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Whose customers is McDonald's luring with coffee?


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July 18, 2006

Whose customers is McDonald's luring with coffee?

Aaron Pressman

Ever see the movie "You've Got Mail" starring Tom Hanks as the owner of a Barnes & Noble-like chain of super-size book stores and Meg Ryan as the owner of a cute little children's book store? Goofy but appeals to the romantic, (former) New Yorker in me. Hanks opens a superstore on the Upper West side prompting protests but he's confident he can win over the opponents. "We're gonna seduce them with our square footage, and our discounts, and our deep armchairs, and...our cappuccino."

I guess I'd admit to being about as snobby as an Upper Westsider when it comes to the golden arches. There's a McDonald's (Symbol: MCD) less than a mile from my house and I pass it three or four times a day but I pretty much never go in. That all changed a week or so ago when I saw, horror of horrors, a funny new television commercial Mickey D's is running touting their new line of Newman's organic coffee (I'm not sure how I even saw the commercial since we have Tivo - maybe during a Red Sox game).

In the spot, a bunch of teachers send one guy down to try the new McDonald's coffee as they look down from a window. The guinea pig comes out and thrusts his arms in the air declaring "It's good." I not only laughed, I actually tried an iced coffee the next time I went by. Hey, pretty good. So I tried it a few more times. And I noticed that the line of cars outside the local McDonald's was longer in the mornings that it used to be.

Turns out, coffee is boosting the bottom line big time. The company yesterday reported earnings per shares ahead of analysts' estimates and same store sales up over 5% due to more customers stopping in. Hmm, what's up? As a bunch of analysts noted on yesterday's earnings call, it's in part the new coffee line luring in folks who aren't typically McDonald's customers.

Here's President and COO Michael Roberts answering one of those questions:

"Our coffee business since we launched is up significantly, double digits in fact. Our breakfast comp is up in Q1 as well. What we learned here is that, you know, we have some breakfast rejecters if you will, who didn?? think our coffee was as good as it could be. Now that they know it?? better they??e coming to McDonalds, so coffee combined with our breakfast sandwiches is leading our breakfast comp. The opportunity here I think is enormous."

The stock is up about 5% over the past two days but there may be more to this opportunity. It also begs the question -- where was everybody buying coffee before?

Update: Looks like they're adding comfy chairs, too.

10:10 AM

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"(I'm not sure how I even saw the commercial since we have Tivo - maybe during a Red Sox game). "

Does anyone have a pure play idea for a stock that could gain because its programming would never be TiVo and result in higher ad revenue. All I got is ESPN or DIS but to much other junk I don't want. I know Comcast made bid of $25 in 2003 for all of DIS to get ESPN but I don't think they wanted the junk either. (im guessing on price and date)

Posted by: winston at August 2, 2006 12:54 AM

O.K. sounds silly, but McDonald's really has improved their coffee. It really isn't that bad! Now, if they would work on their service, and the variability in the cleanliness of their outfits, that would be nice as well.

Reminds me of the old Field of Dreams schtick: If you build it they will come. I guess, with McDonald's it should be "If you grind it they will come?". Nevermind.

How about fixing up the french fries to some healthy fats and what about a little improvement in the menu? Maybe even a healthy bran muffin for breakfast?

Posted by: Robert Freedland at August 9, 2006 02:09 PM


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