The Homa Files

Excerpted from AdAge “Credit Crunch Takes Bite Out of McDonalds” by Emily Bryson York , September 29, 2008 

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The banking crisis is threatening to take a rather surprising hostage: McDonald’s big-budget coffee rollout.

Tightening credit conditions, which are crimping plans for marketers as diverse as giant General Motors Corp. and relatively small household-products company Method, have prompted Bank of America to halt loans to McDonald’s franchisees. They need the capital to frantically build coffee bars in the chain’s 14,000 locations for what was planned to be an April coffee introduction.

And although it won’t derail the launch altogether, it is likely to delay it nearly into summer — hardly optimal timing for a hot-beverage introduction. It also could force the company to postpone a huge marketing push it’s been planning to support the java drive, as the company generally waits until 60% of its stores have been outfitted to undertake a national ad push. The fast feeder maintains that everything is on track…

Franchisees are spending about $100,000 per store to accommodate the “combined beverage business,” which includes lattes and cappuccinos. Most are seeking loans for the build-out. “As money remains tight, it’s going to be more difficult to get the loans to remodel for the combined beverage strategy,” one franchisee said…

The corporate memo additionally advised that “now is not the time to be shopping for loans based on interest rates,” or to refinance existing debt. It went on to suggest franchisees consider using cash on hand to cover new-equipment costs…

“I think it could very likely slow down the [rollout],” said Darren Tristano, exec VP of Technomic. “That plus the impact that Starbucks has seen in traffic and a decline in sales, I think it probably would be better to slow it down and continue to test it and see how the results are.”

McDonald’s spokesman Bill Whitman, however, said the beverage strategy is “on target and progressing as planned.”

“There continues to be more than sufficient liquidity available to our franchisees to fund capital improvements in their restaurants,” he said, adding that more than 50 national, regional and local lenders are providing financing to U.S. franchisees.

…it seems clear that the company is backpedaling. In July, McDonald’s was expecting the rollout to be completed by April. Earlier this month, Ralph Alvarez, chief operating officer, told analysts at a Bank of America conference that the specialty-coffee rollout should be complete by mid-2009.

Even if that date stays on track, the chain would likely miss the cold-weather window in which hot drinks are said to be the most popular…Another problem will be what to do with the ad calendar…

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Full article:
http://adage.com/article?article_id=131320

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