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Extra11/21/2007 12:01 AM ET

Coffee clash at McDonald's

The fast-food chain wants to move full steam ahead into the growing market for specialty coffees with cappuccinos and other espresso drinks. But first it must bring reluctant franchisees on board.

By The Associated Press

McDonald's (MCD, news, msgs) executives came out swinging when they announced their assault on the comfy world of coffee shops.

After the success of its upgraded drip coffee -- which even managed to snag a thumbs-up from testers at Consumer Reports earlier this year -- the fast-food chain known for supersize meals is gearing up for a massive expansion into the world of lattes.

"We want to move from beverages as an accompaniment to being a beverage destination," Don Thompson, president of McDonald's USA, said in a recent meeting with analysts. "Our speed, our convenience, the value that we can afford to customers" without compromising quality will make McDonald's a formidable player, he said.

Restaurants will offer lattes, mochas, cappuccinos and espressos with a choice of different flavorings and milk. Industry watchers say the drinks will cost about 50 cents less than at Starbucks (SBUX, news, msgs).

But as it tries to cash in on the fast-growing specialty coffee market, the world's largest restaurant chain is already finding itself at odds with the unlikeliest of groups: its own franchise owners.

"There's a real groundswell of resistance among the franchisees about this," said Richard Adams, a consultant for McDonald's franchise owners. He estimated the effort has a 50-50 chance of getting off the ground because of franchise opposition.

Store owners are balking at the plan's estimated $100,000 price tag to cover renovations and initial new equipment.

An espresso a day

And many are concerned that little customer interest in McMochas means it could take years to recoup their investment, even on the famously high-margin coffee drinks.

"They're going to have whipped cream on their face," Adams said.

McDonald's said it's confident the new coffee will win new customers and help individual stores boost annual revenue by about $125,000 once the coffee products -- along with new bottled drinks, smoothies and other beverages -- are added to stores.

Zachary Aisley, a 27-year-old from Woodland Hills, Calif., has been impressed with the value and taste of McDonald's premium drip coffees and iced coffees. Now he's looking forward to sampling the company's lattes and mochas to see if they merit more frequent visits.

"I think their addition could bring me into the store," he said. "And I would definitely be likely to go in and try it."

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Costs less, tastes better
Consumer Reports ranked McDonald's coffee ahead of Starbucks' and other rivals' in terms of value and flavor.
If McDonald's can persuade its franchisees to sign on, analysts say it can likely thrive in the growing $12 billion specialty coffee market, which includes both brewed coffee and beans.

About one in five Americans drinks some kind of espresso-based coffee each day, and the market is supposed to grow by at least 4% each year until 2011.

"With coffee gaining so much ground, McDonald's almost has to go there," said Sharon Zackfia, a restaurant and retail analyst with William Blair. "The feeling that the coffee business is a single pie and everyone is fighting for different slices doesn't seem to acknowledge that the pie is growing."

In response, companies are scrambling to offer more steamy drinks and snacks.

Continued: Starbucks is struggling

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