Summer Beverage Strategies: Revisit Old Flames, Raise Prices

McDonalds posted its second ever loss for the quarter. Not the biggest deal in the world since the loss of $711MM came with a one-time charge of $1.6B from the sale of operations in Latin America. Revenues rose 12%.

Maybe it's just a coincidence that McDonalds went with an old profit-making strategy this summer. Even though the company dropped its "super size" options a few years back (in the wake of negative publicity after the release of the documentary "Supersize Me"), McDonalds introduced the Hugo, a limited-edition, 42-ounce cup of soda that sells for an incredible 89 cents. ("Price and participation may vary," claims the website.) With standard soda, the Hugo clocks in at 410 calories. Frankly, I'm disappointed that McDonalds went crawling back to its old flame when breaking up was the right thing to do.

From The New York Times:

"In 2003, company executives set about reinventing McDonald’s by focusing on getting better rather than bigger. In the last few years, McDonald’s has seemed to do just about everything right.

The chain has spruced up its restaurants, improved its advertising and introduced menu items that have helped to reshape its image and reinvigorate sales.

Premium salads and apple dippers brought moms back. Chicken wraps lured people during off-hours; higher-quality coffee turbocharged breakfast business.

McDonald’s stock price has quadrupled in the last four years, and the company has reported positive same-store sales, an important industry measure, every month since April 2003.

Given those results, a new McDonald’s menu item is a bit of a stunner. Remember Supersize sodas? They’re back, except this time the chain is trying a new name. ...

McDonald’s might as well have called it the Tubbo.

Making matters worse, Hugo ads are available in several languages, making sure that minorities — who are disproportionately affected by the obesity epidemic — are aware of the budget beverage."

Starbucks plans to raise its prices for the second time in the last year. Coffee beverages will cost nine cents more, which is about a 3% increase. (It announced a price increase of about five cents per drink in September of 2006.) Starbucks shares peaked in November 2006, and since then Wall Street has been on the company's case to improve margins.

The price increase was blamed on high dairy prices (which wiped out Hershey Co's profits in the second quarter).

The Starbucks Gossip blog has some analyst quotes that predict the nine-cent price increase will result in "some traffic fall-off" and "should help both comps and margins." I'd bet those analysts ten bucks that traffic fall-off will be either nothing or next to nothing. If Americans can get through the summer of 2007 without spending less on gas, they can get through another miniscule increase on the price of their coffee ritual(s). That brings up a good question: Are Americans more dependent on their cars or their coffee fix?

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[Glenn]

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[Oscar Atkinson]

It does not look like Coke is counting on Ronold McDonald to improve its flagging cola sales. They are turning to the alternative beverage space for their growth. The Dasani water product has proven to be rediculously profitable for them given their existing distribution network and the low cost of bottling what is basically filtered tap water. In May Coke paid a big premium for Vitamin Water at a cool $4.2B. You have to guess Pepsi was right behind them in that auction. Why else would Coke have paid double the valuation of one year ago? The savvy Indians from the Tata Group bought in at a $2.2B valuation in August of 2006. You would think that McDonald's would be peddling Ronnie Water at the drive through rather than the Hugo.