McDonald's shakes up soft drinks, boots Pibb Xtra for Dr Pepper

Published: 4/27/2009 8:42 AM

McDonald's Corp. will replace Coca- Cola Co.'s Pibb Xtra with Dr Pepper at all of its U.S. restaurants, giving Dr Pepper Snapple Group Inc. a greater foothold at the fast-food chain.

Dr Pepper, now available in 8,500 McDonald's, will be added to fountains at all of the company's 14,000 U.S. locations, Dr Pepper Snapple said today in a statement.

"This is about McDonald's becoming a beverage destination and building off our offerings of fountain beverages," Karen Wells, vice president of U.S. strategy and menu for McDonald's, said in an interview. "It's another extension to have more variety and choice for our customers."

McDonald's, based in Oak Brook, is expanding its fountain and bottled drinks to complement the McCafe espresso- based drinks that are now available in about 70 percent of its U.S. stores. The company expects fountain and bottled drinks to help drive beverage sales outside of breakfast hours.

The world's largest restaurant company also will test Coca- Cola Zero, Atlanta-based Coca-Cola's most successful new drink since Diet Coke was introduced 27 years ago, at some of its U.S. restaurants. McDonald's 180 regional franchise groups, known as cooperatives, won't be able to add it among their options yet, Wells said.

For Dr Pepper Snapple, the 5-year agreement is "the last piece of the puzzle" in making the soda available in restaurants nationwide, said Dave Rollins, senior vice president of fountain and foodservice at the Plano, Texas-based company.

'Huge Prize'

McDonald's operators will have a choice to add the diet version of Dr Pepper, now featured at 3,500 stores, as Dr Pepper Snapple tries to increase its third-place share of the Coke- dominated U.S. fountain-drink market.

"This is a huge prize for us," Rollins said in an April 24 telephone interview. "In the last five years, we've been able to gain 100 percent availability in 25 of the top 30" fast-food chains.

Coca-Cola's core fountain brands remain the foundation for McDonald's beverage offerings, said Ray Crockett, a spokesman for the company. Coke is the exclusive supplier to McDonald's of cola, lemon-lime and root beer, the bulk of its fountain business. McDonald's doesn't break out its beverage sales.

Fountain drinks accounted for 23 percent of the 9.92 billion cases of soft drinks sold in the U.S. in 2007, according to industry newsletter Beverage Digest. A case is equivalent to 192 ounces.

McDonald's shares fell 99 cents to $54.31 on April 24 in New York Stock Exchange composite trading. They have lost 13 percent this year before today. Coca-Cola fell 13 cents to $42.79, while Dr Pepper Snapple gained 1 cent to $19.

Handshake Deal

Boosting Dr Pepper to another 5,500 McDonald's stores will be a "significant top line increase" for Dr Pepper Snapple, Rollins said. The company had about 10 percent of the U.S. fountain market in 2007, according to Beverage Digest. Before this agreement was signed, Dr Pepper Snapple forecast sales growth of 3 percent to 5 percent this year.

Dr Pepper is already available nationwide in Burger King Holdings Inc.'s 7,500 U.S. stores and Sonic Corp.'s 3,500 sites. Diners can buy Dr Pepper at 80 percent of Wendy's restaurants and 60 percent of Subway Restaurants, Rollins said.

Coca-Cola, which counts McDonald's as its largest customer thanks to a handshake deal dating to 1955, controls about 70 percent of the fountain market. PepsiCo Inc., based in Purchase, New York, controls about 20 percent.

Core Soft Drinks

The fountains used in McDonald's stores have eight taps, five of which will serve the so-called core beverages: Coca- Cola, Diet Coke, Sprite, Hi-C Orange and Dr Pepper. The franchise co-ops will vote to select which options they'll add to the remaining three taps.

McDonald's will continue to offer Coca-Cola's bottled Dasani water, and regional stores also will be able to choose to sell bottled Powerade Mountain Blast and Vitaminwater XXX. The stores will begin voting next month on which drinks to add to the core line-up.

McDonald's is adding the McCafe coffees to lift sales of more profitable beverages as part of the biggest brand introduction since it introduced the breakfast menu in 1977. The company is seeking to lure customers from coffee shops including Starbucks Corp. and Dunkin' Donuts Inc. with lattes and cappuccinos.

Coca-Cola's share of the soda market fell 0.1 percentage point to 42.7 percent last year as its sales volume dropped 3.1 percent, Beverage Digest said last month. Pepsi's share fell 0.3 percentage point to 30.8 percent, following a 4 percent volume decline.

Dr Pepper Snapple Group gained 0.3 percentage point of share to end the year with 15.3 percent thanks to its Dr Pepper brand.