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    Competitive Watch: Much A'Brewin

    McDonald's specialty coffees get off to a slow start, while Starbucks scales back its U.S. expansion plans and Dunkin' Donuts doles out free iced coffee.

    NEW YORK -- Specialty coffee is proving a challenging business these days, as a recent McDonald's report showed that early sales figures for the fast-feeder's new specialty coffees are tepid, and Starbucks announced plans to significantly scale back its U.S. expansion targets for the next three years, according to media reports.

    According to Crain's Chicago Business, sales remain tepid in McDonald's two initial test markets -- Michigan and Kansas City -- even after months of aggressive advertising and marketing, company documents obtained by Crain's show.

    Weekly sales of specialty coffee in those markets averaged about 300 drinks per store during the four weeks ended March 6, according to an internal company report that provides a first look at hard sales figures from McDonald's biggest menu expansion in 30 years. The report doesn't disclose the dollar value of specialty coffee sales, but the unit sales appear to be well below the number needed to reach McDonald's goal of adding $125,000 in annual revenue per restaurant, or about $1.5 billion companywide.

    McDonald's officials declined to comment on specialty coffee sales, Crain's reported. The chain plans by early next year to have the specialty coffees in all 14,000 U.S. restaurants and will begin adding smoothies and bottled beverages later in 2009. About 1,200 restaurants were reporting specialty coffee sales by the beginning of April, including seven in Chicago, according to Crain's report.

    "If they don't grow specialty coffee beyond these numbers, that means they will have to sell lots of smoothies, frappes and bottled beverages to achieve their goals," said John Owens, an analyst in Chicago with Morningstar Inc., adding he's heard similar numbers from several franchisees. "There is still a lot of work to do with specialty coffee."

    Dick Adams, a former franchisee who advises McDonald's restaurant owners, said "those numbers don't justify the investment" that McDonald's wants its franchisees to make.

    However, Larry Miller, an analyst in Atlanta with RBC Capital Markets, thinks McDonald's can steal customers from Starbucks: His firm conducted a survey of regular Starbucks drinkers in which 45 percent said they would switch to McDonald's if its coffee tasted similar and was cheaper. "McDonald's has a very good shot at taking their business," Miller told Crain's.

    Starbucks Corp., meanwhile, has significantly scaled back its U.S. expansion targets for the next three years, blaming the challenging economic environment, Nation's Restaurant News reported. With profits dropping 28 percent for the second quarter ended March 30, Starbucks officials lowered their store-opening projections for the U.S. to about 1,020, including 620 company-operated and 400 licensed units. That represents a 43-percent decline from the 1,800 units that were opened domestically in 2007.

    Earlier in 2008, Starbucks officials disclosed plans to cut new openings by 425 units and close 100 underperforming stores. Slower domestic growth is expected to continue through the next three years, with fewer than 400 net new stores expected to open each year for a total of 21,500 by the end of 2011, according to the report.

    Starbucks, though, is hopeful that its summer launch of new beverages will stop a slowdown in traffic. The company also disclosed plans to take another crack at the breakfast market, this time with proprietary baked goods and chilled products.

    The chain this summer will unveil three new types of beverages, including entries into the $4.4 billion energy drink market. It will debut new custom-made DoubleShot caffeine drinks, as well as ready-to-drink energy beverages in a distribution partnership with PepsiCo, Nation's Restaurant News stated.

    In response to consumer demand for healthful products, Starbucks said it also will roll out a new whey protein-and-fruit-based drink that will be available in two flavors, each containing fewer than 270 calories. And in Southern California, a new Italian-style frozen fruit drink will launch that will likely roll out nationally in 2009.

    In other coffee news, Dunkin' Donuts hosted its second, nationwide Free Iced Coffee Day on Thursday. From 10 a.m. to 10 p.m. on May 15, customers could walk into any participating Dunkin' Donuts restaurant throughout the country and receive a free small 16-ounce cup of Dunkin' Donuts' original or flavored iced coffee. This year, Dunkin' Donuts expected to serve nearly four million cups of iced coffee nationwide.

    Customers were also encouraged to try new Berry Berry Iced Coffee, which combines the seasonal tastes of blueberry and raspberry with Dunkin' Donuts' coffee.

    Iced coffee is fast becoming as hot as hot coffee, the company reported. While iced coffee sales typically spike in summer months, Dunkin' Donuts has seen rapid growth year-round. Iced coffee is the second most frequently sold coffee product after hot coffee. Dunkin' Donuts said it sold more than 190 million servings of iced coffee in 2007.

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