McDonald's launches a new coffee chain concept that investors may love

Prakash Kolli
Wealth of Geeks

For 2024, McDonald’s has a whole new caffeine concept they hope will make coffee aficionados say, “I’m lovin’ it.”

The fast food giant announced it would open several beverage-centered concept stores called CosMc’s to compete with Starbucks. The chain’s name refers to an obscure orange alien mascot from McDonaldLand in the 1980s. The stores will be smaller than regular McDonald’s, serving mainly specialty beverages with limited food offerings. The idea is to serve coffee, specialty lemonades and teas, blended drinks, and iced coffees.

Clearly McDonald’s to expand its reach beyond burgers, nuggets, and fries. But can CosMc really compete with Starbucks and Dunkin’?

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What is CosMc?

CosMc was an orange alien character in McDonaldLand in McDonald’s ads from the late 1980s to early 1990s. Since then, CosMc has been mysteriously incognito. The alien has not appeared in commercials or marketing efforts.

CosMc first appeared in a 1987 commercial with Ronald McDonald, Grimace, and the Professor called “The Story of CosMc.” In the short story, Ronald McDonald notices a silver spaceship and knocks on it. CosMc emerges. He has buggy eyes, six arms, and sneakers.

And a craving for the fast food he can only find at McDonald’s.

He trades space objects for earthly items, but he then grabs their McDonald’s food. Ronald McDonald uses his McMagnet to pull CosMc back. Afterwards, they all eat lunch together.

CosMC last appeared in McDonald’s commercials 1989. In 1992, he even appeared in the Nintendo game M.C. Kids. But he hasn’t been seen much since.

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McDonald’s mines its past

McDonald’s is looking to its past because of its success with Grimace, a much more familiar mascot. In June of this year, the quick service restaurant introduced the Grimace Birthday Meal which included a bright purple milkshake. The combo meal and Grimace snowballed on social media. Fans turned the Grimace Shake into a murder mystery that generated over 3 billion hits on TikTok.

Charles Kempczinski, the CEO of McDonald’s, admitted in the second quarter earnings call, “This quarter, the theme is — well if I’m being honest, the theme was Grimace. I mean, Grimace has been everywhere the past few months…”

Sales grew nearly 12% globally. Success with the Grimace Shake has caused the fast food company to think about other ways to grow.

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Can McDonald’s compete in specialty beverages?

McDonald’s already sells coffee iced and frozen drinks, cappuccino, etc., in its 40,000+ stores, many of them through their McCafe concept. Overall, the product lineup is limited but successful. In fact, McDonald’s is a primary player in coffee, selling enormous quantities of the drink annually — more than some smaller coffee and beverage chains.

Despite McDonald’s success, it does not have the broad product lineup and size of Starbucks (SBUX), Dunkin’, Tim Horton’s (QSR), Peet’s, etc. They hope CosMc affords them that option.

“This is a $100 billion category growing faster than the rest of the informal eating-out segment and with superior margins,” Kempczinski said in the expansion announcement.

CosMc’s menu will include new items and some classics. Some of the new drinks include a Turmeric Spiced Latte, a Churro Frappe, and a Sour Cherry Energy Burst. New food items include a spicy queso sandwich, a creamy avocado tomatillo sandwich, and pretzel bites.

The menu also contains popular traditional offerings like the Egg McMuffin, Bacon McMuffin with Egg, Sausage McMuffin with Egg, and McFlurries.

The company began testing the concept earlier this month in a store in Bolingbrook, Illinois, near McDonald’s headquarters in Chicago. After the initial test, 10 stores will open, including ones in the Dallas-Fort Worth and San Antonio, Texas metro areas.

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Investors love McDonald’s

Investors obviously love McDonald’s because the stock price is near its 52-week and all-time high. Organic sales in existing stores and revenue are rising rapidly in part due to the success of the Grimace Shake. The company’s market capitalization has increased to more than $200 billion, making it the largest restaurant chain. For some perspective, the market cap of McDonald’s is now more than Shell (RDS.A), Netflix (NFLX), or Nike (NKE).

Investors also love McDonald’s because of its dividend streak and share buybacks. It’s on the 2023 Dividend Aristocrat list, meaning it has a 25+ year steak of dividend increases and is on the S&P 500 Index.

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The bottom line about CosMc’s

Despite its resources and reach, McDonald’s has had mixed success in expanding beyond its core retail operations. In the 1990s, it bought Donato’s Pizza and Boston Market, which the company eventually exited. The company’s one primary success was Chipotle, which McDonald’s divested in 2006. However, Chipotle’s hypergrowth occurred after it went independent. So the success of CosMc’s is not a sure thing.

The CosMc concept allows McDonald’s to experiment and potentially compete with Starbucks, Dunkin’, and other chains without diluting its leading brand. If CosMc is successful, investors should see solid returns.