The coffee wars are heating up across Canada, with McDonald's offering free java for two weeks as high-end chain Starbucks closes locations, Tim Hortons struggles with falling profits and Country Style repositions itself under a new owner.
McDonald's said Monday it will give away a small coffee to its customers during breakfast hours at its 1,400 locations across Canada until May 3, and you won't have to buy anything to get one.
The promotion is an attempt to lure in customers "and those who haven't been visiting for a little bit," said McDonald's Canada president John Betts.
The move is a shot at both the low end of the industry, represented by Tim Hortons, a coffee leader with about 2,800 stores across the country, and the high end, represented by Starbucks, which is closing some of its 500 locations across Canada as it suffers from over-expansion and a drop in consumer spending in the recession.
Starbucks is also offering free coffee on Wednesday, which is Earth Day, to people who bring their own mug to the store.
"It's a jump ball for market share," analyst Michael Krestell of M Partners Inc. said of the McDonald's promotion and the current coffee landscape in Canada.
"In addition to going after the higher price of Starbucks coffee, it's a direct shot at Tim's. There's no better way to announce your presence than by offering something for free."
To some, the McDonald's promotion may be even more enticing than Tim's annual "Roll up the Rim" promotion, which offers prizes ranging from cars and TVs to free coffee and pastries.
Recently, Country Style did what industry watchers called a "promo hijack" by giving free coffee for a week in early March to Tim's customers who got the "Sorry, Try Again" message on their cups.
Krestell said the McDonald's two-week free coffee promotion is also an interesting marketing strategy.
"If you can get someone to try your product every day for two weeks, it becomes an acquired taste," he said.
"To get them into a routine, you have the potential to break from a previous habit. It's no coincidence."
Wendy Evans, head of retail consultancy Evans and Co. Consultants Inc. called the McDonald's move "clever."
"I think there's a whole segment of the population that has just left McDonald's. This could certainly be a draw for them to try it again," she said. "Nobody is beyond a free cup of coffee."
She said the coffee business is "highly competitive and becoming more so all the time."
Coffee firms report sales drop
Earlier this month, Country Style's 490 coffee and doughnut outlets were bought by MTY Food Group Inc., which franchises and operates Sukiyaki, Cultures, Yogen Früz.
Under the deal, MTY will have 114 Country Style traditional shops selling coffee, doughnut and sandwiches, 360 Country Style kiosks and 16 BunsMaster outlets.
Tim Hortons saw its profit drop 8.7 per cent in the fourth quarter to $69.1 million from $75.7 million a year earlier after charges related to store closures in the United States. Revenues were up 9.4 per cent to $563.7 million and same-store sales, which are those open more than one year, increased 4.4 per cent in Canada and fell 0.1 per cent in the U.S.
In its outlook for 2009, the company said it expects operating income to grow 11 per cent to 13 per cent this year. Same-store sales are expected to grow three to five per cent.
However, some analysts have called those expectations overly optimistic in the current economy.
Oak Brook, Ill.-based McDonald's Corp. saw its overall revenue dip about three per cent in the fourth quarter and blamed the stronger U.S. dollar.
McDonald's, which reports first-quarter earnings on Wednesday, said in March that its quarterly sales will likely be off by at least $600 million US and earnings could be hurt by seven cents to nine cents per share because of foreign-currency rates.
Analysts polled by Thomson Reuters expect profit of 82 cents per share on revenue of $5.18 billion US for the quarter.
In February, it said system-wide sales for its worldwide restaurants fell 4.6 per cent but increased 3.2 per cent in constant currencies.
Analysts say despite the currency impact on earnings, more consumers are turning to McDonald's as a cheaper alternative as the recession results in thousands of layoffs worldwide and lower consumer confidence.
Betts said breakfast represents a large and growing portion of sales at McDonald's, without being specific.
He said the new promotion in Canada is for its "premium roast" coffee the chain has been offering for years.
"It's our version of a stimulus," Betts said.
He also said the company is introducing a new coffee cup that is double-walled and doesn't require a sleeve to hold its hot contents. Betts said the cup is made of standard paper board, "which is standard in the industry."
Free coffee doesn't sit well with environmentalists
Pierre Sadik, legislative manager with the David Suzuki Foundation, said while the cup might be recyclable, the lids aren't.
He said the problem with companies such as McDonald's and Tim Hortons is that they don't have alternative to plastic lids. They also don't offer recycling options for the cups and people just throw them away.
On the new McDonald's cup, users are encouraged to "put litter in its place," with a diagram of the Ronald McDonald character dropping waste into a bin.
Sadik said coffee chains should encourage people to bring their own mugs by charging a high price for cups.
Last fall, Toronto city council considered a ban on single-use coffee cups that were overflowing garbage bins.
The city's public works committee decided to consult further with coffee companies, including Starbucks and Tim Hortons, to devise a plan to curb the growing number of paper cups landing in the landfill.
Paper coffee cups and plastic lids are recyclable in some other cities, but the two items together can't be sorted at Toronto's recycling depot.
Discounts for people who bring their own mugs are common at some coffee chains across the country, including Starbucks.