When Consumer Reports magazine crowned McDonald’s the champ in a four-way coffee taste test against rival quick-service brands last month, many in the foodservice industry knew there was more at stake than just the bragging rights to a beverage beauty contest.
Whereas fast-food chains once battled for sandwich-and-side-dish supremacy, the advent of specialty coffees as a lucrative profit center has all but transformed the QSR sector’s competitive landscape. Operators who used to see a cup of java as an unexciting but necessary menu component, particularly at breakfast, have found lately that a creative selection of premium coffees and coffee-based drinks can stoke sales across all dayparts.
In just the past three years, coffee sales at quick-service chains have climbed 8 percent in terms of gallons sold, according to Technomic Inc., a Chicago-based foodservice consulting firm.
“That’s a big number,” says Joe Pawlak, Technomic’s vice president.
At the same time, this new age of coffee consciousness has spilled over into other beverage categories, driving chains to expand their drink offerings at the fountain, in bottles and through other single-serve containers. Not only has the incidence of new beverage rollouts at chains surged, but their debuts also are often supported by the same kind of marketing ballyhoo formerly reserved for new food items.
For example, after years of stubbornly resisting the cloning of its one-of-a-kind shake, the Original Chocolate Frosty, Wendy’s International last summer introduced a Vanilla Frosty, noting that additional flavors are being planned for future rollouts. Then, just a few weeks ago, the Dublin, Ohio-based chain debuted the Frosty Float, a line extension available in chocolate or vanilla and mixed with a choice of sodas, such as cola or root beer. Advertising support is expected to follow later this spring.
Burger King recently trumpeted the launch of a limited-time-only Mocha BK Joe Iced Coffee, the burger chain’s latest extension of its BK Joe line. Regional coffee king Dunkin’ Donuts, which upgraded its coffee selections several years ago, declared that it is branching out into the increasingly popular iced tea arena.
Krispy Kreme executives said they also are planning to offer a new beverage program, which features its Chillers frozen drinks that include a Kremey and a Fruity line. Starbucks recently launched a pair of new drinks: a Dulce de Leche Latte and a Dulce de Leche Frappuccino. Also, chicken expert Chick-fil-A is adding new beverage options to its kids’ menu.
Executives at Papa Gino’s and sister brand D’Angelo’s Sandwich Shop say they are expanding the chains’ drink selections by adding a new variety of bottled drinks in grab-and-go dispensers, while hot dog pioneer Nathan’s Famous is making its signature lemonade available in bottles at the counter or in dispensers.
McDonald’s, which has made deep inroads into the specialty-coffee business over the past couple of years, is looking to install beverage bars in its units that would feature a greater range of beverage selections.
“Beverages have emerged as a driving force at some QSR chains,” says Harry Balzer, vice president of the NPD Group, a consumer market research firm based in Port Washington, N.Y. “And whenever you find growth in the industry, you will see a lot of people looking to capitalize on it.”
But if most fast-food chains have by now entered the competitive fray with their own signature products, industry observers credit Seattle-based coffee powerhouse Starbucks with sparking the gold rush into the beverage sector.
“When you look at Starbucks, the base of their drinks is coffee,” says Malcolm Knapp, president of the New York-based Malcolm M. Knapp consulting group. “But they have clearly transferred themselves into the specialty-drink category with frappuccinos, iced lattes, and other drinks and offerings.”
As a result, Starbucks has helped to reposition beverages as snacks in the minds of the American public.
“They’ve done a good job of turning coffee into something that people consume in place of a candy bar or bag of chips,” Technomic’s Pawlak says.
In 2002, some 8 percent of all afternoon or evening snacks included coffee, NPD research found. By 2006 that figure had risen to 11 percent.
“It’s not that people are snacking more,” Balzer says. “But when they are snacking, they’re more likely to snack on coffee drinks or other beverages. It’s about a change in behavior.”
Certainly, beverages have always been viewed as an important piece of the sales equation for quick-service operations. They are purchased frequently, are highly profitable and are relatively easy to prepare, a Burger King spokeswoman says. For those chains that offer breakfast, coffee—one of the most profitable items on the quick-service menu, with a food cost under 10 percent—is a major component of the daypart, often driving the sale of other selections. According to NPD, 38 percent of all breakfast meals in 2006 included coffee, up from 37 percent in 2002.
In addition, bundled or value meals—a fundamental underpinning of most fast-food merchandising—historically have featured a beverage component, which helps to drive sales during the lunch and dinner dayparts, Knapp says.
Nevertheless, consumers’ buying patterns have been shifting over the past several years. Heightened health concerns and the new focus on obesity have impacted consumers’ attitude toward sweet, carbonated soft drinks, which sparked a shift toward other types of beverages. A survey conducted by Sandelman & Associates of quick-service restaurant patrons found that soft-drink purchases declined to 47 percent of visits in 2006, down from 52 percent in 2005.
And while sales of diet carbonated beverages are increasing—up 5.3 percent in 2006 from 4.6 percent in 2002, according to NPD—consumers apparently are looking for alternative selections, including bottled waters, energy drinks, flavored teas, smoothies and other drink varieties.
“Variety clearly is the news that drives the beverage category,” says Todd Townsend, chief marketing officer for Sonic, the 3,245-unit drive-in chain based in Oklahoma City.
Long recognized as a quick-service pioneer in the area of beverage merchandising, Sonic offers an extensive variety of drink selections that includes carbonated and noncarbonated beverages, milk, a range of fruit juices, flavored teas, fruit smoothies, bottled water and coffee. Shakes and floats introduced over the past 15 months include Banana Pudding Shake, Hot Fudge Oreo Shake, Strawberry Cheesecake Shake, Orange Float and Vanilla Coke Float.
The chain also ratchets up beverage possibilities by allowing customers to customize their drinks by blending existing selections or adding other ingredients, such as fresh fruit.
“When you add everything up, we’ve calculated that you can have 168,894 unique drinks at Sonic,” Townsend says.
In addition, the chain regularly augments its beverage menu with the rollout of new selections and limited-time offers. Townsend said Sonic is testing a new coffee product that could include a variety of extensions such as lattes.
Because beverages make up such an important part of Sonic’s strategy, the chain showcases that side of the business separately in ads and point-of-purchase merchandise with the tagline “Your ultimate drink stop.”
But clearly Sonic is no longer the only quick-service chain looking to leverage its beverage menu. Canton, Mass.-based Dunkin’ Donuts, a division of Dunkin’ Brands Inc., has expanded its former coffee-only menu to include a wide variety of beverages that appeal to customers across all dayparts. While the chain has stepped up the development of new food items—it recently said it is testing pizza—beverages across the board account for 64 percent of Dunkin’ Donuts’ sales, says Michael O’Donovan, vice president of global research and development for Dunkin’ Brands.
“Three years ago we identified that there were nine beverage occasions in a day, compared to only three or four eating occasions,” O’Donovan says. “A light bulb went off. That makes for a lot of untapped visits. So we decided to broaden our menu.”
Over time the chain launched a new variety of beverages, including flavored iced coffees, Turbo Hot and Turbo Ice drinks made with coffee and espresso, iced lattes, white hot chocolate, fruit-and-yogurt-flavored smoothies, and the popular Coolatta line. Dunkin’s espresso line of drinks generated more than 5 percent of total sales in 2006, amounting to some $235 million.
“Dunkin’ Donuts has always been known for coffee,” he says. “We still sell more than 2.7 million cups a day. But consumer ‘need states’ have changed. People are looking for a different end result from each beverage, and we want to deliver choice.”
To increase that choice, Dunkin Donuts is about to introduce iced teas into its new prototype locations. The teas, which were first tested in Southern markets, will be available sweetened or unsweetened, or with a shot of raspberry or peach juice.
“We’re going to have a comprehensive tea program over the next five years,” O’Donovan says.
Another quick-service stalwart that has steadily been expanding its beverage platform is McDonald’s. The industry buzz generated by Consumer Reports’ test—in which McDonald’s thumped Burger King, Dunkin’ Donuts and, perhaps more surprisingly, Starbucks—has served to further underscore the seriousness with which the fast-food chain now takes its coffee.
But while McDonald’s premium-coffee upgrade has bumped up sales by 15 percent, the Oak Brook, Ill.-based chain continues to broaden its beverage menu. McDonald’s is testing several new beverages, including iced coffees, espresso drinks, sweet iced teas and bottled soft drinks at restaurants across the country. Caffè latte and cappuccino beverages are in test mode in all of the chain’s 531 restaurants in Michigan and other regions.
The chain also is working to speed up the service for specialty-coffee drinks. Execution time poses a problem for all quick-service chains when it comes to adding new items. Dunkin’s O’Donovan points out that a beverage can fail if it is too complicated.
“You have to deliver it in a certain amount of time,” he says.
McDonald’s new focus on beverages has operators singing its praises. John Jelinek, a 25-year veteran franchisee in the Kansas City, Mo., area, says he is wholly supportive of the new initiative.
“I think it’s the greatest thing since sliced bread,” says Jelinek, a three-unit licensee. “We launched iced coffee last week and our [150-unit] area franchisee co-op just voted to add sweet iced tea.”
The iced coffee, which is available in 24-ounce and 32-ounce clear plastic cups for $1.69 and $1.99, respectively, can be flavored with vanilla, hazelnut or just sugar.
While Jelinek acknowledges that it takes a little more time to prepare the beverage, “I’m not worrying about it,” he says.
Jelinek says the company is planning to install a 14-foot-long beverage bar in area stores that would dispense coffees, iced coffees, sweet iced tea, espresso-based drinks and other beverages. Some locations also are adding bottled beverages in dispensers.
Meanwhile, he calls McDonald’s new coffee “fantastic.”
“It’s impacted breakfast sales upward,” he says. “Our competitors are coming after us tooth and nail at breakfast—even Subway. And this is a good way to fight back.”
At the same time, McDonald’s reportedly is testing a pilot program that offers Pepsi products with its standard Coca-Cola fountain drinks. Outlets participating in the 11-month-old program feature Pepsi products in bottles and cans, but not at the fountain, which remains the province of McDonald’s longtime beverage supplier Coca-Cola.
Archrival Burger King also is taking a hard look at extending its coffee products line, notably into the various snack dayparts. For a limited time, the new Mocha BK Joe Iced Coffee—which includes a shot of chocolate syrup—will be available all day at participating units. It is available in a 22-ounce cup and is priced at about $1.99. The 11,100-unit Miami-based chain launched the drink as an extension of its premium BK Joe coffee product, which was introduced in October 2005.
Some beverage rollouts are not focused on adults. For instance, Chick-fil-A—an early entry in the premium-coffee wars—is expanding the beverage offerings for its kids’ program. The Atlanta-based chain is about to roll out 7-ounce Milk Chugs—small, juglike containers—with its kids’ menu. Varieties will include 2 percent, low-fat and chocolate, says spokesman Mark Baldwin.
Westbury, N.Y.-based Nathan’s Famous Inc. is looking at new merchandising opportunities for beverages. Although its signature lemonade product already accounts for more than 20 percent of overall beverage sales, president Wayne Norbitz says that the chain is testing bottled lemonade in about 25 locations. Previously only available from a dispenser on the counter, Nathan’s Old Fashioned Lemonade will now be sold in 20-ounce bottles.
“We have many locations in high-traffic market environments where the consumer wants to be able to walk away with the beverage—have half now and half later,” Norbitz says.
Shifts in consumer buying patterns, in fact, are sparking other trends in beverage merchandising.
“More people are switching from fountain beverages to bottled beverages,” says Michael McManama, senior vice president of brand development for Dedham, Mass.-based Papa Gino’s Holding Corp., which owns and operates the 164-unit Papa Gino’s and 190-unit D’Angelo Sandwich Shop chains. “It’s becoming a more preferred option.”
He says company officials have observed a shift away from carbonated soft drinks, or CSDs.
“At first people were changing from full-calorie CSDs to diet drinks,” he says. “But now we’re seeing customers move away from all CSDs to alternative products like flavored waters, energy drinks and juices, to a smaller degree. Customers want more variety and more better-for-you beverages.”
As a result, executives have been working with the company’s beverage partner to develop a new merchandising strategy. There are plans for the addition of an upright grab-and-go refrigerated unit in all locations that would feature a variety of new beverages, including iced teas, flavored waters, juices and energy drinks.
“We’re hoping to improve the number of beverage sales incidences, and raise the average check and profitability,” McManama says. He adds that beverages currently account for about 12 percent of total sales for D’Angelo and 9 percent for Papa Gino’s.
The new direction in its beverage lineup is part of an overall menu engineering initiative that is under way, McManama says.
“Beverages are a core ingredient of the whole plan,” he says.