McD's Looking to Clean Up in the Coffee Aisle

Fast Feeder Will Challenge Dunkin', Starbucks in Bid to Be Premium-Java Player in Grocery Stores

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When CEO Don Thompson speaks during McDonald's investor meeting this week, he's likely to talk about coffee -- and not just what it's serving in restaurants. Shareholders are waiting to hear details about the fast feeder's foray into grocery stores.

Jousting for share in the coffee aisle was once the domain of Folgers and Maxwell House. But recently, more expensive restaurant-branded bags, like Starbucks and Dunkin' Donuts, have entered the fray.

The lower-price brands still hold sway: Folgers, which is owned by J.M. Smucker Co., still dominates grocery-sold coffee with a 30% share of the $4 billion ground-coffee category, followed by Kraft-owned Maxwell House at 16.2% share, according to IRI.

But the growth is in the restaurant-branded segment, where Starbucks and Smucker's Dunkin' are fighting it out. Starbucks unit sales rose 8.6% in the 52 weeks ending Oct. 6, giving it an 8.3% share. Dunkin' unit sales grew 6.8%, putting its share at 7.2%.

McDonald's grocery plans include selling ground and whole-bean bagged coffee, plus single-serving packages in partnership with Kraft, which has offered few specifics other than suggesting the brand will be positioned above Maxwell House but below its premium Gevalia.

McDonald's didn't respond to a request for comment.

Rick Shea, president of Shea Marketing, said it was a good move for McDonald's and Kraft. "The coffee industry continues to go upscale. ... Maxwell House is more in the value segment, and Gevalia just doesn't have the brand recognition to compete with Starbucks, Dunkin', Peet's and others."

Others aren't so optimistic. "It's a strategy that's inconsistent with trying to fix [McDonald's] core business," said Howard Penney, managing director at investment-research firm Hedgeye, citing the chain's decelerating-sales trend.

Jonas Feliciano, a beverages analyst for Euromonitor International, expects McCafé to challenge Dunkin', which he described the "working-class coffee of America." He gave Dunkin' the advantage because the brand is well known for coffee, though McCafé is still better known than other fast-food coffees.

McDonald's has put significant efforts behind its McCafé brand. In 2012, the chain spent almost $129 million on U.S. measured media on McCafé, about 15.5% of its total measured-media budget.

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