Drink Fresh? Subway Tests Out Coffee Concept

Plans to Introduce Cafés in D.C.; Execs Say It Could Fare Well in the Java Wars

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CHICAGO (AdAge.com) -- The coffee wars have a new combatant: Subway.

As Dunkin Donuts and McDonald's go after Starbucks, a Washington-area franchisee is testing a Subway café concept. While it's a relatively small step for the sandwich chain, the coffee push could pose a big threat if Subway ever decided on a rollout.

According to Ron Paul, president of Technomic, Subway could quickly become a player in the coffee wars based on the convenience factor alone. The chain has nearly 22,000 U.S. locations -- far more than any other fast-food chain. "Trial would be pretty high," he said. "They're going to be a value player, and it's surely going to have an impact."

However, Subway isn't viewing this as much more than a test. "Starbucks created a huge market for that type of product," said Alan Warmund, president of mid-Atlantic development at McLean, Va.-based Subway Development Corp. of Washington, which has more than 1,000 Subway locations. "If the store is open for breakfast, you have to have a great coffee product."

Espresso, gelato
Mr. Warmund's company has approval to build up to five Subway Cafés. The cafés will be larger locations with Wi-Fi and more-comfortable seating. Espresso drinks, gelatos and paninis will be added to Subway's standard menu. The new items are expected to be incremental to sales, but sandwiches are expected to account for 90% of volume.

"We're not looking to get into the coffeehouse business," Mr. Warmund said.

The cafés are going into office buildings in high-density areas. Mr. Warmund said his company developed the concept in response to requests from landlords in those spaces. The concept, he said, probably wouldn't work in a rural area. "There just wouldn't be a need for it."

Subway spokesman Les Winograd said that even though the franchisee is building cafés with the parent company's blessing, the push is purely the franchisee's. It's also true, however, that the closely held chain has a history of letting its franchisees try out the big ideas first.

"Many of our franchisees are very entrepreneurially minded," Mr. Winograd said. "After all, it was a franchisee that first suggested we serve turkey. It was another franchisee that explored ... opening locations inside convenience stores."

Lot of beans
So franchisees will be watching the D.C.-area tests closely. "We will be very interested in our area to develop this new Subway Café," said Hardy Grewal, who owns the franchise rights to Subway restaurants in Southern California.

The coffee market is, of course, becoming increasingly crowded. McDonald's is in the midst of its McCafé rollout, and Dunkin' Donuts is on an expansion binge. Other chains have conceded testing various coffee drinks: Wendy's is testing iced coffee in some areas, spokesman Bob Bertini said.

Burger King also boosted its efforts on the coffee front. The chain relaunched its coffee as BK Joe and added a mocha flavor. Other flavors are being tested, along with some espresso-based drinks, said spokeswoman Heather Krasnow.

However, Ms. Krasnow stressed, "We're not getting into it like McDonald's."

The industrywide coffee frenzy appears to run counter to the problems at Starbucks, which recently said it would close 600 stores and later launched a value promotion.

Subway's Mr. Warmund said he isn't losing any sleep. "Starbucks has expanded very rapidly over the last several years and they may have put some stores too close together and it cannibalized existing stores. I don't think it's a systemic problem with people getting away from coffee."
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