype into their new coffee line, but Second Cup Coffee Company Inc.’s CEO says the burger giant is attracting customers more accustomed to low-priced “push-button latte machines,” and isn’t stealing business from the higher-end coffee retailer.

After Second Cup’s annual shareholder meeting Monday, Stacey Mowbray suggested that lower-priced coffee sellers, such as Tim Hortons Inc. (TSX:THI) and Country Style, will probably suffer the most as McDonald’s ramps up its coffee rollout to lure customers away from Starbucks and other retailers.

‘There will be concepts that are playing around that shouldn’t be in coffee, and they’ll probably drop out of the market,” Mowbray said.

Presumably that could include gas stations, other fast food joints, and retailers who have tried to sneak coffee into their broader product lines.

Her opinion rests partly on the high-profile McDonald’s campaign launched earlier this spring where the company handed out free small coffees to customers during its breakfast hours for two weeks in April.

McDonald’s move is part of increased competition that’s trying to appeal to consumer’s taste preferences, and their tighter budgets during a recession. On the defence are Canadian mainstays like coffee and doughnut giant Tim Hortons to Starbucks and Second Cup.

‘Across our system we did not see a significant effect to our sales,” Mowbray said after a speech to shareholders. “We are watching them closely and are very mindful about what they’re doing in the U.S.”

However, Second Cup is exactly the type of higher-end coffee shop that McDonald’s has publicly acknowledged as a target. In the U.S., it’s coffee giant Starbucks that’s in its crosshairs, as consumers look for cheaper alternatives in a tough economy.

So far, McDonald’s is carrying both premium roast drip and iced coffee at each of its more than 1,400 Canadian locations, but it also plans to broaden its offerings in Atlantic Canada this summer as part of a test project.

A spokesman for the company said McDonald’s will launch its McCafe espresso-based coffees in Eastern Canada over June and July at 70 stores, and add another test location in Vaughan, Ont., just outside Toronto.

Second Cup, with about 350 cafes across Canada, has been closing down some of its less successful franchised stores over the last year as leases ran out and customers migrated away from some neighbourhoods.

All in all, the company closed 17 underperforming outlets in 2008.

This year, Second Cup plans to open 10 to 15 new stores, while it will close 15 to 20 more. That leaves the chain with five fewer store fronts this year alone.

‘There are locations we have that are just at the wrong side of the mall, or wrong side of the block that we’d rather close and wait for the opportunity to come up in a better location,” Mowbray said.

Another 24 stores will be renovated to reflect the company’s new layout and colour pallette.

Second Cup has also faced a decline in traffic that Mowbray was unable to quantify. She said customers who visit stores several times a week are now making fewer visits.

Tim Horton’s has made similar complaints in recent months, noting that customers who would buy coffee two or three times a day are now showing up only once or twice, as they cut back spending.

The competition between McDonald’s and Tim Horton’s could become more fierce in the coming quarters, suggests Ken Wong, a professor at Queen’s School of Business in Kingston, Ont.

He said McDonald’s is vying for a share of the breakfast customer that Tim Horton’s stole from them when they rolled out their breakfast sandwich combos over a year ago.

At the same time, McDonald’s will try to lure back more of the lunch consumer that Tim Horton’s attracted with its sandwiches and soups.

Wong said for Second Cup and Starbucks, the battle is more about atmosphere and consumer image.

‘Starbucks is supposed to be about selling the coffee experience,” he said, noting that servers, known as baristas, make your drinks while you wait.

As long as Starbucks and Second Cup maintain that image, he believes they’re relatively safe.

‘If it’s dispensed by a machine at the push of a button, then a McDonalds product is just as good,” he added.

In trading on the TSX, Second Cup units closed five cents higher to $5.35, a gain of nearly one per cent.

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