TORONTO — McDonald’s Canada is taking on Tim Hortons and Starbucks in one go by opening standalone versions of its successful McCafé concept in highly-trafficked areas of Toronto — the first outlets of their kind in North America.
The veteran fast-food chain has made serious inroads into Canada’s restaurant coffee market since reformulating its classic brewed coffee blend in 2008, and in 2011 began expanding its McCafé concept, which sells coffee, espresso drinks, baked goods and smoothies, into 1,200 of its 1,400 restaurants across the country.
But the new outlets, opening Wednesday in the commuter hub of Toronto’s Union Station and in January inside the highly trafficked downtown Exchange Tower, represent a bold step for McDonald’s Canada, which has managed to escape the sales troubles faced by its U.S. counterpart, due in no small part to the burgeoning growth of its coffee and breakfast business. The new standalone locations will be rolled out across Canada if they perform well, and could stand to meaningfully grow the mature chain’s market share.
Peter J. Thompson/National Post)
Peter J. Thompson/National Post)McDonald’s Canada’s first standalone McCafe at Toronto Union Station.
In addition to its fast-growing category of coffee, the standalone McCafés will have an entirely new lineup of soups, salads, cold and hot sandwiches and bagels, as well as baked goods. It also has an ace up its sleeve that answers a longtime consumer demand — all-day servings of its four varieties of McDonald’s Egg McMuffins.
“This is where we have momentum,” said John Betts, chief executive of McDonald’s Restaurants of Canada Ltd., in a preview of the Union Station location. “Since 2009, we have grown our share of coffee more than all the other players put together, which is significant, because we have not grown our (store count) that much. That tells me we have a very special connection with the Canadian public in terms of how they feel about McCafé.”
The menu is a big change, too: In addition to the existing staples of McMuffins and a new line of sweet baked goods, it boasts a selection that would appeal to its key competitors’ customer bases — from comfort food offerings such as a classic grilled cheese or a roast chicken sandwich, to on-trend salads and sandwiches. Newer dishes include ingredients such as edamame and sriracha and a broader array of vegetarian options — a lentil and sweet potato hummus wrap with kale sells for $5.99 and it costs $6.99 for a kale and brussel sprouts salad with mixed vegetables.
“This menu in some ways has leapt over the competition — it goes after Starbucks and Tim Hortons at the same time with its selection,” said Bruce Winder, a partner at Toronto-based Retail Advisors Network.
“McDonald’s has made big inroads and established great credibility in its coffee line over the years. Starbucks is a great environment, but you pay a premium for that. If this is priced below Starbucks, they can win big.”
Initial prices appear to be competitive: Starbucks sells a sausage, cheddar and egg English muffin breakfast sandwich for $3.95, (compared with $3.59 for an Egg McMuffin with meat options); Starbucks’ lineup of cold sandwiches ranges around the $6.95 price point, as does McCafé’s; and Starbucks’ newer salads cost $8.95, versus $6.99 to $7.99 for McCafé’s large salads.
If this is priced below Starbucks, they can win big
“This does open up a whole new category,” Betts acknowledged, without naming competitors. “This will get people to visit us who wouldn’t necessarily come to a McDonald’s, because they don’t frequent McDonald’s, but they love the McCafé brand, so they will come here. We know we are going to be successful with this.”
Since 2009, McDonald’s has more than doubled its share of brewed coffee sales at Canadian restaurants, to 11.5 per cent of the category, and since then has tripled its own coffee sales. Tim Hortons still dwarfs the others, with a 75 to 80 per cent share of coffee, followed by Starbucks in third, said Robert Carter, executive director at market research firm NPD.
“McDonald’s unit growth has been flat for about five years, so this is a very strategic way to expand their footprint in a way that does not involve the capital of opening a new restaurant,” he said. The two McCafés are 1,100 and 1,600 square feet, compared with 5,000 square feet for an average McDonald’s restaurant. “This will put pressure on Tim Hortons,” Carter added.
Peter J. Thompson/National Post
Peter J. Thompson/National PostMcDonald’s Canada President and CEO John Betts at the company’s first standalone McCafe at Toronto Union Station.
Growing its coffee business also helped McDonald’s expand breakfast sales, which now account for 21 per cent of overall revenue. Seven years ago, Betts said, breakfast sales were in the low teens, on a “much lower volume” of overall sales.
The standalone McCafés will also sell the company’s lineup of ground packaged coffee, as well as single-serve Tassimo and K-Cup pods.
Canada is second-highest in sales and guest count growth among McDonald’s 12 major global markets, behind Australia.
Last year McDonald’s Canada was the No. 2 restaurant chain in the country behind Tim Hortons, with sales of $3.89 billion, up from $3.86 billion in 2013, according to estimates from the industry publication Foodservice and Hospitality.
That is in contrast to the U.S., where same-store sales grew 0.9 per cent in the most recent quarter after seven straight quarters of declines. CEO Steve Easterbrook has moved to simplify the chain’s menu and recently introduced all-day breakfast in the U.S. in a bid to bump up sales performance.
“In the U.S., they are turning their business on the back of breakfast all day, and that’s awesome,” Betts said. “They are in a turnaround phase. We are in an acceleration phase. We turned our business around in 2008.”
He did not say when or if Canada might follow suit on all-day breakfast.