March 28, 2007 / 4:04 PM / 10 years ago

McDonald's to serve changing tastes in coffee

<p>Pouches of McDonald's decaffeinated ground coffee roll off a packaging line into shipping cartons at F. Gavina &amp; Sons Inc., a custom coffee roaster company, in Vernon, California March 26, 2007. The company supplies almost 2,700 McDonald's fast food restaurants in the Western region of the U.S. with coffee and expects to sell the restaurant chain six million pounds of coffee in 2007.Fred Prouser</p>

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

<p>Employee Juan Puente unloads a cargo container filled with burlap bags of coffee beans on the loading dock at F. Gavina &amp; Sons Inc., a custom coffee roaster company, in Vernon,California March 26, 2007. The company supplies almost 2,700 McDonald's fast food restaurants in the Western region of the U.S. with coffee and expects to sell the restaurant chain six million pounds of coffee in 2007. Picture taken March 26, 2007.Fred Prouser</p>

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.

So far the world's largest coffee company, Starbucks, has not felt an impact from efforts by McDonald's and Dunkin' Donuts' to upgrade their coffee offerings, Chief Financial Officer Michael Casey told the same conference.

Dunkin' Donuts has been selling espresso beverages for three years, and those drinks now make up more than 5 percent of the chain's sales.

"More educated customers about high-quality coffee is good for all the participants in the business," Casey said.

One expert said demand for higher-quality coffee is so strong that McDonald's will probably see robust sales of specialty coffee drinks without making a dent at either Starbucks or Dunkin' Donuts.

"It will expand the market rather than impact Starbucks," said Bob Goldin of restaurant research firm Technomic Inc. "It's not the right experience (for Starbucks customers) ... the smell of french fries and ultra premium coffee drinks don't go together," he said.

Still, the market has clearly become more competitive. Both Starbucks and Dunkin' Donuts this month gave away free coffee to customers, and McDonald's tells customers that its workers will add cream and sugar to drip coffee for them -- a direct attack at Starbucks, where customers add their own.

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