Canadian Vending

Features Coffee Service
McMochas


March 24, 2008
By Colleen Cross


Topics

McDonald’s 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.

McDonald’s 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.
“Our speed, our convenience, the value that we can afford to customers
without quality comprise will make us a formidable player.”

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Restaurants
will offer lattes, mochas, cappuccinos and espressos with a choice of
different flavourings 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 ground
swell 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 convince 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 per cent 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 some particularly saturated markets.

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 one per cent on the margin or big companies that are
trying to take more,” Starbucks Chairman Howard Schultz said. “We are
up for the defence and we are going to get on the offence.”

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, its
added the specialty coffee drinks to about 800 U.S. stores, and
announced Tuesday that it intended 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.

“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.”said.


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