McD's to pick up part of coffee tab

Company shares costs with franchisees

McDonald’s Corp. will help franchisees pay the $1 billion-plus cost of its bid to compete with Starbucks across the country next year.

The company told franchisees this week that it will pay up to 40% of the costs to remodel restaurants to accommodate the machines needed to make lattes, mocha drinks and other specialty beverages. McDonald’s USA President Don Thompson said last month said the remodeling could cost as much as $75,000 for each of the 13,800 U.S. restaurants.

The price McDonald’s pays per restaurant will vary depending on the amount of remodeling needed, but if the company pays $30,000 a restaurant, the total would exceed $400 million. In addition to the cost of remodeling, franchisees would have to pay about $25,000 per restaurant for the new beverage equipment.

“This contribution demonstrates the company’s conviction in its strategy,” says John Owens, an analyst in Chicago with Morningstar Inc.

McDonald’s officials have estimated specialty coffees could boost annual sales by an additional $125,000 per restaurant, or more than $1.7 billion across the chain. The restaurants now average about $2.2 million in annual sales.

McDonald’s executives say the launch of specialty coffees is the biggest expansion of its menu since the company added breakfast three decades ago. McDonald’s move is a direct attack on struggling Starbucks. McDonald’s has had success with the premium coffee it began offering last year. McDonald’s officials said in the coming years they want to begin offering smoothies and bottled soft drinks as well.

A major hurdle for McDonald’s is persuading franchisees, who would bear most of the cost of the cost of the new beverage plan, that it’s worth it. McDonald’s provided a statement late Thursday from franchisee Don Armstrong, chairman of a franchisee leadership group called the National Leadership Council, who said “McDonalds and the NLC continue to work together every step of the way in developing new beverage offerings for our customers.”