McDonald’s will officially begin its beverage push starting next month, with a selection of Refreshers and dirty sodas and, later this year, energy drinks.
That has to be bad news for the rapidly growing business of drive-thru beverages, correct? Not necessarily.
To be sure, the fast-food giant is a brutal competitor. It operates 13,706 U.S. restaurants. Most of those restaurants have drive-thrus and are on some of the best retail sites in the country.
Those restaurants generate $4 million in sales from each of those locations and it has the buying power to undercut pretty much anybody else, which is the brand’s goal here. McDonald’s believes that it can price the beverages it sells lower than the brands that are already out there.
The prospect of McDonald’s selling beverages like Refreshers or dirty sodas, boba teas and energy drinks at lower-than-average prices through those plentiful drive-thrus in high-traffic parts of town makes sense for the company. And it would immediately take monstrous market share.
If we simply say that beverages increase McDonald’s average-unit volumes by, say, 5%, that would be $2.7 billion, or more than Dutch Bros generated systemwide last year. If beverages add another 10%, that’s a $5.5 billion business that instantly becomes the third-largest beverage chain in the U.S.
These lower-priced beverages from plentiful drive-thrus could in theory siphon traffic from 7 Brew, Dutch Bros, Swig and others that have been growing at a rapid clip, capping their potential growth. Indeed, Dutch Bros routinely gets questions about the potential incursion of McDonald’s into the specialty beverage business.
But McDonald’s is a different animal. The fast-food giant has a tendency to confirm and amplify trends, rather than take market share from a sector’s existing players. In other words, McDonald’s creates a tsunami in a market that ends up lifting all boats. That will most certainly be the case here.
To wit: McDonald’s introduced smoothies in 2010, which was widely expected to damage the burgeoning market for such products at the time. Since then, Tropical Smoothie has grown by nearly 1,200%, according to data from Restaurant Business sister company Technomic. Smoothie King has grown 380%. Those are not exactly market-destroying numbers.
A better example might be chicken wings. McDonald’s introduced Mighty Wings in 2013, which left some analysts questioning the potential impact on chicken wing players Buffalo Wild Wings and Wingstop.
It did have an impact, by first leading to a restriction in chicken wing supplies that drove up prices, then a market flood when suppliers stopped hoarding frozen wings after McDonald’s wing market failed. That created a wing price roller coaster for both those chains.
But the existing brands only gained customers as McDonald’s brief foray further mainstreamed chicken wings, leading to the product’s growth. Wingstop’s U.S. system sales have gone up 528% over the past decade.
When McDonald’s enters a certain business, it floods the market with advertising on that product. But rather than overwhelming those smaller players and taking customers, that advertising essentially works as marketing for a specific product. That can generate traffic to its restaurants for that product. But that mostly works to bring new customers to that product, rather than take away customers who already know about it.
Dutch Bros CEO Christine Barone said as much in February when analysts asked her whether McDonald’s energy drink test in Colorado took share from the beverage chain’s locations there. “This is a category that continues to grow,” she said.