McD thirsts for $1B in new beverage sales

QSR leader reportedly poised to take on coffeehouses with chainwide espresso rollout

Eyeing $1 billion in incremental sales that would be siphoned largely from the Starbucks-dominated coffee-house sector, McDonald’s is poised to pursue a massive espresso beverage rollout requiring chainwide remodelings and equipment upgrades, according to a published report quoting internal planning documents.

However, until meetings scheduled for later this month, McDonald’s Corp. isn’t expected to clarify its role in helping finance what could be $100,000 in typical per-location overhaul costs for the mostly franchised chain of nearly 14,000 U.S. units, the report in Crain’s Chicago Business stated.

The nearly $1.3 billion price tag, for a rollout that McDonald’s reportedly wants to complete by late 2008, apparently would pay for more than automated espresso machines. The plan to tap what McDonald’s estimates is a $60 billion market in beverages also entails drive-thru modifications and installations of smoothie machines and wall-mounted refrigerators to sell bottled beverages and energy drinks, the planning memos are said to indicate.

The chain already has taken aim at Starbucks Coffee and other espresso specialists by test marketing such drinks as hazelnut caramel lattes and cappuccinos at hundreds of McDonald’s units in at least six states. Those tests were launched after the chain scored a 15-percent surge in coffee sales following an upgrade of its standard brew to a darker, richer beverage.

The Crain’s report said leaked McDonald’s memos envision sales of specialty beverages growing by 90 percent in the next five years to an average of $125,000 annually per location, yielding per-store profit ranging from $15,000 to $60,000.

Some 1,500 McDonald’s outlets reportedly would get the espresso makeovers by the end of 2007.

However, a McDonald’s spokeswoman denied that the company had decided to broaden its current beverage testing, which also includes bottled drinks being sold at some locations. Though the company has said it is eyeing a possible launch of smoothies, it would not comment on the leaked memos’ purported reference to energy drinks—presumably like those sold at Jamba Juice and other smoothie chains.

“We’re testing a variety of beverage options, including specialty coffee,” spokeswoman Danya Proud said. “It is far too early, however, to speculate about test results or specific product offerings. No final decisions have been made.”

Nonetheless, analysts say McDonald’s could easily take market share away from the burgeoning coffeehouse sector, especially by targeting consumers who are seeking lower-priced beverage alternatives.

“McDonald’s will steal value customers away from Starbucks,” said Darren Tristano, a vice president of Chicago-based restaurant consulting firm Technomic Inc. “In the past, Starbucks hadn’t perceived QSR to be competition. They may have to now.”

There is a proven market for specialty coffee in QSR,” said Dennis Lombardi, a foodservice consultant with WD Partners in Columbus, Ohio. “Dunkin’ Donuts has proved that, and McDonald’s will make that happen.”

Dunkin’ Donuts has sold lattes and other espresso-based drinks since 2004.

Each item from McDonald’s espresso menu would be “another snack for the growing snack day-part, and it will build morning sales,” Lombardi observed.

“It also will complement the Wi-Fi stoppers who may not be hungry enough to get a sandwich,” Lombardi said, referring to laptop-toting users of wireless-Internet services who frequent the thousands of McDonald’s that offer Web access.

Coffee has grown to 11.4 percent of all snack occasions so far this year, from 10.9 percent in 2006, said Harry Balzer, vice president of the consumer research firm the NPD Group of Port Washington, N.Y. He credited increased convenience and novelty for the surge.

The number of consumers who buy a coffee drink during a quick-service visit has jumped to 6.6 percent so far this year, from 3.5 percent for 2006, according to the latest Quick-Track consumer survey from Sandelman & Associates of San Clemente, Calif. In the third quarter of 2007 ended Sept. 30, that percentage was 8.9 percent, the Sandelman group said.

McDonald’s tests of espressos, cappuccinos, lattes, mochas, hot chocolate, iced coffees and sweet tea have spread to include the markets of Grand Rapids, Mich.; California’s Central Coast; Kansas City, Mo.; and parts of Georgia, North Carolina and Texas.

McDonald’s franchisee John Jelinek of Kansas City said sales have surged “like gangbusters” since two of his three restaurants began selling the specialty coffee items a few months ago. Most of the additional sales are in the morning, he said.

Jelinek expects to add an extra employee in each restaurant, primarily to handle the coffee service. Making the new beverages “does take more time,” he said.

However, a manager for a five-unit McDonald’s franchisee in the Grand Rapids, Mich., area that has been testing specialty coffees for the past year said most of the preparation process is automated, except for stirring in optional syrup toward the end. Now that crew members are used to the procedure, it has become second nature, she said.

Prices for the hot or iced lattes, cappuccinos, and mochas range from about $2 to $3, depending on size. Customers can choose whole, nonfat or 2-percent milk, and can opt for vanilla, chocolate, caramel and other syrup flavors.

Jelinek said he is not testing bottled soft drinks, as are some other franchisees, and he does not know of anyone in the chain currently testing smoothies. So far, he said, McDonald’s has not charged him anything for the new coffee equipment.

Whatever the cost, “there will be a payback later,” the 25-year franchisee said. “Nobody knows what it will be. McDonald’s has always been very reasonable.”

Crain’s said notes from an August meeting of McDonald’s operators indicated that one franchisee who had installed new beverage gear had pegged the cost of revamping an individual location at $100,000. Crain’s also noted that some franchisees had been angered when the chain’s last major equipment overhaul, the Made For You kitchen upgrades begun in the late 1990s, exceeded the estimated $25,000 per-location cost, of which McDonald’s had agreed to pay half.

U.S. Consumers Feel the Pinch as Wheat Prices Soar

Anthony Ippolito visits the Breadsmith bakery on Chicago's Near-North Side once or twice a week for coffee and a pastry, a rare indulgence in his otherwise healthy diet.

"I don't buy these things that much, so it's sort of a treat when I do," said Ippolito, a biology professor at nearby DePaul University.

But like many consumers paying close attention to food prices that have been creeping higher, Ippolito said he might deny himself the pastries if he has to pay much more for them.

Wheat prices are at record highs, with futures at the Chicago Board of Trade surging amid tight global supplies and strong demand from importing nations.

U.S. food companies, already struggling with higher energy, transportation, packaging and labor costs, have adjusted some of their prices or reduced package sizes to cope with the rising input costs, industry analysts said.

Sara Lee Corp, which raised prices by 5 percent in its U.S. bakery business this month, has said it may need to raise bread prices again if wheat remains near historic highs.

Many bakeries, including Breadsmith, have not yet fully passed on the rising cost of ingredients such as wheat flour, milk, and cooking oil to customers, possibly fearing sales would slow.

But as higher costs keep squeezing bakery margins, price increases across the board may be inevitable.Jill Rodriguez, a personal trainer having coffee with Ippolito on Thursday morning, agreed she also would curb her spending if prices became unreasonable.

"It's kind of like with gas prices, we don't drive as much now that gas prices are higher," she said.

Food industry analysts expect sales of staple bakery items such as bread to remain consistent even if prices rise, but purchases of nonessential goods such as cakes, pies, and pastries peobably would slow.

"It really depends on the consumer. The wealthy are not going to blink. They'll maybe complain about it, but in the end they'll pay," said Len Steiner, principal at Steiner Consulting Group, food industry consultants.

"Lower-income people will buy the staples and give up on some of the fringe items. They'll buy the bread but they won't have the pie," he said.

Any slowdown in consumer food purchases could be short lived.

"In the short term, consumers can fight it and they can walk away from the bread counter for a while," Steiner said.

"But eating habits are tough to turn around so in the longer run they're going to come back and pay what they have to to get the product," he said.

A fruitful market

Smoothie operators find abundant opportunities as consumers slurp up blended beverages

“I see smoothies where the specialty coffee industry was just 10 years ago,” says Sheri Miksa, the former chief operating officer of Seattle’s Best Coffee. Miksa now heads up the 118-unit Robeks’ chain, which serves made-to-order smoothies in 15 states and the District of Columbia.

Citing a recent report by Mintel International Group Ltd., a London-based consumer and market research firm, Miksa says Americans are buying about $2 billion worth of puréed fruit drinks a year and are expected to buy 10 percent more than that next year.

“We are at an exciting time,” she says of the burgeoning smoothie world.

“Every half-dozen years or so, chain restaurants respond to demands from public health advocates and others to add more healthful items to their menus. Traditionally those items sell badly and are soon dropped, but this time groups ranging from aging baby boomers to working mothers to high school and college students are sipping and slurping their way through satisfying drinks that are targeted as being good for them. If they can buy those options quickly and drink them with one hand while driving a car, all the better.

But, of course, some smoothie buyers just want a tasty pick-me-up, and rich, indulgent frozen beverages are selling well, too, such as Godiva Chocolatier’s “Chocolixir” line, which was just expanded with dark chocolate raspberry and white chocolate raspberry flavors.

“It’s for someone who really wants to enjoy that chocolate decadence,” says Erica Lapidus, Godiva’s head of public relations and promotion, noting that the $4.75 drinks have succeeded at bringing in younger and more frequent customers

On the lighter side, Robeks recently launched a line of “naturallylight” smoothies with one third fewer calories, on average, and no artificial sweeteners. The new smoothies eliminate the frozen yogurt and sherbet in Robeks’ other beverages, replacing them with more fruit and fruit juice along with a fiber and protein additive.

“They are really in response to what our guests are asking for,” Miksa says, pointing to a desire both for fewer calories—and fewer carbohydrates and sugar—but also for food that does not have sugar substitutes and seems natural.

Even when customers want sugar and sugar substitutes in their smoothies, the more natural they seem the better: Barbara Valentino, director of marketing and communications for Tropical Smoothie Café, a 10-year-old chain based in Destin, Fla., with 245 units in 31 states, says the chain’s smoothies contain either turbinado sugar or, in the case of their “Splendid Smoothies,” a sugar substitute that’s marketed as “natural.”

The convenience of smoothies isn’t lost on patrons of higher end restaurants, either.
“People who want to eat their breakfast on the go… They order it at the bar on the way out instead of grabbing, like, a yogurt,” says Kristine Subido, chef of Wave at the W Chicago Lakeshore hotel, noting that they sell them in clear plastic cups there.

Her most popular smoothie is the “Peacharific,” made with peaches, banana, vanilla yogurt and orange juice, which is $6 for eight ounces.

Although most of her smoothies are bought during breakfast, they sell reasonably well all the way until noon, and then kids like to get them for afternoon pick-me-ups.
“I know a lot of parents order them for their children,” she adds.

Efrem Cutler, corporate executive chef and vice president of food production for UFood—a Massachusetts-based chain formerly known as KnowFat Lifestyle Grill—also sees kids ordering his fruit-based “Smuuthies” as afternoon snacks, often with the chain’s air-fries, while active college students and others will drink protein-enriched “Prolatta” drinks before or after working out. The Prolattas are “a little bit fluffier” in texture, owing to the added protein that’s beaten into them, he says.

Jim Baskett, vice president of business development for Emerald City Smoothie, a 48-unit chain based in Seattle, says he also sees a demand for functional foods from his customers and has noticed police officers, firefighters and emergency medical technicians using his protein-enriched smoothies as meal replacements.

James Boyce of Studio in Laguna Beach, Calif., has jumped on the antioxidant trend with his gojiberry-açaí smoothie. Both goji and açaí are fruits that are praised for their high antioxidant content.

“Açaí is sort of gritty,” Boyce says, noting that the purée he buys is about 95 percent pit and 5 percent flesh. “So I thought we’d smooth it out by adding the chewy gojis.”

He describes the flavor of açaí as being similar to boysenberry. Gojis are tart, he says, “almost between a cranberry and a raspberry.” He purées them with a banana, apple juice, soy milk and ice.

Boyce also makes seasonal smoothies, so now he is making one of peach and other stone fruit. “Sometimes we’ll throw a cherry in there,” he says.

Starbucks also jumped on the antioxidant bandwagon with the recent release of its Blueberries & Crème Frappuccino.

For David Guas, executive pastry chef of Acadiana, Ceiba, DC Coast and TenPenh restaurants in Washington, D.C., the idea of smoothies didn’t come from health or indulgence, or even convenience, but as a way to deliver an intense berry flavor without much fuss.

He makes blueberry shooters by mixing blueberries with limoncello, light corn syrup and salt, macerating them at room temperature for an hour and then refrigerating the mixture. To serve he pours it all into a blender, adds ice cream and blends it until smooth, then puts it in a 1.5- to 2-ounce shot glass and serves it on the side of fruit desserts.

“Customers think it’s fun and cute,” he says, noting that he will add a shot of bourbon to peach smoothies for a more adult drink.

Sometime he will add egg white powder and froth it a bit to make it reminiscent of an Orange Julius.

“There’s something about a blended drink, for whatever reason, whether it’s a daiquiri, a shake, or a smoothie, that touches the child in people,” he says. “There’s some kind of recognition and comfort level with it.”

But some studies have indicated that when people drink liquids, they don’t feel as full as when they eat solid food. That, some scientists have suggested, could lead to overeating.

Jamba Juice is launching a “chunky smoothie” to address two issues, says Paul Coletta, senior vice president of marketing and brand development: the fact that more smoothies are being used as meal replacements, and the trend in smoothies toward more texture and, as a result, satiety.

“We started playing in the lab with bringing [textured] ingredients into the smoothie,” he says.
So drinks with fruit and granola pulsed into it are being tested in Jamba’s home market, the San Francisco Bay area, and plans are under way to roll it out systemwide to its 577 units in 2008.

“We are looking at it to be a significant driver of our comp store sales,” he adds, noting that the new line of smoothies will be available all day but are being positioned as breakfast items.
Coletta adds that Jamba Juice already does 18 percent of its business at breakfast, compared with 11 percent on average in the quick-service segment.

The chain also launched this month a smoothie category called Jamba “Functionals,” which focuses on specific health issues that its customers are looking to address. Coletta said the company’s research found that its customers’ top demand in food was taste—but functionality was No. 2.

So the new line includes a Nike Protein Berry Workout Smoothie, developed with Jamba Juice’s shoe-producing marketing allies, with 19 grams of protein in a 24-ounce serving.

The Heart Defender includes a “Happy Heart Boost,” one of many supplements available at this and other smoothie chains. This particular “boost” is made with a heart-healthy plant sterol.
The other three new items are the Açaí “Super-Antioxidant,” the Cold Buster and, for people looking to lose weight, the Fit and Fruitful.

Jamba Juice is also adding a new “boost” to its offerings—the Green Caffeine, which is derived from green tea and engineered to be high in antioxidants and caffeine, but nearly neutral in color and flavor.

Smoothies also can fit into a nonsmoothie restaurant’s brand positioning, such as at Pico’s Mex-Mex in Houston, where avocado, yogurt, agave syrup, ground almonds, vanilla and nutmeg are blended into a smoothie. “The yogurt gives it a very nice texture, and so do the almonds,” says restaurant owner Arnaldo Richards.

But he admits that more people order daiquiris.

The Nutrition-Conscious Are Taking a Bite Out of Fast Food

So, maybe you'll have a side order of fruit instead of fries with that cheeseburger.

After a decades-long fast-food binge, the notion of watching what you eat seems to be hitting more Americans -- but certainly not all -- as they approach the counter of their favorite "quick-service" outlet, experts say.

Changing tastes -- along with some regulatory prodding -- means the nation's fast-food industry is also getting the message. Citywide bans on tasty but heart-clogging trans-fat cooking oils, legal moves to mandate calorie counts on menus, and even an effort to outlaw new fast-food franchises in obesity-plagued south Los Angeles have grabbed headlines this year.

One industry representative believes fast-food businesses are responding to consumers' changing tastes and health concerns -- and the obesity epidemic.

"I think that quick-service restaurants have done a great job of offering and highlighting [healthier] items," said Sheila Weiss, a registered dietitian and director of nutrition policy at the National Restaurant Association, which describes itself as the leading business association for the restaurant industry. "A lot of their campaigns recently have focused on the elimination of trans fat oils, on offering more entree salads and better options for side dishes like fruits and low-fat skim milk."

Last week, Burger King pledged to offer kids healthier food options, such as apples cut to resemble French fries and a kids meal with low-fat, flame-broiled chicken tenders, unsweetened applesauce and low-fat milk. McDonald's already offers children apple slices in a low-fat caramel dip, while adults can snack on the chain's Paul Newman salads or fruit parfaits. Wendy's is offering up salads, or yogurt laden with granola and mandarin oranges.

One independent nutritionist agreed that, 67 years after the first McDonald's opened in San Bernardino, Calif., fast-food menus may be finally changing for the better.

It's been tried before, but this time the changes might stick, said David Grotto, a Chicago dietitian and national spokesman for the American Dietetic Association.

"We have seen healthier offerings now because there is a market for it," Grotto said. "If we think back to McDonald's, when they first offered the McLean burger [in 1991], that was a disaster. But there wasn't a market for it then -- people were not going to burger joints to get healthy, they just wanted a good burger."

Times and trends have changed, Grotto said. "What is happening now is that you are starting to see Paul Newman salads, apple dippers, etcetera, and they are selling because there is a market for it," he said.

That doesn't mean fast-food menus are necessarily causing Americans to eat better, however.
"The healthier options that are offered at quick-serve restaurants are for a very specific demographic," Grotto contended. "They walk into the restaurant already knowing that they are going to make a healthier choice. On the other hand, if you go into a burger joint and you have your mind set on a burger, you are not going to get the Paul Newman salad."

For similar reasons, Grotto is dubious that proposals to mandate calorie counts on fast-food menus will get people eating healthier diets. One such law proposed for New York City was shot down by a judge last week.

"I firmly believe that the consumer who goes in and wants the burger already knows that it may not be the healthiest thing in the world," Grotto said. "So beating him over the head about [calories] isn't necessarily going to change things."

Weiss agreed, adding that information on the calorie content of fast foods is already offered to consumers in other ways, such as brochures, tray liners and Web sites. And she wonders whether the average consumer can easily interpret calorie counts, anyway.

"When the International Food Information Council asked people how many calories they needed per day to maintain their weight, only 12 percent of respondents were able to give the correct answer," Weiss said. "That shows that people do not understand the context of calories in their diet and lifestyle."

According to Weiss, what consumers really want is choice.

"This is not a charity, it is a business," she said. "Restaurants are providing foods that their customers want and are going to eat." For some of today's customers, that now means healthier foods, Weiss said, and "if people didn't want them and they weren't selling, they wouldn't stay on the menu."

Weiss said her association supports recent moves in New York City, Seattle and elsewhere to limit trans fat cooking oils in restaurant fare. But she worries that deadlines for the changeover are being set too tightly to allow businesses to find reliable substitutes in time.

Grotto, author of the forthcoming book 101 Foods That Can Change Your Life, cautioned that McDonald's, Wendy's and other fast-food retailers haven't turned into health food havens quite yet.

"The bread-and-butter of the quick-service industry is not healthy foods," he said. "It's still very much driven by what the consumer wants," and for most consumers, that's high-calorie, fatty fare, he said.

So, what efforts can work to change people's dining preferences for the better?
"I'm old school on this," Grotto said. "I think that starts in the home." When parents model good nutrition and exercise, healthier kids will follow, he said, and those children typically grow into health-conscious adults.

"If we are ever to tackle this huge problem of obesity, it's not about any one smoking gun," Grotto said. "Everybody has got to play a role in turning this around."