Would you like fries with that cappuccino?

McDonald's brews plans for gourmet coffee

By Bruce Horovitz
Friday, September 22,2000

SYDNEY - After years of testing the leisure coffee concept in Australia, McDonald's will begin to open McCafe coffee shops in the USA next year, says Jack Greenberg, McDonald's CEO.

This is the first time that McDonald's has publicly commented on domestic plans for the value-priced, gourmet coffee shops that operate as separate units inside 50 McDonald's restaurants in Australia.

The fallout could be enormous. Starbucks owns roughly half of the nation's 7,000 gourmet coffeehouses. No one else comes close. But McDonald's has 13,500 locations in the USA, and it has another 13,500 abroad.

If even a quarter of those stores eventually sell gourmet coffee, McDonald's will become a gourmet brew behemoth. Specialty coffee sales are regarded as the only growth segment in the $18 billion domestic coffee market. "Other than Starbucks, no one really has a national brand," Greenberg says.

Although Starbucks and McDonald's generally attract very different customers, "We could be a problem for them," Greenberg says.

Starbucks executives are keeping mum on McCafe. "As a company, we don't comment on competitors' concepts," a statement reads.

However, "it's going to be difficult to convince anyone that McDonald's stands for premium coffee," says Ron Paul, analyst at Technomic, a consulting firm. Because of that, it will have to treat McCafe as a separate brand.

That's what it does in Australia. The typical McCafe is at the front of a McDonald's, has its own counter, signs and coffeehouse-like furniture. Employees are dressed in visibly more upscale outfits than those at the McDonald's counter. Drinks such as cappuccino and caffe latte are served in ceramic mugs; beans are 100% Arabica. And like any gourmet coffee shop, the counter is stocked with all sorts of sweets, from muffins to biscotti.

Cappuccino, which is the top-selling drink at McCafe, sells for slightly less than $1 (American) here. Fresh-baked muffins are about $1 each, as well. That's roughly half the price that Starbucks sells the same products for in the USA.

But quality, not price, is the big issue with most Starbucks customers, says Bonnie Kramer Tonneson, analyst at Chase H&Q. "People go to Starbucks for quality and justify the price as a small indulgence."

Greenberg won't say where the chain will initially test domestic McCafes, but industry analysts suggest it will likely be in the Chicago area, where company executives can keep a close eye on it.

The McCafe concept was devised in 1993 at a McDonald's in Melbourne. By next year, McDonald's plans to double to 100 its McCafes in Australia. Currently, there are about 300 McCafes in 15 countries, including France, Italy, Portugal and Brazil.

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