McDonald's to serve changing tastes in coffee

By Nichola Groom

LOS ANGELES (Reuters) - Leonor Gavina-Valls's father began selling dark roast coffee to Vietnamese and Armenian immigrants in the late 1960s, seeing a niche market for strong coffee when weaker brands ruled the United States.

Decades later, the coffee is still strong, and her biggest client is McDonald's.

Sales of high-end coffee to the fast-food chain known for affordable burgers have expanded rapidly over the past year, and she sees even better times ahead, because McDonald's Corp. is testing drinks such as lattes and cappuccinos.

"Way back when, you said espresso, and people looked at you kind of funny," said Gavina-Valls, vice president at coffee importer and roaster Gavina. "Now with Starbucks, and a coffee house on every corner, it's different."

McDonald's is pushing quickly into the high-end coffee market, with its mouth-watering profit margins.

"You can't get much better profit than adding water to beans," McDonald's USA President Don Thompson said at an investor conference last week.

The burger chain, which has seen sales of cups of coffee rise 15 percent with the introduction of premium joe, is now experimenting with iced coffees and espresso-based drinks.

"These beverages can be destination drivers, encouraging customers to stop by at different times of day, which is why we are pursuing this opportunity," Thompson said.

According to the Specialty Coffee Association, the U.S. market for specialty coffees -- defined by the use of high-quality beans and roasting standards -- was worth $12.27 billion in 2006, up from $8.3 billion five years earlier.

COMPETITION

Gavina sells McDonald's beans used for brewed coffee, not espresso beans. Gavina-Falls said that will change if and when the chain decides to expand its current test nationwide. She spoke at the family company's headquarters and plant near Los Angeles, surrounded by the aroma of roasting beans.

Gavina supplies coffee to about 2,700 McDonald's restaurants in the western United States. The company's other U.S. coffee suppliers are S&D Coffee Inc. and Kraft Foods Inc.

McDonald's success has invited speculation that the chain may be taking business away from coffee rivals Starbucks Corp. and Dunkin' Donuts.

Thompson said at the J.P. Morgan conference that McDonald's hoped to take market share from specialty coffee retailers but declined to name names.

McDonald's specialty coffees are produced in machines that grind the beans individually for each drink but are quick enough to live up to the company's stringent speed requirements.