CHICAGO (AP) - McDonald's Corp. executives came out swinging when they
announced their assault on the comfy world of coffee shops.
After the success of its upgraded drip coffee -- which even managed to snag
a thumbs-up from testers at Consumer Reports earlier this year -- the fast food
chain known for super-size meals is gearing up for a massive expansion into the
world of lattes.
"We want to move from beverages as an accompaniment to being a beverage
destination," Don Thompson, president of McDonald's USA, said in a meeting with
analysts Tuesday. "Our speed, our convenience, the value that we can afford to
customers without quality comprise will make us a formidable player."
Restaurants will offer lattes, mochas, cappuccinos and espressos with a
choice of different flavorings and milk. Industry watchers say the drinks cost
about 50 cents less than at Starbucks.
But as it tries to cash in on the fast-growing specialty coffee market, the
world's largest restaurant chain is already finding itself at odds with the
unlikeliest of groups: Its own franchise owners.
"There's a real groundswell of resistance among the franchisees about this,"
said Richard Adams, a consultant for McDonald's franchise owners. He estimated
the effort has a 50-50 chance of getting off the ground because of franchise
opposition.
Store owners are balking at the plan's estimated $100,000 price tag to cover
renovations and initial new equipment.
And many are concerned that little customer interest in McMochas means it
will could take years to recoup their investment, even on the famously
high-margin coffee drinks.
"They're going to have whipped cream on their face," Adams said.
McDonald's said it's confident the new coffee will win over new customers
and help individual stores boost annual revenue by about $125,000 once the
coffee products, along with new bottled drinks, smoothies and other beverages
are added to stores.
Zachary Aisley, a 27-year-old from Woodland Hills, Calif., has been
impressed with the value and taste of McDonald's attempts at premium drip
coffees and iced coffees. Now he's looking forward to sampling the company's
lattes and mochas to see if they merit more frequent visits.
"I think their addition could bring me into the store," he said. "And I
would definitely be likely to go in and try it."
If McDonald's can persuade its franchisees to sign on, analysts say it can
likely thrive in the growing $12 billion specialty coffee market, which includes
both brewed coffee and beans.
About one in five Americans drinks some kind of espresso-based coffee each
day, and the market is supposed to grow by at least 4 percent each year until
2011.
"With coffee gaining so much ground, McDonald's almost has to go there,"
said Sharon Zackfia, a restaurant and retail analyst with William Blair & Co.
"The feeling that the coffee business is a single pie and everyone is fighting
for different slices doesn't seem to acknowledge that the pie is growing."
In response, companies are scrambling to offer more steamy drinks and
snacks.
Dunkin' Brands Inc. added espresso beverages to Dunkin' Donuts shops in 2003
and credits the full-line of coffee drinks with helping its aggressive growth
plans.
And Canadian coffee chain Tim Hortons, which is expanding its own U.S.
presence, said customer demand for one-stop food and coffee shopping is growing.
"I think we're all now competing in the same space," said spokeswoman Rachel
Douglas. "I think the lines are blurring, and I think consumers are demanding
that."
A full-court press by McDonald's couldn't come at a worse time for Starbucks
Corp., the world's largest chain of coffee houses, which is struggling with
rising dairy prices, growing competition and flattening store traffic in the
U.S.
In a conference call with analysts last week, executives with Seattle-based
Starbucks said they welcomed the competition. Then they threw in a subtle jab.
"We understand all too well that we have built a very attractive business
for others to look at and try and take away, whether it's 1 percent on the
margin or big companies that are trying to take more," Starbucks Chairman Howard
Schultz said. "We are up for the defense and we are going to get on the
offense."
McDonald's first launched its so-called premium coffee about 18 months ago,
followed by limited tests of sweet tea and iced coffee. Since then, it has added
the specialty coffee drinks at about 800 U.S. stores, and it announced Tuesday
that it intends to add the beverages to locations nationwide by early 2009.
A Starbucks spokesman declined to comment on the news, offering a company
statement that it remains "focused on exceeding ... customers' expectations."
In a seemingly coffee-saturated society, there's little chance of a
full-fledged coffee war between McDonald's, Starbucks and the myriad of other
coffee purveyors like Dunkin' Donuts and Caribou Coffee Co.
"I think that they appeal to two different types of customers," said
Morningstar analyst John Owens. "I think there's room for both McDonald's and
Starbucks to be successful in selling coffee. This isn't something where one is
going to be completely victorious over the other."
AP Business Writer Elizabeth M. Gillespie in Seattle contributed to this
report.
(This version CORRECTS that Starbucks has not specified which U.S. markets
have been hit with flattening store traffic.)
Copyright 2007 Associated Press. All rights reserved. This material may not be
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