Restaurant chains bet on consumer thirst

LOS ANGELES Wed Sep 10, 2008 6:15pm EDT

A man stands at the counter inside a McDonald's restaurant at the Times Square in New York June 9, 2008. REUTERS/Shannon Stapleton

A man stands at the counter inside a McDonald's restaurant at the Times Square in New York June 9, 2008.

Credit: Reuters/Shannon Stapleton

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LOS ANGELES (Reuters) - Whether hot or ice-cold, beverages have become a key offering as restaurant chains ranging from McDonald's Corp (MCD.N) and Wendy's International Inc WEN.N to Pinkberry try to spur traffic and additional sales.

Promoting drinks is nothing new at restaurants, after all, Starbucks Corp (SBUX.O) rose to popularity selling specialty coffee.

But in recent months, restaurants including Starbucks are expanding their offerings beyond former bounds.

Some are finding that, with certain flavors and prices, consumers are more willing to spend on a liquid treat even if they cut back on other food items.

McDonald's and Wendy's are adding fancy coffee drinks to their menus, while Starbucks has added smoothies, Sorbetto and a daily drip coffee blend. Privately-held Pinkberry is getting ready to release a new drink called Granita, a sippable version of its tart frozen yogurt.

Analysts say drinks can help draw customers during off-peak hours and bump up sales and profits.

Drink sales "have halted some of the weakness in the segment," said independent restaurant consultant Dean Haskell, who has not consulted any of the companies mentioned in this article.

Jack in the Box Inc JBX.N Chief Executive Linda Lang said in the company's latest earnings call that its new real fruit smoothies helped insulate sales at established restaurants.

"On the strength of new products introduced during the quarter, like our real fruit smoothies, same store sales at company Jack in the Box restaurants were only slightly negative in the quarter versus the 2 percent decrease that we forecast in mid-May," she said.

Restaurants are attracted to drinks because they generally cost less to make than food and they sell at prices that benefit the profit line, Haskell said.

That is important these days as financially-squeezed consumers pinch pennies to counter rising food and fuel prices. But they are still looking for inexpensive treats.

COFFEE, TEA FUEL MCDONALD'S

Oklahoma City-based Sonic Corp (SONC.O) has long used its broad drink menu to set itself apart from its rivals.

Sonic, known for having restaurants resembling old- fashioned drive-ins, also offers daily half-price "Happy Hour" alcohol-free drinks from 2 to 4 p.m.

Elsewhere, Yum Brands Inc's (YUM.N) Taco Bell plans to expand its line of Frutista Freeze frozen fruit drinks.

On Tuesday, analysts said McDonald's handily beat expectations for August sales with help from coffee and iced tea -- which sold for $1 at some restaurants.

The world's biggest restaurant chain has been adding a wide range of coffee drinks and other beverages. McDonald's also plans to sell frappes and smoothies.

"Management has high hopes for, and a subdued confidence in, this program, and we view this next leg of the McDonald's story positively," Goldman Sachs analyst Steven Kron said in a recent note to clients.

Starbucks' "Treat Receipt" summer drink promotion offers $2 cold drinks in the afternoon to people who bring in the receipt from the purchase of their morning coffee fix.

Starbucks, which won fans with its pricey Frappuccino drinks, is looking for a new hit with its Vivanno smoothies and Sorbetto, an icy drink available only in Southern California.

"Early indicators demonstrate that they have the ability to drive traffic into our stores, particularly in the challenging afternoon day part," Starbucks Chief Executive Howard Schultz said on the company's latest conference call.

A similar idea drove Pinkberry to launch Granita, which will be available in some Southern California stores as of Friday.

"Our customers want Pinkberry at different times of the day," Pinkberry Chief Executive Ron Graves said. Granita "is obviously much more portable, whether you're in your car or walking down the street."

Schultz is on the Pinkberry board and is a backer of the venture capital group funding Pinkberry's growth.

(Editing by Andre Grenon)

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