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    McDonald's Grab-N-Go Coolers Show Promise

    Exec says the fast-food chain is a losing a chunk of beverage sales to c-stores

    A little more than two months in, fast food mammoth McDonald's Corp. and beverage giant Coca-Cola Co. are describing the preliminary results of their test -- selling competing bottled products at McDonald's restaurants in Texas -- as "promising."

    Should that continue, McDonald's plans to put coolers full of Coca-Cola's products, as well as competing brands, in its restaurants, according to news reports.

    "The industry has grown the [beverage] category and continues to do so," said Ralph Alvarez, president of McDonald's North America, in an interview with MarketWatch . "Plus consumers are in love with bottled beverages. They can seal and unseal them as much as they want. We need to be part of that," he said.

    McDonald's is testing sets of self-serve coolers filled with single-serve drinks in 15 of its Texas stores. At the test sites, coolers behind and in front of the counters are carrying cans of Arizona teas, bottles of core Coca-Cola brands, such as Coke Classic and Diet Coke, as well as cans of Dr. Pepper and Diet Dr. Pepper. Other Coca-Cola products sold in cans include Vault, Full Throttle and Tab Energy. Coca-Cola's Powerade and Dasani waters also are being sold in bottles. A Coca-Cola spokesman said new Nestea products will go into the coolers later this month, but they won't be replacing Arizona.

    "We are looking at customers' favorites," Alvarez said of the types of beverages McDonald's is testing and considering. He is searching across all brands, but was quick to note that "Coke is our preferred supplier."

    This is the first time in its 51-year history that McDonald's is looking to shake up the flavors, types and even brands of beverages it sells, MarketWatch reported.

    Alvarez said McDonald's is losing a chunk of beverage sales when consumers -- and there are a lot of them who do this -- go to the drive-thru for fries and burgers or salads, but stop by a convenience store for carbonated and noncarbonated drinks.

    Each McDonald's store now sells only eight fountain choices that franchisees can select from a limited list. The choices are dominated by Coke, Diet Coke, the Dr. Peppers or Mr. Pibb, Sprite, Hi-C Orange, Fanta Orange or Grape, Minute Maid Lemonade, Barq's Root Beer, Fruitopia and Powerade.

    Most of the fountain beverages are carbonated and while that's by far the biggest sector of the $100 billion soft-drink industry, it is also one that has lost at least some of its appeal. Last year, for the first time in more than two decades of tracking, volume sales of carbonated sodas turned south, down 0.7 percent to 10.2 billion cases, according to Beverage Digest, the industry trade publication.

    People aren't drinking fewer beverages, said Beverage Digest editor John Sicher. "It's the migration from soft drinks to bottled water and noncarbonated beverages," he said.

    Sales from energy drinks like Red Bull, Monster and Full Throttle surged 80 percent from 2004 to 2005 to about $650 million, a small but fast-growing sector of the market. Sports drinks like Gatorade and Powerade, not to mention the various flavored and vitamin-laden waters, have been draining carbonated soda sales for some time. Also telling is this statistic: In the U.S., 77 percent of all soft drinks are sold in bottles and cans, leaving only 23 percent in fountain sales.

    "There are a lot of beverages with 1 percent and 2 percent share that we couldn't justify as fountain drinks," Alvarez said. "But if we have them in bottles, we can be a destination for those drinks."

    And if customers use the drive-thrus -- which currently account for nearly 60 percent of all McDonald's sales -- to buy individual bottles of Diet Coke or Arizona Tea, it's likely they will order fries, an apple pie or a yogurt parfait, too.

    CIBC analyst John Glass said it could create an ongoing traffic flow of customers during slower times of the day, such as mid-morning or late afternoon.

    "It's like adding another day part," Glass said. "There are many times when the drive-thrus aren't crowded. Customers probably won't wait in the lunch queue for just a Powerade, but they'll go through during [the slower periods]."

    What's more, a broader menu of choices in containers customers will go out of their way for puts McDonald's on better competitive footing with convenience stores.

    "It could be like putting a little 7-Eleven in a McDonald's," said Morningstar food and beverage analyst Matthew Reilly.

    In related news, McDonald's also wants to try its hand at smoothies, including creating its own mixtures similar to how fast-food restaurants sell their own milkshake creations, Alvarez said. Though Coca-Cola already sells Minute Maid smoothies, the company could create a private-label brand that is sold only in McDonald's restaurants.

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