McDonald's Beverage Business a Fountain of Profits

Source Article: McDonald’s Ends Pepsi Test in Victory for Coca-Cola | www.bloomberg.com (view article)

Ramifications:

1) Bottled Drinks would make McDonalds Beverage Business More Complicated, less Profitable.

2) Bottled Drinks would need to be Priced at Premium in order to maintain margins - Away from "Value" Image

3) McDonalds and Coca-Cola Linked in Consumer's minds - Iconic American Consumer Brands.

Analysis:

McDonald's testing Branded Bottled Drinks in Stores is an unnecessary complication to a vital high profit product line.

Being rooted in Convenience Retailing, any store owner will tell you the profit picture and inventory turns between Fountain products and individually packaged beverage portions is night and day. If we could only sell fountain, we would. McDonald's can, and that's what they should do.

An increased selection for the customer means decreased inventory turns for you. The availability of packaged beverages isn't going increase visits to McDonald's in any significant way, but it will reduce the margins in their drink business. To sell a unit of packaged drinks at a competitive price, they will be in the 35% to 40% GM area, versus an 80% plus margin on fountain drinks, even with free refills. Fountain drinks that are received at the drive through are even better. No refills there.

No Inventory to stock and reorder, no additional refrigeration equipment and energy consumed... Fountain is the way to go in McDonald's.

In terms of a Pepsi-Coke fountain competition, which wasn't in play, Coke has a large and dominant presence in the field. To switch to Pepsi doesn't seem to make any sense. What competitive advantage would it give McDonald's?

McDonald's should stick with fountain drinks and keep the profit formula they have used to achieve great operating results over the years.

The free, low-cost, self-service refills fit into the value image very well, and makes for a good complement to the packaged meals with sandwich, fries, and the fountain drink.