McDonald's challenging Starbucks with cheaper coffee drinks

When Charles Ruppert has a yen for a white-chocolate latte, he doesn't head to a Starbucks shop. He goes to a McCafe located in a McDonald's restaurant and pays 26 percent less.

"McDonald's got a real winner," said Ruppert, 55, a car-repair shop owner in Greensboro, N.C. Analysts think so, too: McDonald's shares will rise 18 percent in the coming year, UBS Securities estimates.

McDonald's, the world's biggest restaurant chain, has added the frothy drinks at two-thirds of its 13,794 U.S. stores since introducing a stronger brew in 2006.

Shares of Starbucks are down 24 percent in 2007, on track for their worst annual performance amid the slowest sales growth in more than five years at stores open at least 13 months.

McDonald's is "being extremely aggressive," said Peter Kwiatkowski, who helps manage $21.9 billion, including 1.3 million McDonald's shares, at Fifth Third Asset Management in Cincinnati.

"They're a lot cheaper than Starbucks coffee in general, and they have the high quality to go with it."

Ruppert paid $3.31 for a 20- ounce cup of latte at the McDonald's in Oak Ridge, N.C., compared with the $4.48 cost for the same size at Starbucks

.
McDonald's coffee is drawing new customers and spurring food sales, especially at breakfast, President Ralph Alvarez said.

"Coffee, by itself, is a very high-margin business," said Alvarez, 52. "But it doesn't compare to what we get selling a full meal."

McDonald's said Tuesday that August same-store sales climbed 8.1 percent, helped by coffee and breakfast items. Sales on that basis have advanced 7 percent in the first eight months of the year. Alvarez declined to disclose breakfast results.

The chain offers lattes, cappuccinos and iced brews in 9,000 U.S. restaurants where consumers order coffee primarily at drive-through windows, Alvarez said.

U.S. coffee sales through restaurants, cafes and other outlets may reach $29 billion by 2011, 50 percent more than last year, according to New York-based National Coffee Association. About six in 10 adults drink coffee, making it the second most popular beverage after water.

Starbucks controls 52 percent of the global specialty coffee market, Euromonitor International Plc said. McCafe is the fifth-largest, with 1.7 percent.

Word is getting out about McDonald's coffee. In March, Consumer Reports magazine reported a taste test of basic black coffee found McDonald's stronger blend beat brew from Starbucks, Burger King and Dunkin' Donuts.

Consumer Reports' "trained tasters" visited two stores of each company. McDonald's coffee was "decent and moderately strong," whereas Starbucks was "strong, but burnt and bitter enough to make your eyes water," the magazine said.

In the U.S., McDonald's coffee sales climbed 20 percent through June from the February 2006 debut of the stronger blend. Sales that include hot, iced and specialty blends are up 34 percent this year, it said.

Sales at Starbucks stores open at least 13 months rose 4 percent in both the second and third quarters this year, the slowest growth rates since 2002. Total revenue jumped 20 percent to $4.61 billion from January through June of this year.

Rising sales of McDonald's coffee prompted Marc Greenberg, a Deutsche Bank Securities Inc. analyst in New York, in June to reduce his Starbucks stock-target price by 14 percent to $32.

"The golden arches are doing coffee better," Greenberg wrote in an investors' note. He rates Starbucks as "hold."

Starbucks has set a goal of 40,000 locations. The company had 14,396 outlets as of July 1. In the U.S., it has 10,295, compared with almost 13,800 for McDonald's.

Starbucks Chairman Howard Schultz has acknowledged the threat of fast-food chains, even though his company has 87 percent of the U.S. specialty coffee-shop market, whereas McCafe has less than 1 percent, according to Euromonitor.

Fast expansion and similar designs made Starbucks cafes lose the "warm feeling of a neighborhood store," Schultz wrote in a memorandum to top executives in February.
Starbucks now sells warm breakfast sandwiches such as eggs Florentine with spinach and Havarti cheese. It offers gourmet salads, including Asian sesame-noodle that cost $6.
Alvarez said McDonald's has no plans to offer the breadth of Starbucks beverages such as raspberry latte with soy milk and half the caffeine.

"If your only business is coffee, you better have all those options," Alvarez said.
"But we don't need 31 flavors, just enough variety to be considered a destination for coffee."

California Passes Nation’s First Statewide Menu Labeling Law

By a vote of 42 to 31, the California Assembly tonight made California the first state in the nation to pass statewide legislation requiring fast-food outlets and chain restaurants to provide nutrition information at the point of purchase – a move favored by 84 percent of Californians in a statewide poll last April. Commonly known as the menu-labeling law, Senate Bill 120 (Padilla/Migden) is seen as landmark legislation to help Californians make healthier choices.

“The Assembly vote confirms that 35 million Californians have a right to know what they are eating before they order it,” explained Dr. Harold Goldstein of the California Center for Public Health Advocacy (CCPHA), a sponsor of the legislation. “This is solid, well-thought-out legislation that recognizes that consumers can’t possibly make a healthy choice without basic nutrition information on menus and menu boards.”

The challenge to understand chain restaurant menus was highlighted earlier this year when a statewide Field Research Corporation poll was released showing that only 10 percent of Californians could pick the healthiest item from a short list of common fast foods. Restaurants and fast-food outlets are a key concern because Americans spend nearly half their food dollars away from home.

When signed by the Governor, SB 120 will make California the first state to require chain restaurants and fast-food outlets to provide nutritional information for standard menu items. Specifically, the bill requires the number of calories to be posted on menu boards. Printed menus would provide the amount of calories, grams of saturated fat, trans fats, sodium and carbohydrates.

Earlier this year, New York City and Washington’s King County mandated similar menu labeling requirements, part of a growing national trend to help consumers beat America’s growing obesity crisis. California’s SB 120, however, marks the first time that a state legislature has passed this policy (New York and King County adopted the policy through regulation).

CCPHA is an independent, nonpartisan, nonprofit organization leading efforts in California to understand and address the state’s growing obesity crisis. The American Heart Association, American Cancer Society and California Optometric Association are also sponsors of the bill. For more information on this legislation, visit the CCPHA site at: www.publichealthadvocacy.org.

FDA Endorses Strategic Framework Document on Food Import Safety

Michael O. Leavitt, secretary, U.S. Department of Health and Human Services (HHS), today delivered a strategic framework on import safety to President Bush. The framework was developed by the Interagency Working Group on Import Safety, established by the President July 18 to examine our nation’s system for assuring that all of our imported products are safe.

"I strongly endorse the release of the Strategic Framework developed by the Interagency Working Group on Import Safety and commend Secretary Leavitt for leading this comprehensive effort,” said Dr. Andrew C. von Eschenbach, commissioner, FDA. “Recent recalls of imported products have caused Americans to question the safety of imports. Americans rightly expect to purchase food and medical products without having to worry about their safety; and assuring the safety of these products is a core part of our mission at the FDA.”

The Interagency Working Group on Import Safety, made up of senior Administration officials, was established by executive order on July 18, 2007, to conduct a comprehensive review of current import safety practices and determine where improvements can be made.

“The three organizing principles that form the keystones of the Strategic Framework—Prevention, Intervention and Response—are ones we embrace strongly here at FDA and are principles we know will guide us towards better and smarter import safety strategies,” says von Eschenbach. “We know that in the 21st century's global economy, our efforts to assure product safety for Americans cannot just begin at our borders, they must begin at the time the products are produced in other countries. I am excited about the fact that these principles have been embraced by the Framework, and I look forward to working with the Group on the Action Plan to be released in November. Together, we will further integrate and enhance our processes relating to the safety of imports."

China declares 'special war' on shoddy goods

LETS STOP BUYING OUR FOOD PRODUCTS FROM CHINA!

China has stepped up its campaign to restore confidence in the "Made in China" label over the past week while also striking back at critics who have called its goods shoddy or dangerous.
Responding to a series of high-profile recalls and product safety scandals this year, Beijing introduced a new food and toy recall system last week and also announced what it called a "special war" to crack down on poor quality products and unlicensed manufacturers.

Moving swiftly with an army of inspectors, the government said it had begun nationwide inspections of farms, groceries, restaurants and other manufacturing operations in an effort to root out fake and substandard goods.

Regulators claim that in recent months, they have busted up scores of counterfeit drug makers and unlicensed toy producers, and criminal networks that make everything from fake bird flu medicine and sham Viagra to counterfeit toothpaste.

Indeed, beginning last weekend, regulators here also said food packages that did not contain a quarantine label certifying them as safe were blocked from being exported.

"This is a special war to protect the safety and interests of the general public, as well as a war to safeguard the Made in China label and the country's image," Deputy Prime Minister Wu Yi said at a news conference Friday.

Trying to persuade the international community of its commitment to improving consumer product safety after a series of scandals involving everything from tainted pet food ingredients and toxic toothpaste to toys coated with lead paint, the government even offered foreign journalists escorted tours Tuesday of a toy factory and toy testing lab in southern China's Guangdong Province, where most of the country's toys are produced.

The government hoped the tour would demonstrate that safeguards had been put into place.
The bold moves and tough rhetoric suggest that China is growing increasingly worried about the possibility of trade sanctions or further damage to its international profile heading into 2008, when Beijing is host to the Summer Olympics.

But the government has also shown its resolve to fight back against critics of its booming exports, many of whom Beijing has labeled trade protectionists.

Last week, for instance, China said it had blocked imports of American wood packaging material after finding them contaminated with what inspectors said were "worms and other creatures."
Earlier this year, Chinese regulators rejected imports of American meat, Indonesian seafood and other products from the Philippines, South Korea, Germany, France and Spain, saying those countries also shipped shoddy and tainted goods, even Evian water tainted with high levels of bacteria.

Experts said that not since the SARS, or Severe Acute Respiratory Syndrome, hit China in 2003, has the government moved so aggressively to respond to critics with such a forceful global public relations campaign.

But experts say regulators here are facing daunting challenges in trying to overhaul a corrupt and ineffective regulatory system that is ill equipped to control a marketplace teeming with unlicensed operations and entrepreneurs willing to cut corners to make a fatter profit.

"They're very concerned about the reputational damage to the China brand," said Arthur Kroeber, a longtime China observer and publisher of China Economic Quarterly, an economics research outfit based in Beijing. "But the reality is this is a vast problem, involving hundreds of thousands of factories, which are hard to police."

The government has also begun a campaign aimed at the domestic market or Chinese citizens who face the greatest risk of being exposed to substandard goods.

In recent weeks, Beijing's largest state-run television network has been broadcasting a special called "Believe in Made in China," which features interviews with regulators, in-depth reports on China's biggest companies and segments on "foreigners who buy Chinese goods."

A promotion for one special called it "fighting to save the reputation of Made in China."
Still, most of China's efforts have been aimed at the international community. And so in recent weeks, government officials and diplomats have called news conferences, held high-level talks with Western officials and also briefed foreign reporters on the drastic changes they say are under way here.

"The government is really, really serious, and you will see concrete results by the end of this year," Kuang Weilin, China's deputy consul general in New York said at a U.S. news conference last Thursday. "Officials will be held accountable for what happens."

Chinese officials are likely to take such a threat seriously, given the execution in July of China's former top food and drug regulator for taking bribes to approve untested medicine.

Beijing insists that improvements are already being seen. And while China has long insisted that 99 percent of the country's exports to the United States, Europe and Japan are safe, the government has at times acknowledged huge problems in product safety.

After government investigators found that Chinese companies had exported tainted pet food ingredients and toys coated with lead paint, they closed factories and even detained managers.
But the recalls continue to come, not just from the United States but from a growing number of other countries around the world.

Two weeks ago, for instance, New Zealand said it was investigating reports about what some called "chemical pajamas," Chinese made clothing that some scientists said contained dangerous levels of toxic formaldehyde.

And late last week, Canada announced it was recalling thousands of pencils made in China because of fears they were coated with too much lead.

Beijing, however, has made food safety one of its first initiatives. The government says it plans to spend $1.1 billion to improve food and drug safety supervision by 2010. The government also said that under the new recall system announced last week producers would be held accountable for products that posed a danger to public safety.

The government even issued a lengthy "white paper" on food safety last month and said it would begin offering rewards to those who blow the whistle on bad producers.
Regulators have unleashed a flood of new regulations and initiatives in recent months, including a promise to create national standards to govern things like cooking oils and the fillings of moon cakes.

And if anyone has doubts about food safety during the Olympics, Beijing said it was already acting: White mice will be used to test most foods served to athletes, and pigs are already being bred organically, in secret locations. Global position system, or GPS, technology is being employed to track the whereabouts of some animals.

At home, however, consumers seem to be suggesting they have heard it all before. When China Daily, the country's English language newspaper, recently asked consumers whether they believed most food in China was safe, 41 percent answered: "No."

Muffins: not just for breakfast

Although muffins are not the largest contributor to in-store bakery department sales, the popular breakfast food maintained steady sales throughout 2006 and outpaced bakery department growth by 4 percent. Nationally, muffin sales made up 4.5 percent of total bakery sales in 2006, up 0.2 percentage points from the previous year. The category saw an 11.6 percent increase in national dollar sales compared to a year ago, averaging $377 in sales per week per store, according to the Perishables Group. The Chicago-based market research firm compiles scanner data from the perishables departments of more than 16,000 stores nationwide. This report includes the group’s most current annual data from the 52 weeks ending Dec. 30, 2006.

Muffins’ popularity beyond breakfast–through lunch, dinner and snacking dayparts–also is contributing to sales growth of the category. “We sell the most muffins between [the hours of] four and seven,” said Mike Lamontane, bakery/deli department manager, Food Lion’s Bloom, Salisbury, N.C. “People also tend to buy them to eat the next day.”

In 2006, muffin dollar sales were lowest in early January and again in December indicating that competition from other holiday breakfast foods impacted everyday muffin sales. The category slowly rebounded in the first quarter of 2006 but experienced a distinct dip in sales during the fourth week in April yielding the third lowest average weekly dollar sales of the year. Muffin dollar sales reached an annual high of $392 average weekly dollar sales during the second week of May and a low of $288 average weekly dollar sales the
week after Christmas.

The East region contributed the highest percentage of muffin dollar sales to the bakery department in 2006, averaging 7.2 percent per week per store–2.9 percentage points higher than total U.S., but unchanged compared to the previous year. The East region also claimed the greatest muffin dollar sales, more than double average weekly dollar sales nationally and 5.1 percent higher than a year ago. Though the Central region reported the second lowest average weekly dollar sales with $296 per store per week, the muffin category outpaced department growth in the region by 13.1 percentage points.

Across the U.S., regular muffins generated the majority of muffin dollar sales in 2006 at 53.5 percent followed by jumbo/ gourmet muffins at 31.3 percent. Regular muffins peaked in average weekly dollar sales during the second week in May before leveling off and then steadily declining throughout June and July. Jumbo/gourmet muffins saw a steady increase in average weekly dollar sales throughout the summer, reaching peak sales the last week in September.