HK saturated with highly priced coffee

PUBLISHED : Monday, 14 January, 2008, 12:00am
UPDATED : Monday, 14 January, 2008, 12:00am


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Every morning Agnes Lee heads to the Starbucks, orders a HK$30-cup of tall Cafe Latte and takes it back to her office. 'It is real coffee. It tastes better,' explains the accountant.

Ten years ago no one would believe that people would spend more than HK$20 on a cup of coffee. But getting a fresh brew from a well-designed, up-scale chain like Starbucks or Pacific Coffee has become routine for many people like Lee.

The phenomenal success of Starbucks has transformed the little black beans into a trendy and stylish beverage business worth hundreds of millions of dollars. The market is so profitable that even fast- food colossus McDonald's has set foot in it to get a slice of the big pie, changing its famously rigid business model to do so.

The first McCafe opened in 1999 in Central. But it was not until the past few years that it rapidly expanded its outlets. McDonald's now has 46 located within its 200 Hong Kong branches.

Inside a McCafe, the sharp yellow and red colour scheme is softened; the bright lighting is dimmed; and the hard plastic booths are replaced with sofas and armchairs. McCafe provides a cosy, stylish, more-adult and open ambience than the standard fast-food formula.

Starting from HK$17 for a small cappuccino freshly brewed by a trained expert, McCafes provide a wide selection of coffee, sandwiches and cakes.

Customers can personalise their coffee with additional milk or chocolate powder.

In addition, McCafe offers 20 minutes free WiFi (wireless internet access) to customers per day - generous when compared to Starbucks, which only offers WiFi to registered PCCW users.

Back home, McDonald's aims to set up McCafes in its 14,000 locations across the US. It is the biggest menu addition in three decades.

Apart from comfy environment and a wide selection of coffee, McDonald's will also work with Sony to provide free WiFi access in all its US restaurants.

'In the past five years, the designed cafe has become a trend in the market, particularly in Hong Kong. What McDonald's is trying to do is to further refine itself and broaden its customers base,' says Robert Wright, assistant professor of the department of management and marketing at Hong Kong Polytechnic University.

He doubts if it is a smart decision. Citing an analogy used in the bestselling business strategy book Blue Ocean Strategy, Wright calls the current cafe market a 'red ocean' - a saturated market. 'McDonald's move is following the trend, not innovation. Rule one of the Blue Ocean Strategy is to avoid head-to-head competition in a red ocean. You should always try to create a blue ocean.'

McDonald's Hong Kong says they see McCafe continuing to grow, and they plan to expand in future. Yet their presence in the coffee business does not appear to be as lucrative in Hong Kong as Starbucks. If you walk into a McCafe on a busy afternoon the seats are sparsely occupied, a sharp contrast to Starbucks or Pacific Coffee where you struggle to sit. And although Starbucks costs more, people still opt for it.

'Starbucks has a powerful psychological strategy; it makes customers need it, like a lot of women think they need a Louis Vuitton handbag.

'When people look at Starbucks, it goes beyond the caffeine and the trend. It's about the environment. That's why they come back,' Professor Wright explains.

Does that mean that McDonald's stands no chance in the coffee market?

Starbucks may still maintain dominance in Hong Kong but it faces stiff competition from Pacific Coffee and has gradually been losing ground. In the US, Starbucks' share price has dropped by almost 50 per cent, and it recorded a decrease in revenue for the first time in its history in 2007. And McDonald's is a very well-developed brand with hundreds of branches, so it certainly has a chance.

But what it really comes down to is quality. There are customers, like university student Teresa Yeung, who are prepared to test out McCafe but they know what they like.

'I've tried McDonald's coffee. It's not as good as Starbucks or Pacific Coffee. But if McCafe brings out a great espresso, I will go for it.'