By KEITH MCARTHUR
Tuesday, March 13, 2007
There's a crack in McDonald's Corp.'s long-entrenched relationship with Coca-Cola Co. The restaurant chain is experimenting with giving consumers a choice between bottled products from Coke and archrival PepsiCo Inc., alongside its traditional fountain drink offerings.
Coke has been the preferred supplier for McDonald's for 51 years in the United States. While the test program involving PepsiCo products is limited to a few U.S. markets, it could have major implications in the beverage wars. Coke derives up to 10 percent of its North American profit from McDonald's sales, according to some estimates.
"McDonald's is always testing something. But at the same time, if you're Coke you don't want your exclusivity to be messed with," said analyst Matthew Reilly.
"You don't want other people to be horning in on your turf," the Morningstar analyst added.
Reilly said that as long as the program is limited to a few test markets, it doesn't threaten Coke's profit. But he said that if McDonald's makes PepsiCo products available across the country, it could negatively affect his valuation for Coca-Cola.
The fountain taps at McDonald's restaurants in the Texas and Kansas test markets are still exclusive to Coke. But PepsiCo products including Gatorade, Mountain Dew and Lipton ice tea are now available in bottled form along with bottled Coke products. Pepsi's cola brands _ Pepsi and Diet Pepsi _ are not part of the test program.
"Coke is McDonald's preferred beverage supplier in the U.S. and certainly here in Canada as well. And in fact, Coke is working with McDonald's on these tests in the U.S.," said Ron Christianson of McDonald's Restaurants of Canada.
McDonald's relationship with Coca-Cola is said to date back to 1955, when founder Ray Kroc shook hands with a Coca-Cola executive to sell Coke with his burgers and fries.
McDonald's is experimenting with bottled beverages to bring in consumers who might buy drinks at convenience stores, Reilly said. "They're looking at bringing people in for another occasion. If people will stop at McDonald's instead of a 7-11 to pick up a beverage, you're bringing people in for a whole other potential usage."
Margins are much higher for fountain drinks, because Coke and Pepsi sell their syrups directly to restaurants, while partner bottling firms gobble up much of the profit on bottle and can sales. At the same time, sports drinks are stealing market share from carbonated beverages, and Pepsi's Gatorade is a clear leader over Coke's Powerade.
"I think (the McDonald's test) is something to watch very carefully. Consumers today clearly want more of a variety of beverages than are on most fountain taps. Pepsi has some very strong brands like Gatorade and Mountain Dew and I think potentially they could make some inroads with some of those brands," said John Sicher, editor and publisher of Beverage Digest.
Sicher estimates Coca-Cola has a 42.9-per-cent share of the U.S. beverage market, compared with 31.2 per cent for Pepsi. Coke has a commanding 70 percent share of the fountain drink market, he said.
Post new comment