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For McCafe supplier, a case of jitters

If McDonald's espresso-based beverages become popular with customers, the payoff will be huge for Distant Lands Coffee, the fast-food chain's main supplier.

July 10, 2009|Mike Hughlett

TYLER, TEXAS — Every day at the Distant Lands Coffee roasting plant here, a river of green coffee beans is transformed into espresso, fuel for McDonald's Corp.'s boldest gambit in decades.

Distant Lands' Russell Kramer was skeptical at first that it would ever happen. Could the burger giant really be serious about selling cappuccinos? A bike ride with a McDonald's executive through the coffee-tree-studded mountains of the Indonesian island of Sumatra helped convince him that it was.

Kramer knew that signing on as McDonald's lead espresso provider meant the Renton, Wash.-based coffee company would have to hew to rigorous rules aimed at making sure the world's best-known restaurant chain would never suffer a supply-chain breakdown. He also knew that the payoff would be huge if the restaurant's foray into the world of espresso were to succeed.

When per capita milk consumption rose in 2006 for the first time in 20 years, McDonald's was a prime reason, said Chris Moore, a senior vice president at Dairy Management Inc., the marketing arm of the U.S. dairy industry.

That's because two years earlier, McDonald's had introduced milk in resealable plastic bottles, a hit with children and a practice the rest of the fast-food industry then adopted, he said. The dairy industry is counting on the same sort of effect from McDonald's espresso coffee drinks, which can contain up to 80% milk.

"We believe this will be a huge growth driver for the dairy industry," Moore said.

Analysts say the same will happen for the coffee industry -- if McDonald's espresso experiment succeeds.

The fast-food giant's coffee venture is an attempt to solidify a sub-brand called McCafe. Retrofitting a McDonald's restaurant to accommodate specialty coffee and other new beverages can cost as much as $100,000. Yet it's far from clear that consumers will come to equate coffee with McDonald's like they do Big Mac burgers.

The Oak Brook, Ill., company won't release any data, but ever since the McCafe launch two months ago, sales of the chain's espresso-based coffee drinks have met expectations or exceeded them in some markets, said Neil Golden, McDonald's chief U.S. marketing officer. A marketing push beginning Monday will feature free hot or iced mocha beverages every Monday until Aug. 3.

Kramer first got a whiff of McDonald's grand coffee plans in late 2003 when he received a phone call from Danielle Paris, McDonald's U.S. senior group manager for product innovation.

Distant Lands had worked with McDonald's before, but on a limited coffee concept that never went past test marketing. This time, McDonald's was planning a full assault on Starbucks Corp. and the coffeehouse crowd.

Distant Lands was a smaller coffee provider, with a roasting plant in Texas, though it has since added a second near Seattle. The firm has worked with a lot of smaller coffeehouses, and its largest restaurant client had only about 3% as many outlets as McDonald's.

McDonald's was calling to see if Distant Lands was interested in becoming its lead espresso supplier, a role that would entail co-developing the coffee's blend.

"We had this debate: Is this worth it?" Kramer said. "There was skepticism internally."

Was it worth it, given the daunting task Distant Lands would face? And was McDonald's really committed to a product with enough quality to compete with established espresso players?

The former question was answered by the many overseas trips Paris made with Kramer in order to fully understand how quality coffee is grown and harvested. Distant Lands' own farm in Costa Rica was on the tour, as were farms in Indonesia, Brazil and Guatemala. The other question was answered by the potential rewards of becoming a McDonald's supplier.

"If you get a contract with them and do OK, you're going to make money," said Ken Boyer, a supply chain expert and business professor at Ohio State University. "They're not known for nickel-and-diming suppliers, and they generally stick with suppliers because they see it as a partnership."

McDonald's immediately became Distant Lands' biggest food service customer, though the coffee company counts large supermarket chains, including Pleasanton, Calif.-based Safeway Inc., among its clients.

The flip side of landing McDonald's as a client is adapting to its ways.

"McDonald's has a very stringent set of requirements for its suppliers," said Dennis Lombardi, executive vice president of food-service strategies for WD Partners, a consulting firm.

Kramer learned that firsthand. For instance, Distant Lands long had its own quality-control regimen that involved testing coffee beans at several steps in the supply chain: farm, outgoing seaport, incoming port, roaster.

The log of all that testing had been a piece of paper affixed to each big burlap sack of green coffee beans. Not good enough. Distant Lands had to devise a way to electronically record each inspection and make that record available immediately to McDonald's.

"It tests you," Kramer said of McDonald's protocol. "But it makes you a better company. It has made us more disciplined as to how we run our business."

Distant Lands is one of three roasters that provide espresso for McDonald's U.S. operations. The other two are Gavina Gourmet Coffee of Vernon, Calif., and S & D Coffee in Concord, N.C.

But the other suppliers roast to the standard developed by Distant Lands and McDonald's. Asked if Distant Lands receives a royalty for its development work, Kramer smiled and said, "We got to be an approved supplier to McDonald's, and for a little company like ours, you have no idea how important that is."

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Hughlett writes for the Chicago Tribune.

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