Do You Really Want McCafe in Your Keurig?

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In a few months, morning commuters hitting the McDonald's (MCD) drive-thru window won't be the only ones enjoying McCafe coffee. McDonald's is teaming up with Kraft Foods (KRFT) to distribute its packaged java beans through retailers come 2015.

The original announcement called for Kraft to distribute McCafe blends in bags containing whole and ground coffee as well as pods for single-serve brewers. It wasn't clear if the partnership included Keurig Green Mountain's (GMCR) category-leading K-Cup platform, but that was settled on Friday when Keurig struck a licensing deal with Kraft that would include getting McCafe into the popular K-Cup portion packs.

The deal between Kraft and Keurig is in and of itself a pretty big deal. Kraft has been championing its own one-cup brewing platform for years, but the high-end Tassimo -- capable of making cappuccino, latte and espresso beverages as well as traditional cups of coffee -- never took off as Keurig became the country's industry standard.

The only real mystery here is why folks will want to shove McCafe K-Cups into their Keurig brewers. What's next? Microwave-ready McRib sandwiches?

Beyond the Golden Arches

It's easy to see why someone goes for a cup of McCafe in the morning. McDonald's has more than 14,000 restaurants in the U.S., and odds are that morning commuters pass by a location.

McDonald's is also cheap. A cup of coffee can be paired up with a meaty Dollar Menu offering including a Sausage McMuffin or a sausage burrito for just a buck more. It's also fast.

However, just because a product sells briskly under favorable conditions -- and that's why McDonald's has been able to thrive in the breakfast market -- doesn't mean that a product will be successful on a more level playing field.

Go to any of McDonald's U.S. locations -- or any of its 35,000 eateries worldwide -- and you only have one brand of coffee. It's a different ball game in the grocery-store aisle.

Keurig itself offers 232 varieties through its online store, and these are just the licensed options. K-Cup patents expired nearly two years ago, opening the floodgates for portion packs by third parties that are serving up the private-label brands of many retailers. Good luck competing against Starbucks (SBUX), Dunkin' Donuts (DNKN), and even Keurig's own original Green Mountain Coffee K-Cups.

A No-Win Situation

We can't forget about the glut of unlicensed house brands, because it assures that K-Cup pricing will be honest. This will pose a particular challenge for McCafe. It can't sell at the same price as the established K-Cup brands.

McDonald's is in a pickle. The perceived quality of its brand is weak. A Consumer Reports poll asked more than 32,000 fast-food customers to rate the quality of chains based on their flagship products. McDonald's ranked dead last out of 21 chains on burger quality. If consumers don't see the value in its burgers, will they pay up for its coffee when the shelves are brimming with alternatives?

That leaves McDonald's in a bad place. If Kraft prices its McCafe K-Cups at comparable prices to existing offerings, they aren't likely to sell well. Pricing the portion packs to compete with cheaper private-label K-Cups will only diminish the brand.

Heads will turn when folks see McCafe K-Cups next year, but pocketbooks are unlikely to open.

Motley Fool contributor Rick Munarriz owns shares of Keurig Green Mountain. The Motley Fool recommends Keurig Green Mountain, McDonald's, and Starbucks. The Motley Fool owns shares of Starbucks. Try any of our Foolish newsletter services free for 30 days.

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Philippe Frechette

Just took some McCafe K-kups home and I really love them, they are in the higher tier price range (10$cdn for 12) but I will buy them again, better than starbuck and tim horton

October 04 2014 at 6:06 PM Report abuse rate up rate down Reply