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Latin America: McCafe Grows 

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McDonald’s strategy to expand through McCafé pays off in Latin America.

BY MARY TABION
Euromonitor International

McDonald’s is synonymous with burgers around the world, and Latin America is no exception. The U.S.-based fast food chain ranks first in fast food burger restaurants in Argentina, Brazil, Chile and Venezuela. Just as consumers in the United States look to the Golden Arches for fast and economical lunches, workers in Latin America also are on the lookout for appetizing meals that fit their budgets.

While the lunchtime trade is a lucrative business, McDonald’s has been eyeing another opportunity to grow its daypart business outside of lunch in Latin America. The McCafé concept is McDonald’s take on the local café culture, offering not only traditional and European coffee drinks, but local treats, such as pastries, cakes, confectionery items, ice cream or other snacks. Rather than cannibalizing McDonald’s lunch business, McCafé is attracting consumers looking for a coffee break, a place to socialize or a merienda. McCafé revenues in Latin America reached $55.2 million in 2008.

NEW DECOR, WIFI ACCESS

Most McCafés occupy space in a McDonald’s restaurant; some McDonald’s outlets even have an additional space dedicated to soft-serve ice cream and desserts. The McCafé spaces, however, have a decidedly different décor, often featuring separate seating with softer lighting. The McCafé space tends to have more of a coffee shop feel, offering seating arrangements that are more conducive to lingering for a conversation than the booths in the McDonald’s branded space designed for a quick meal or snack. The pastry or dessert cases and coffee preparation equipment are prominently displayed.

Another amenity being introduced into the McCafé environment is Internet or WiFi access. By offering a space to check e-mail, visit a chat room or plug in a laptop, McDonald’s is tapping into a younger generation that increasingly seeks access to communications and entertainment technology at all times, not just at the home and office. McCafé is not the only foodservice concept offering WiFi—other coffee shops and restaurants are experimenting with the idea as well. For example, the Aroma Café chain in Argentina also offers free WiFi at some of its locations.

DIFFERENT MENUS

Menu choices vary from country to country in Latin America, tapping into the local sweet tooth and coffee traditions.  In Brazil, the coffee menu at McCafé is extensive and includes traditional drinks like café com leite, espresso, cappuccinos, but also coffee drinks featuring whipped cream and chocolate, as well as cold drinks like fruit frappés. Brazilian McCafé food offerings include sandwiches, cakes, croissants and pão de queijo, as well as U.S. inspired baked goods like brownies and muffins.

In Argentina, McCafé draws heavily upon Italian coffee specialties, such as lattes and macchiatos, as well as favorites like the submarino (hot chocolate) and coffee drinks featuring dulce de leche. The Argentine dessert selections include pastries and cakes, and some outlets feature artisanal-style ice cream. Gourmet ice cream might be perceived as competition for McDonald’s soft serve ice cream cones and sundaes, but the McCafé products sell at a higher price point and are clearly marketed as a premium dessert option. Sundaes are part of the Pequeños Precios promotional menu and carry a price tag of 4 Argentine pesos (U$1), while an artisanal ice cream cone costs 10 pesos, on par with ice cream shops.

The McCafé model is quite similar in Chile, Colombia and Mexico, which offer espressos, macchiatos and a variety of cappuccino flavors. The Chilean dessert menu includes classic desserts like torta mil hojas and pastel de manzana. The Colombian food items vary depending on the city—the Medellín dessert menus also include an exclusive selection of pastries and iced drinks. In Mexico, muffins are a local addition to the cakes and pastry lists.

STRONG CHALLENGE

McCafé faces a particularly strong challenge from other chained coffee shops in Chile, Colombia and Mexico. Local and international coffee shop operators have invested heavily in these markets, and from 2003-2008 1126 coffee shop outlets were opened in these three countries.

The Mexican coffee shop scene is particularly vibrant and quite fragmented, with over 20 players. The Italian Coffee Company leads in terms of the number of outlets, and has a unique strategy among its competitors, focusing on cities outside the Federal District and offering a lower-cost product. In this sense, The Italian Coffee Company can be considered a competitor for McCafé, which tends to occupy a lower price point compared to international brands, such as Starbucks, which zeros in on the most affluent of Mexican consumers.

Although Mexico is the largest market, Chile outpaced the Latin American region in terms of outlet numbers, exploding 540 percent during the 2003-2008 period. The competition in Chile is particularly fierce, with Starbucks, Havanna Café, Starlight Coffee, Coffee Factory and McCafé having established operations and strong brand recognition. New entrants are also eyeing this segment of the foodservice industry, and accounted for 15 percent of outlets by 2008, up from only 2 percent in 2005. The limited menus of coffee drinks, pastries and sandwiches help keep overhead low compared to alternative foodservice formats, such as fast food and full service concepts, which tend to have broader menus with more costly ingredients. On-the-go coffee consumption also seems to be taking off in Chile, as coffee shops tend to be located in business districts or shopping malls. Coffee shops also serve as social spaces for younger adults, as a meeting point for friends or a location for informal business meetings.

JUAN VALDEZ

While Colombian coffee has reached iconic status around the world, the chained coffee shop concept is relatively new in the country. So far McCafé remains a minor player with just 10 outlets in 2008. McDonald’s faces a challenge in this market given that local coffee producers have been ramping up their presence in order to stake their claims before Starbucks lands. Oma and Juan Valdez hold an easy lead over McCafé, thanks to strong coffee brands.

The coffee shops are an extension of a long legacy in the retail coffee industry. These two coffee chains, Juan Valdez in particular, have been working to educate the Colombian consumer beyond the daily cup of tinto to experiment with single-origin, free trade and flavored coffee varieties and specialty coffee drinks.

Coffee shop prices, however, tend to be relatively high—if McCafé can offer a similar experience at a lower price point, it may tap into the growing niche of more sophisticated Colombian coffee drinkers.

GOOD OUTLOOK

Coffee shops are expected to continue to register growth in 2009 and beyond, albeit at a slower pace compared to before the global economic slowdown of 2008. Part of the slower growth is due to consumers keeping a closer watch on non-essential expenditures, but the coffee shop concept is also becoming more mature across Latin America.

Still, value sales are expected to post double-digit growth across Latin America in 2008-2013. Mexican sales are projected to rise 85 percent, and 80 percent is forecast for Chile. Even the lower growth outlooks in Argentina and Brazil, 38 percent and 60 percent respectively, look rosy. 

Coffee shops, in contrast to traditional cafés and bakeries, tend to target a younger consumer, looking for a high quality food and drink in a convenient and comfortable setting. McCafé offers both, and if it can continue to hold the line on price increases compared to other coffee chains, the prospects for this concept remain positive. 
 

Mary Tabion is the Latin America Research Manager for Euromonitor International. This article was written for Latin Business Chronicle.

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