More than Just a Hill of Beans

Kraft Foods recent announcement of its intent to test market McCafe packaged coffee adds a deep, new wrinkle to the already interesting coffee wars being waged in grocery aisles. If you think it doesn’t have big implications and bigger stakes, just look at what has happened since Starbucks terminated its agreement with Kraft in 2010. There was an ugly court battle that Starbucks won and a separate arbitration that just days ago resulted in a $2.76B settlement in favor of Kraft. That equates to well more than 10 billion cups of Starbucks coffee if you are brewing at home.

What does the deal between Kraft and McDonalds mean? For Kraft Foods, it signals they have no intention to surrender quietly in the premium bagged and single serve pods coffee categories. While still the owner of substantial brand Maxwell House in canned coffee, Kraft struggled in replacing the Starbucks business with its Gevalia brand. Previously a direct to consumer product, Gevalia has not fared well against the competition. The newly formed Starbucks vehicle had a few hiccups, but didn’t really miss a beat. Dunkin’ Donuts, a brand first licensed by Procter & Gamble before being transferred to Smucker’s along with Folgers, picked up most of the slack. And because McDonalds traditionally sells its drinks for a significantly lower price than Starbucks, you can expect to see a price difference at the shelf in the bagged category.

For McDonalds, it shows they are going aggressively after more consumers in the quick service coffee business. It gives them another marketing vehicle as they compete against not only against Starbucks and Dunkin’ Donuts, but also Caribou Coffee and Peet’s. It is also very significant as it marks McDonald’s first foray into food and beverage licensing. There have been occasional toy products and don’t forget the long defunct McKids lines (even though they might want you to), but McDonalds has been content up to this point not to follow competitors like Burger King and Taco Bell into grocery aisles.

For both entities it must be a measured and calculated approach. Kraft will have to avoid the missteps it took in fostering the 10+ year relationship it had with Starbucks. Kraft’s slow adoption of the burgeoning K-Cup franchise was probably just one of the factors that led their partner to leave the party early. McDonalds will have to be patient and committed. That means no rash, costly decisions if the market shifts as it did with the emergence of the single serve market. For a company reluctant to license they will have to trust Kraft if this partnership is to not only succeed, but help both companies recover some of the footing they have lost in recent years.