McDonald’s last week opened CosMc’s, a drive-thru beverage concept that is named for a McDonaldland alien character from the 1980s. The location, in suburban Chicago, drew hours-long lines. Some customers came from as far away as London.
It’s an interesting bit of risk-taking for the fast-food giant. But there is good reason for that. Specialty beverages is a hot category. Customers are loyal. They can come in frequently. And the menu is profitable.
“In our top six markets, this is a $100 billion category that’s growing faster than the rest” of the market for informal eating out, CEO Chris Kempczinski told investors last week. “And with superior margins.”
“It’s a space that we believe we have the right to win,” he added.
Beverages have long been a restaurant profit center, because restaurants were able to charge well above their actual cost to produce drinks. And then Starbucks came along and took that idea to another level.
The company learned it could charge customers a premium for higher quality coffee and espresso drinks, which people would consume while doing homework or meeting folks in the cafes.
As Starbucks has grown, however, the types of beverages, and their prices, has grown with it. Cold beverages now make up about three-quarters of its beverage sales. And some of those beverages cost quite a bit. For instance, a grande Iced Apple Crisp Oatmilk Shaken Espresso costs $6.25.
Not only that, customers will customize these cold beverages with flavorings and foams that can drive up the price further. For a customer who has a certain drink preference, an extra dollar or two doesn’t matter. To Starbucks it does: Those beverage modifiers are a $1 billion annual business.
That customers are willing to modify their beverages and increase their own costs, and continue to pay it, says a lot about the market and why McDonald’s would want a piece of it.
Beverage chains also boast a loyal customer base, many of whom are willing to visit several times over the course of a week or even a couple of times a day. Not every brand can say the same thing. A person may only get a Big Mac once or twice a week, generally. But they may get an iced coffee once or twice a day.
All this makes the business profitable. Starbucks has used its profitable beverage business to fuel heavy investments in its employees, technology and expansion—enough that it is on the verge of overtaking Subway as the world’s second largest chain by unit count. And within five years it’ll be the largest such chain in the U.S.
Dutch Bros, the Grants Pass, Ore.-based chain of drive-thru beverage shops, generated a 31% restaurant-level profit margin in the third quarter. That was about 500 basis points higher than Chipotle, which has long used such profitability to expand and boast about the “Chipotle model.”
Meanwhile, brands are also learning that drive-thru beverages is where to go. Starbucks has shifted much of its U.S. development toward drive-thrus. Caribou, the Minneapolis-based coffee chain, is deploying a drive-thru-only model that it is using to expand. Biggby Coffee out of Michigan is, too.
Drive-thru beverages are also attracting a lot of growth concepts and franchisees. Scooter’s Coffee, based in Omaha, grew sales by 52% last year, according to Restaurant Business sister company Technomic. Arkansas-based 7 Brew grew nearly 150% last year and is on pace to beat that this year. And the customizable soda chain Swig is in the early stages of its own rapid growth.
Bubble tea is another hot growth area, and much of CosMc’s menu is aimed in that direction. Gong Cha, the rapidly growing tea brand, grew by nearly 40% in the U.S. last year, according to Technomic.
None of this guarantees success for McDonald’s. It’s difficult for large restaurant chains to create secondary concepts and this is no different. Just because McDonald’s can get a lot of attention for CosMc’s early on doesn’t mean that the concept will be a long-term success. And if the big brand ever struggles, that secondary chain can become a target of criticism for franchisees, investors and others.
But it’s a profitable, fast-growing market full of loyal customers who visit frequently. It’s not a bad market to target.