McDonald's plans expansion of drinks lineup

McDonald's plan to expand the beverage lineup at its US restaurants with cappuccinos, lattes and other drinks is expected to add $1 billion to annual sales, a spokeswoman said.

The espresso-based drinks, which are currently in 800 of McDonald's nearly 14,000 US locations, mark the newest effort by the world's No 1 restaurant company to upgrade its coffee offerings and take on rival Starbucks Corp.

McDonald's has even added a "barista" position in its restaurants and dedicated a section of counter space to the automated espresso machines so customers can see the drinks being made, spokeswoman Danya Proud said. Those details were first reported on Monday in the Wall Street Journal.

But though McDonald's expects the coffee drinks, smoothies and new bottled beverages to add $1 billion to its annual revenue (the company recorded $21.6 billion in sales in 2006), investors and analysts said they do not expect much of that to be at Starbucks' expense.

"People don't go to McDonald's for their coffee, they go for their food," Friedman Billings & Ramsey analyst Howard Penney said in an interview. "It's ridiculous to think that McDonald's is going to take all of Starbucks' business. Even McDonald's doesn't think that's going to happen."

In the last year, Starbucks shares have fallen 48 percent on investor fears about slowing US sales growth, soaring dairy prices and increased competition from McDonald's, Dunkin' Donuts and other fast-food rivals. McDonald's stock, meanwhile, has climbed 33 percent as extended hours, demand for breakfast offerings and other new products have fueled US growth.

One McDonald's investor said its foray into espresso-based drinks would still not provide the choice that many die-hard Starbucks customers have come to expect. As a result, McDonald's could end up taking market share from other relative newcomers to the latte field.

"If you want a half-caf, no-whip, low-fat, sugar-free, raspberry syrup latte you are probably not going to get that at a McDonald's," said Janna Sampson, co-chief investment officer at OakBrook Investments in Lisle, Illinois. "But you aren't going to get that at Dunkin' Donuts either. It's a more direct hit at Dunkin' Donuts' business."

Agencies

(China Daily 01/09/2008 page16)