McDonalds and Starbucks: How Both Get Coffee Pricing Wrong (and Dunkin Doesn’t)

Kraft Foods recently entered into a license agreement with McDonald’s to deliver McCafé Coffee to a supermarket near you. While there’s nothing wrong with McDonald’s making or selling coffee, translating a brand into licensing requires the right pricing strategy. And McDonald’s has got that pricing wrong.

Even more surprising, so have most of the other coffee-house brands that are now selling supermarket coffee, too.

IMC’s own Shawn Walter identified this disconnect with some recent thoughts on the connection between brands and how they price their licensing products. Based on Shawn’s ideas we ran a survey with our Vibrant Nation community this week to see if consumers agreed. It turns out they do.

People think McDonald’s is Cheap. People think Starbucks is Expensive. We asked consumers to guess the price of each brand of coffee.

We showed consumers five roasted coffee brands that originated at coffee shops. We also showed them five actual prices, from $5.88/pound to $10.88/pound. 54% of respondents said that the cheapest coffee was McCafé and 54% said the most expensive coffee was Starbucks. Both groups got it wrong.

McDonalds has announced that its McCafé coffee from Kraft will be priced at $7.29/pound, right in the middle of the brand prices brands we included (those prices could change before launch, but given rising coffee prices it is unlikely they will go down). But in the restaurant, McCafé is by far the cheapest, at just over $1 per cup. These low prices lead consumers to expect a comparable pricing in supermarkets, yet McDonald’s has the greatest difference between its in-store price/cup and its pricing for roasted coffee. It looks like McDonald’s and Kraft are making a mistake.

Consumers also guessed that Starbucks was the most expensive supermarket coffee brand even though it is $2/pound cheaper than Peet’s. Starbucks could possibly be charging even more for its roasted coffee.

Starbucks also owns the Seattle’s Best Coffee brand, for which it should probably be charging less, maybe because most national shoppers don’t know it well enough. Seattle’s Best has the lowest price per pound of the five brands we surveyed, yet few consumers guessed that. Most of them thought it was priced just about average among coffee-house brands. For its own strategic reasons (because it needs to offer a premium and a value offering), Starbucks may be pricing this brand lower than it deserves.

Everyone understands Dunkin Donuts. No one understands Peet’s.

There was one coffee-shop brand whose roasted-coffee pricing actually matched consumer expectations: Dunkin Donuts. Priced right in the middle of the pack (2^nd lowest, but just below the median price), most consumers actually guessed its pricing correctly. Almost none guessed it was the lowest-priced brand; even fewer guessed it was the highest-priced brand. Consumers appear to understand Dunkin as a high-quality, mid-priced brand, and the brand’s own offerings confirm that understanding.

Peet’s is another story. At $10.88/pound, the specialty coffee chain is the highest-priced coffee offering in supermarkets. There’s nothing wrong with high pricing if consumers understand it, but consumer feedback suggest that Peet’s either has to narrow its focus to the consumers who understand it, or lower its retail pricing to conform to the positioning that most consumers expect from it.

Translating Brands into Pricing Strategies Isn’t Easy

Our research confirms that even smart companies don’t always understand how to price their brands in new channels and categories. Roasted pounds of coffee are a very different category from coffee-shop cups of coffee, but not to consumers. The brands that started by getting us to pay for their products from baristas need to think harder about what we’re willing to pay for their same products at the supermarket.