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MCDONALD'S FRANCHISEES STAGE COFFEE MUTINY

Regional Operators Launch Gourmet Brew; Dunkin' Donuts Competition Cited

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CHICAGO (AdAge.com) -- In the face of stiff competition from Dunkin' Donuts coffee sales, McDonald's Corp. operators in the Northeast have jumped ahead of the parent's plans to launch a premium coffee nationwise in March and are launching their gourment coffee product now.
Stung by Dunkin's Donuts' success at selling premium coffee to morning crowds, some McDonald's franchisees are now offering their own special brew.

Starbuck's-like
Determined to offer their customers a Starbuck's-like branded coffee experience, the franchisees are selling a specially tailored brew under the Newman's Own moniker.

The move spotlights the challenge for national chains to manage the local competitive environment -- and especially for McDonald’s, which has been crediting its system “alignment” as key to its sales turnaround. Some insiders pegged the regional move as a secession from the national organization.

“I’ve never seen [franchisees] go against a national launch,” said one McSystem insider. “I’ve seen them not support something, or add to it, but go against it with a pre-emptive strike? I’ve not seen that before. Anytime a region does something to usurp national creates a problem.”

“What you’re seeing here is a matter of corporate control and corporate agenda, said Dick Adams, a former franchisee turned consultant.

Newman's Own brand coffee
The Northeast operators have formed a partnership with Green Mountain Coffee Roasters to create an exclusive coffee blend under the Newman’s Own Organics Blend brand. The new java, available in regular and decaf varieties made from Fair Trade Certified and organic specialty coffees, will sell in 650 McDonald’s restaurants in Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, Vermont and Albany, N.Y.

McDonald’s had quietly rolled out a new “premium” blend a year ago that went largely

Along with Dunkin' Donuts, McDonald's franchisees must now contend with the new gourmet blend 'BK Joe' coffee being heavily advertised by Burger King.

unnoticed. A test in several markets of a more gourmet-style blend was originally slated for national debut in November, but was pushed back until March 2006 after franchisees voted down marketing plans. “They hated the packaging,” said the executive, noting the franchisees wanted to see more of a Starbucks positioning and packaging style.

Coffee mutiny denied
A McDonald’s spokesman dismissed the notion of a coffee mutiny among franchisees or that the region was trying to more directly compete with Dunkin’ Donuts. “This has everything to do with our customer, not any speculation about what our competitors might do or are doing.” He confirmed that the nationwide coffee launch wouldn’t go into New England, but said he couldn’t address the packaging. “We will have to wait and see once the coffee rollout is announced.”

Mark McBee, a franchisee with nine units in the south Boston suburbs, said the region has been testing the coffee for many months. “The New England consumer is what we pride ourselves in knowing, and we felt very strongly we needed to address the needs and wants of the New England consumer.”

Local brands vs. 'McCoffee'
Despite being the share leader for breakfast nationally, McDonald’s struggles with its breakfast sales in New England because of Canton, Mass.-based Dunkin’ Donuts, according to a knowledgeable executive. “A branded coffee with local heritage would be better than another McCoffee,” the executive said, adding that the Green Mountain coffee brand ranks up with Dunkin’ and Starbucks in the region.

“Anything branded McDonald’s cannot compete with Dunkin’ Donuts in the Northeast" a coffe industry executive said. “The Dunkin' customer is intensely loyal to Dunkin’. If they’re not going to Starbucks for coffee, they’re certainly not going to go to McDonald’s for coffee.”

While Starbucks is viewed as the coffee market leader, Dunkin’ Donuts is the largest seller of regular joe, according to Business Trend Analysts’ Leading Edge Reports. The regional donut and coffee chain controls 17% of national market share, compared to 15% for McDonald’s and 6% for Starbucks.

Dunkin's territory
Indeed, Dunkin' controls just 20% of the breakfast daypart nationally, but as much as 60% in its New England backyard, where it has more than 2,000 units, according to industry executives. Starbucks captures roughly 12% in the region and McDonald’s about 10%, according to a second executive.

McDonald’s own franchisee organization conceded last November that Dunkin' Donuts and Starbuck’s each sell more than twice as much coffee as McDonald’s and that its coffee sales have declined 36% in the past 10 years, according to a memo distributed following a franchisee marketing meeting at the time.

A spokesman disputed those facts, echoing a “perspective” offered by Matthew Paull, McDonald’s chief financial officer, during the company’s April first quarter earnings call. In the call he said, “We had a meeting with our franchisees, trying to get them to understand, and get us to understand, what the opportunity would be to do more in coffee. So in that context, we talked about traffic count with them. Coffee is a very small piece of our total sales today. It could be a lot bigger, and that's the context in which that article was written.”

“Here in New England, our customers are particularly passionate about Dunkin’ Donuts coffee,” Skip Weldon, Dunkin’ Donuts field marketing director for the Northeast, said in a statement. “With all the choices that exist for customers for coffee, Dunkin’ Donuts continues to remain the No. 1 retailer of hot regular coffee-by-the-cup in America.”

Chains high on coffee
Other chains also hoping to cash in on the nearly $8 billion coffee business. Burger King is in the midst of its rollout of BK Joe, a line of three blends of premium Arabica coffee in regular, decaf and an extra-caffeinated “turbo” version positioned as “good, hard-working coffee” that “comes in three easy-to-say sizes.” Other chains have jumped on the premium coffee bandwagon with higher octane brews, including Chick-Fil-A, 7-Eleven, CKE Restaurants’ Carl's Jr., and Jack in the Box.

New England isn’t the only region to have its own coffee blend. In Seattle, the franchisees pour Seattle’s Best and in Hawaii they serve Kona coffee.

“It is not unusual that we have more than one supplier for coffee throughout the U.S.,” the McDonald’s spokesman said without confirming regional brands. He pointed out that the national coffee rollout will also have more than one supplier to manage supply and consistency across the nation. “There will be more than one supplier of premium roast coffee but the quality of the coffee will be consistent.”

Conflicting campaigns?
Len Lodish, a professor of marketing for the Wharton School of Business and vice dean for Wharton West, sees potential difficulties for McDonald’s once it rolls out its own premium blend, noting that one reason to do a national effort is to leverage the media efficiencies. “What are they going to do, block out their national feed or conflict with things on a regional basis?” he said. “It depends on how they introduce it and what advertising they do. It may cause them to change from a national mix to more of a regional mix of advertising. One of them is going to be right and one of them isn’t.”

TV and radio advertising in the Northeast for the rollout will use the tagline “It’s good. It’s real good.” McDonald’s co-op agency, Havas' Arnold, Boston, is handling. New coffee cups prominently feature the Green Mountain Coffee and Newman’s Own Organics logos and carry only a small version of McDonald’s Golden Arches logo at the bottom. Tabletop promotions proclaim: “Good for you. ... Good for the environment. ... Good for the world.”

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