Specialty coffees are a hot topic at McDonald's

CHICAGO -- McDonald's executives came out swinging when they announced their assault on the comfy world of coffee shops.

After the success of its upgraded drip coffee -- which even managed to snag a thumbs-up from testers at Consumer Reports magazine earlier this year -- the fast-food chain known for super-size meals is gearing up for a massive expansion into the world of lattes.

"We want to move from beverages as an accompaniment to being a beverage destination," Don Thompson, president of McDonald's USA, said in a meeting with analysts earlier this month. "Our speed, our convenience, the value that we can afford to customers without quality comprise will make us a formidable player."

Restaurants will offer lattes, mochas, cappuccinos and espressos with a choice of different flavorings and milk. Industry watchers say the drinks cost about 50 cents less than at Starbucks.

But as it tries to cash in on the fast-growing specialty coffee market, the world's largest restaurant chain already is finding itself at odds with the unlikeliest of groups: its franchise owners.

"There's a real groundswell of resistance among the franchisees about this," said Richard Adams, a consultant for McDonald's franchise owners. He estimated the effort has a 50-50 chance of getting off the ground because of franchise opposition.

Store owners are balking at the plan's estimated $100,000 price tag to cover renovations and initial new equipment.

And many are concerned that little customer interest in McMochas means it could take years to recoup their investment, even on high-margin coffee drinks.

McDonald's said it's confident the new coffee will win over new customers and help individual stores boost annual revenue by about $125,000 once the coffee products, along with new bottled drinks, smoothies and other beverages are added to stores.

McDonald's first launched its so-called premium coffee about 18 months ago, followed by limited tests of sweet tea and iced coffee. Since then, its added the specialty coffee drinks to about 800 U.S. stores, and has announced it intends to add the beverages to locations nationwide by early 2009.

Zachary Aisley, a 27-year-old from Woodland Hills, Calif., has been impressed with the value and taste of McDonald's attempts at premium drip coffees and iced coffees. He is looking forward to sampling the company's lattes and mochas to see if they merit more frequent visits.

"I think their addition could bring me into the store," he said. "And I would definitely be likely to go in and try it."

If McDonald's can convince its franchisees to sign on, analysts say it can likely thrive in the growing $12 billion specialty coffee market, which includes both brewed coffee and beans.

About one in five Americans drinks some kind of espresso-based coffee each day, and the market is supposed to grow by at least 4 percent each year until 2011

"With coffee gaining so much ground, McDonald's almost has to go there," said Sharon Zackfia, a restaurant and retail analyst with William Blair & Co. "The feeling that the coffee business is a single pie and everyone is fighting for different slices doesn't seem to acknowledge that the pie is growing."

In response, companies are scrambling to offer more steamy drinks and snacks.

Dunkin' Brands Inc. added espresso beverages to Dunkin' Donuts shops in 2003 and credits the full-line of coffee drinks with helping its aggressive growth plans.

And Canadian coffee chain Tim Hortons, which is expanding its own U.S. presence, said customer demand for one-stop food and coffee shopping is growing.

Starbucks Chairman Howard Schultz recently said: "We understand all too well that we have built a very attractive business for others to look at and try and take away, whether it's 1 percent on the margin or big companies that are trying to take more. We are up for the defense and we are going to get on the offense."