Analyst: McDonald's becoming major coffee player

Stifel analyst says McDonald's 'well under way' to being major specialty coffee player

NEW YORK (AP) -- McDonald's Corp. is "well under way" toward its goal of being a major player in the specialty coffee business, a Stifel Nicolaus analyst said Tuesday.

Analyst Steve West wrote in a note to investors that McDonald's could boost its same-store sales -- or sales at stores open at least a year -- by about 3 percent to 6 percent and raise its earnings per share by 5 cents to 9 cents each year once the program is rolled out nationally.

Same-store sales are considered an important performance indicator because they measure growth from existing locations rather than newly opened ones.

The company has been adding new espresso-based drinks like lattes and mochas to its locations to compete in the specialty coffee market, which has been long dominated by more expensive sellers like Starbucks Corp. and Caribou Coffee Co. Inc.

The national launch of the new platform, called McCafe, is now about halfway done and should be completed by mid-2009.

West said McDonald's may be able to capture more cost-conscious consumers who may skip a trip to Starbucks for a less expensive alternative. Prices vary by market, but West said espresso-based drinks at McDonald's are, on average, about 65 cents to a $1 cheaper than at Starbucks.

West said he was encouraged that drive-in and counter times at locations that have the new drinks have not changed, "putting to rest our main concern."

Unlike at Starbucks and other specialty coffee retailers which rely on trained baristas to steam milk and add espresso shots and syrups, McDonald's uses a fully automated machine to make the drinks.

Although West said the quality of the product may not be "on par" with premium coffee houses, he said the drinks are "at least in the ballpark."

"We believe the service time alone will be a competitive advantage," West said, adding "McDonald's could be positioning itself to become a major force and ultimately market leader in the specialty beverage and snack segments."

West has a "Buy" rating on the shares with a $70 price target.

Shares of McDonald's fell 81 cents to $59.35 in afternoon trading.