Is McDonald's hurting Starbucks and Dunkin'?

But the coffee chains also could be expanding too quickly, says RB's The Bottom Line.

Both Starbucks and Dunkin’ Donuts recently reported earnings from the last three months of 2017 with a similar problem: They were losing customers in the afternoon, and were strong in the mornings.

RB's Peter Romeo detailed efforts by those and other chains to improve their business in the afternoon.

But my question is this: Why are they losing business in the afternoons and evenings, after they both spent so much time and effort improving noncoffee drinks and food offerings in a bid to make their shops all-day affairs?

Same-store traffic is a problem at both chains. Starbucks has struggled with it for more than a year. Dunkin’ has struggled with it for longer.

Both do fine in the mornings, catering to their loyal customers while giving them rewards for their repeat business through loyalty programs. They haven’t generated the same growth in the afternoons.

There are two possible explanations for this: McDonald’s and overdevelopment.

McDonald’s is an underrated but massive player in the coffee market.

If we assume that the soon-to-be-Chicago-based giant gets a third of its business from breakfast or breakfast items plus coffee drinks (which might, in fact, be an underestimate), then that alone is an $11.6 billion business.

That would make it the country’s third largest restaurant chain, just after the rest of McDonald’s business and Starbucks. It would be quite a bit larger than Dunkin’.

Essentially, McDonald’s is a top-three coffee player in a burger chain suit.

McDonald’s has been aggressively going after the beverage business in the past couple of years, but in 2017 in particular, with $1 drinks, $2 McCafe beverages, smoothies and slushie drinks in some markets over the summer. While these drinks might not be able to take away the coffee chains’ powerful and loyal morning business, they could sap less loyal afternoon customers.

In addition, McDonald’s added all-day breakfast in 2015 and expanded it in 2016.

Dunkin’s traffic has fallen for 10 straight quarters, according to BTIG analyst Peter Saleh, a slide that coincides, perhaps coincidentally, perhaps not, with that all-day breakfast.

I think there’s another problem in the form of development.

Both Starbucks and Dunkin’ have aggressively added locations in recent years. In the past two years, Starbucks expanded its unit count by 13% and now has more than 14,000—quietly taking it past McDonald’s to be the second largest chain in the country based on units.

Dunkin’, meanwhile, has grown by 9% over that time, giving it just over 9,000 locations.

Both chains clearly have enough demand in the morning dayparts to handle the additional supply of locations.

But there’s clearly not enough demand in the afternoon for all of these additional coffee shops, at least not with a strong McDonald’s out there offering $1 coffee drinks and all-day breakfast.

There are other factors, to be sure. Dunkin’ has problems in its key markets competing with convenience stores like Wawa that have aggressively targeted beverages and other drinks. Starbucks has problems in retail areas.

Both Dunkin’ and Starbucks have suggested that traffic patterns and consumer changes are more to blame for their afternoon problems. “It’s a competitive environment out there,” David Hoffmann, president of Dunkin’ Donuts in the U.S., said on the company’s earnings call this week. “But traffic patterns and consumer behaviors are changing in the afternoon.”

Starbucks CEO Kevin Johnson, meanwhile, dismissed suggestions that competitors could be taking away business.

He said that data shows Starbucks increasing customer occasions when it builds a new store in an area. And there’s “little to no impact on Starbucks’ traffic” in an area when a competitor builds a store nearby.

“It’s evidence that we’re not losing share to competition,” Johnson said. “And it’s evidence that we’re not cannibalizing as we build new stores.”

Still, it’s difficult to ignore the chains’ unit growth, and McDonald’s, as Starbucks and Dunkin’ lose business in the afternoons.

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