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In McDonald's Breakfast War With Coffee Chains, a New Front: Supermarket Shelves

McCafé Iced Mocha

Courtesy McDonald’s

McCafé Iced Mocha

McDonald’s (MCD) recent beverage launches included White Chocolate Mocha and Pumpkin Spice Latte, drawing obvious comparisons with similar brews from Starbucks’s (SBUX) and Dunkin’ Donuts (DNKN). Now the fast-food giant is looking to compete with the coffee brands inside supermarkets as well, testing McCafé bagged coffee and single-serve pods made in partnership with Kraft (KRFT).

For McDonald’s, working with Kraft to get onto grocery-store shelves is a way to increase brand awareness and sell more coffee in its restaurants, as U.S. Chief Brand & Strategy Officer Kevin Newell explained to investors on Thursday. Kraft, which owns Maxwell House, had been a longtime distributor of Starbucks packaged coffee before losing that business in 2011. Fallout from the broken partnership just resulted in a $2.79 billion arbitration ruling. For Starbucks, however, getting into grocery stores—particularly with its K-cups—has been seen as a giant sales opportunity in its own right, not just a way to extend a brand.

Starbucks and McDonald’s have been pegged against one another since the fast-food chain first started tinkering with the McCafé concept. “Did somebody say ‘McStarbucks’?” wrote the Progressive Grocer about the new McDonald’s cafes opening in Latin America in 1999. But the competition seems fiercer now that McCafé has become an established fixture. And McDonald’s is not only focusing more on coffee; it’s also trying to boost breakfast sales—meaning Starbucks and Dunkin’ have a lot to lose, with about half of sales at both chains coming before 11 a.m. “Anyone that stops off to get a cup of coffee anywhere, that’s an opportunity,” said McDonald’s chief executive, Don Thompson.

Coffee certainly has been a strong business. Starbucks reported growth in same-store sales of 8 percent in the U.S. during its last fiscal year, and the figure at Dunkin’ rose 3.3 percent in the first nine months. By contrast, McDonald’s comparable sales in the U.S. grew only 0.2 percent in the first nine months of the year.

McCafé has branded itself as the “unsnobby coffee”, but it will have to be more than down to earth to take on the bigger coffee brands. Among coffee drinkers, perceptions of Starbucks and Dunkin’ are more positive than McDonald’s, according to survey data from researcher YouGov. Bringing bags of McCafé beans to the supermarket seems unlikely to put McDonald’s on higher grounds.

Wong is an associate editor for Bloomberg Businessweek. Follow her on Twitter @venessawwong.

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