From: Jenn Abelson, Boston Globe
Published October 31, 2005 12:00 AM

McDonald's Brews a Java War

McDonald's Corp. is giving a jolt to the New England coffee market.

Starting next week, the fast-food chain will replace its brew in all 600 New England stores with Newman's Own Organics Blend produced by Green Mountain Coffee Roasters Inc. in Waterbury, Vt.

It's the only place in the country where McDonald's is making the switch, and the move, analysts say, will help the Golden Arches capture part of the growing gourmet coffee market and better compete with Dunkin' Donuts and Starbucks.

"We certainly hope to drive customers into the restaurant more frequently, and if we see some of our competitors' customers, we'd have no problem with that and welcome them with open arms," said Steve Kerley, McDonald's vice president of operations in New England.

McDonald's offering of gourmet coffee -- in the heart of the Dunkin' Donuts stronghold -- comes as other fast-food companies, including Burger King and Subway, are beginning to introduce gourmet brews to US customers. Newman's Own Organics, run by Nell Newman, the daughter of actors Paul Newman and Joanne Woodward, is producing an exclusive blend of light and medium roast for McDonald's stores. Previously, McDonald's sold its own blend of java.

The restaurant company said it is bringing Newman's Own Organics to New England based on customer demand. Outside of the United States, McDonalds has made a big push in the premium coffee market, launching stand-alone coffee shops and espresso bars known as McCafes.

Introducing a high-end blend at its US stores is a way to broaden the appeal of the brand and increase coffee sales at breakfast, when about 25 percent of sales are made, said John Glass, an analyst for CIBC World Markets in Boston. McDonald's has offered premium java in the Pacific Northwest and Hawaii.

"The coffee market in the United States is the fastest-growing segment within fast food," Glass said. "McDonald's recognizes this and wants to capitalize on it. It's surprising it's taken the company this long."

Still, don't expect New Englanders to give up their hometown brew: Dunkin' Donuts has nearly 2,000 stores in New England, said Dennis Lombardi, executive vice president of food service strategies for design-development firm WD Partners in Columbus, Ohio.

The move will likely make consumers who currently buy meals at McDonald's and coffee at other places to try the restaurant's new brew, Lombardi said. Moreover, McDonald's coffee prices undercut its rivals: a small 12-ounce coffee costs $1.19 while Dunkin's small 10-ounce coffee costs $1.46 and Starbucks' small 12-ounce runs $1.58.

"Our customers buy Dunkin' Donuts coffee for both the quality and value," said Skip Weldon, Dunkin' Donuts field marketing director for the Northeast. "And for us, a great value means offering the highest-quality products at an affordable price."

Weldon said the Canton company is paying attention to the marketplace and, despite all of the choices, Dunkin' Donuts remains the number one retailer of hot regular coffee-by-the-cup in America.

Jennifer Guebert, a Starbucks spokeswoman, said the Seattle company believes there is room for many in the coffee marketplace. Starbucks, which has about 200 stores in New England, represents less than 7 percent of overall US coffee consumption, Guebert said.

Gourmet coffee drinkers are increasingly buying their cup of joe outside the home, growing to 54 percent this year from 42 percent last year, according to the National Coffee Association, a New York trade group.

And this year restaurants overtook specialty coffee shops as the second most popular place to buy gourmet coffee outside the home, the group said. Supermarkets remain the top destination.

For Vermont's Green Mountain Coffee Roasters, landing McDonald's is a huge feat, making the fast-food company its largest restaurant account and one of Green Mountain's biggest customers.

Rick Peyser, a Green Mountain spokesman, would not disclose financial details of the McDonald's partnership, but said it's a great opportunity to bring the benefits of the coffee maker's sustainable supply chain to the masses.

"The quality of this coffee will easily enable McDonald's to compete with other outlets in New England," Peyser said. "The McDonald's franchisees are thrilled to provide their customers with a coffee experience that will be very, very competitive."

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Source: Knight Ridder/Tribune Business News

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