After unveiling plans earlier this year to sell espresso drinks at all of its U.S. locations, McDonald's Corp. now faces a fresh set of challenges.
The weak economy has prompted some consumers to brew coffee at home instead of buying it at coffee shops. A sharp pullback by Starbucks Corp., which is shutting hundreds of stores as its sales slow, has analysts questioning whether now is the right time for McDonald's to roll out its premium line of lattes, cappuccinos, smoothies and sweet, ice-blended frappes.
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McDonald's executives have fought back against suggestions that the espresso drinks, the core of its biggest menu expansion in 30 years, aren't selling as well as expected. This summer, internal documents showed that sales of the drinks in several markets peaked about three weeks after the drinks launched. Then they declined in the following weeks, in some cases sharply, according to the documents, which were viewed by The Wall Street Journal.
Management contends the drop was due in part to a lull in demand for hot drinks during the summer, and that the full potential of the drinks can't be realized until they're backed by national advertising. "We are very much on track," says Janice Fields, chief operating officer for McDonald's U.S. business.
Drinks of all sorts tend to have higher profit margins than food items at McDonald's. But in a tough economy, the price of a premium drink could give people pause. Though less expensive than its competitors', McDonald's lattes, for instance, sell for between $1.99 and $2.99 at the Wheaton, Ill. store, making them more expensive than the chain's cheapest burger.
"It's a really tough time to come out with a premium product," says Larry Miller, a restaurant analyst at RBC Capital Markets.
McDonald's Coffee Strategy Is Tough Sell (WSJ, 27 October 2008)
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