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McDonald's premium coffee gains traction with one-stop breakfast crowd

by Elizabeth Ryan
Aug 08, 2007

For years, Tam Payton of Bronzeville has picked up her hash browns at McDonald's and her vanilla iced coffee at Starbucks or Dunkin Donuts before heading to her job in the Loop. But this morning, she got everything she wanted at McDonald's.

“The prices are reasonable and the coffee is great,” Payton said.

The introduction of premium coffees at McDonald’s is changing some people’s coffee habits and helping drive McDonald's same-store sales up 4.3 percent in July, prompting some to ask: Should Starbuck’s be worried?

The answer some analysts say, might depend on the occasion.

“People need convenience with respect to their morning coffee,” said Sharon Zackfia, analyst with Chicago-based William Blair and Co.

Indeed, the Starbucks Corp. strategy of setting up shop on nearly every block is designed to meet that need, Zackfia said.

“I’m guessing three-quarters of their success is because it’s close to where you work,” she said, “I can’t even fathom a circumstance where  I would walk another five minutes for coffee.”

For those who want breakfast, though, McDonald’s new all-arabica bean blend is adding more convenience to its already popular breakfast menu by eliminating the need for a second stop.

This is particularly important in the suburbs, where visiting Starbucks often means parking and getting out of the car. About half of Starbucks’s new locations will have drive-throughs, Zackfia said, but for some, it might be easier to just make a single stop.

McDonald’s sells more than 600 million cups of coffee annually, but according to Zackfia, it remains a small part of their business. For the company, the move toward premium beverages was as much about its broader efforts to rebrand itself as “relevant and contemporary” as it was about growing its piece of the coffee market.

“It’s really about becoming better, not necessarily bigger,” said Danya Proud, spokesperson for McDonald’s USA. “It’s looking at the menu, it’s looking at how we serve our customers.”

Among the other changes at the Oakbrook, Ill-based restaurant chain are the renovation of 6,500 of its 13,700 U.S. restaurants and the expansion of its menu to include premium salads and snack wraps.

So far, the strategy seems to be working.  McDonald’s reported strong sales of $6.01 billion in the second quarter, with same-stores sales surging 7.4 percent over the same period a year ago. According to Steve West, analyst with A.G. Edwards and Sons in St. Louis, Mo., coffee contributed to increased traffic at breakfast time.

But Ron Paul, president of food consultancy Technomic Inc. pointed out that coffee drinkers have different needs for different occasions.

“There are some who prefer the convenience of McDonald’s because of the drive through,” he said. “[but] surely going to Starbucks is more conducive to taking out your laptop and doing work.”

There are some customers, Paul added, who prefer Starbucks because of the taste and the ingredients.

Zackfia agreed.

“If you’re an extra-hot, no-foam, non-fat, vanilla latte, you’re going to Starbuck’s,” she said.

This might not always be the case, however. McDonald's now offers Wi-Fi service in 8,500 of its restaurants, making it the largest out-of-home provider of wireless internet service, Proud said.

The company is also test-marketing an expanded menu of customized coffee options -- a move that could help McDonald's better compete with Starbucks in a category where customers have come to expect dozens of choices. 

And appealing to Starbucks loyalists may not be as hard as some might think. 

“To me, it’s the same exact thing,” said  Kristen Mizialko, market reporter for the Chicago Mercantile Group, who used to go to Starbucks for her morning iced coffee. “Its just as good but cheaper and you know what? It’s bigger too.”