McDonald's seeks to boost its beverage business

For as long as many of its customers can remember, McDonald's has been intrinsically linked with the notion of value meals and super sizing. Now, the fast food chain wants to broaden its reputation: in addition to Happy Meals, it wants to be known for frappés and smoothies.

USA Today reports that, over the next few months, the fast food chain will be launching new beverages like smoothies and iced coffee drinks in an aggressive effort to capture more of the beverage market from convenience stores, specialty beverage chains such as Starbucks, grocery stores and its fast food rivals.

"I think everyone wants to get a piece of the coffee market," said R.J. Hottovy, Morningstar restaurant analyst. "It's more profitable than core menu items and it's a large and growing industry."

An anorexic economy and shrinking disposable incomes have many fast food chains scrambling to boost the bottom line. Some chains, like Taco Bell, have launched new value meals, while others have gotten creative with their menu. Burger King, for example, has added brunch. Yet, even while income at its rivals has nosedived, McDonald's has managed to surge ahead. Same-store sales, a key industry measure, spiked 3.8% in April, and CEO Jim Skinner told USA Today that frappés, which it launched a couple of months ago, had a role to play in that increase.

Unlike food items, beverages are an all day affair and McDonald's hopes that when customers stop by for a smoothie they'll also be tempted to buy something to munch on. "Product innovation has been the hallmark of McDonald's success for a long time, and the beverage initiative is an extension of that," Hottovy said.

The smoothies should help the chain appeal to the health conscious, who have often shied away from the store because of its high-calorie products. "McDonald's has long been heralded for its fountain beverages, but expansion into coffees, espresso-based drinks and smoothies is a reflection of where their consumers and competitors are going," wrote Eric Giandelone, director of research at Mintel Foodservice in an email.

And, because of its sheer size, McDonald's can sell these drinks cheaper than Starbucks. "[O]ffering a competitive product to these higher-priced operators will allow McDonald's to capture those consumers who are trading down or who may be more price conscious about their daily coffee or beverage purchase but who don't want to sacrifice flavor," Giandelone said.

Starbucks seems to have recognized the threat that McDonald's poses. In recent months, it has tried to go more mainstream by launching canned products at stores and partnering with fast food chains. Overall, all of this competition bodes well for the consumer. With all of this intense rivalry, maybe you won't have to shell out more than a couple of bucks for a frappe anymore.
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