McDonald's coffee initiative brings bean grower, roaster to front burner: Distant Lands' decision to become lead supplier has rewards, challenges

TYLER, Texas, Jul 05, 2009 (Chicago Tribune - McClatchy-Tribune Information Services via COMTEX) -- MCD | Quote | Chart | News | PowerRating -- Every day at the Distant Lands 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 slinging cappuccinos and mochas? A dirt-bike ride with a McDonald's executive through the coffee-tree-studded mountains of the Indonesian island of Sumatra helped convince him it was.

And Kramer knew that signing on as McDonald's lead espresso provider meant hewing to rigorous rules aimed at making sure the world's best-known restaurant chain never suffers a supply-chain breakdown.

But Kramer knew, too, that the payoff would be huge if McDonald's espresso offensive, launched nationally in May, succeeds. With nearly 14,000 U.S. restaurants, McDonald's gigantic scale instantly creates gigantic demand when it launches a product -- demand that can turn small companies into big ones and help move entire markets.

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., 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 kids and a practice the rest of the fast-food industry then adopted, he said. The dairy industry is counting on that same sort of "catalyst" effect from McDonald's espresso coffee drinks, which can contain up to 80 percent milk.

"We believe this will be a huge growth driver for the dairy industry," Moore said. Analysts say the same for the coffee business -- if McDonald's espresso foray succeeds.

The changes at McDonald's don't end there: The latest new product, a big Angus burger, rolled out nationally last week.

The coffee venture essentially is an attempt to create a sub-brand dubbed McCafe. Retrofitting a McDonald's restaurant to accommodate specialty coffee and other new beverages costs up to $100,000. Yet it's far from clear that consumers will come to equate McDonald's with espresso drinks like they do chicken nuggets.

The company won't release any data, but since the national ad launch in May, sales of espresso-based coffee have met expectations or exceeded them in some markets, said Neil Golden, McDonald's chief U.S. marketing officer. An espresso marketing push beginning July 13 features free hot or iced mocha beverages each Monday for a month.

Kramer first got an inkling of McDonald's grand coffee plans in late 2003 when he got a phone call from Danielle Paris, McDonald's U.S. senior group manager for product innovation. "I got this call from [McDonald's] and it was 'I'd like to see someone from Distant Lands, like, tomorrow.' "

Unlike many roasters, Renton, Wash.-based Distant Lands has long owned its coffee farm, and that appealed to McDonald's, Paris said. It indicated Distant Lands had expertise not just in roasting but growing coffee.

"The key really starts with the raw material," Paris said.

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 essentially planning a full assault on Starbucks and the coffee house crowd.

Distant Lands was a smaller coffee provider, with a roasting plant in Tyler, Texas, though it has since added a second near Seattle. The firm worked with a lot of smaller coffee houses, and its largest restaurant client had only about 3 percent 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. (McDonald's espresso is made from a blend of beans from all four nations).

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."

Indeed, some McDonald's suppliers -- like Aurora-based OSI Group and Chicago-based East Balt Inc. -- have been with the company for decades. In 1955, the then-fledgling McDonald's chose OSI as its first hamburger supplier. Today, OSI has 42 plants in 17 countries, most of which supply McDonald's.

East Balt, which makes buns and muffins, has grown globally with McDonald's since 1955 too, and 89 percent of the sales at its 21 plants stem from the fast-food giant.

McDonald's immediately became Distant Lands' biggest food service customer, though it counts large supermarket chains, including Safeway, among its retail purchasers. (Distant Lands declined to disclose its sales.)

The flip side of landing McDonald's as a customer 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' relationship with McDonald's has transformed Kramer's job. His main responsibility is running the company's green coffee production subsidiary, Hacienda La Minita.

But for the past few years, he's also been Distant Lands' point man on all things McDonald's -- scurrying to Oak Brook to meet with financial types, helping franchisees implement McCafe, etc. "It's a very complex relationship," Kramer said.

And one that made Kramer antsy occasionally, given the time it has taken to fully roll out espresso-based coffee. "How and the hell can this take four years?" he has asked himself. "But being a new supplier [to McDonald's], you don't understand the product cycle time."

While preparing for McCafe's national launch, the entire production capacity of Distant Lands' Tyler plant was committed to McDonald's. Nowadays, about one-quarter of the plant's daily output flows to the Golden Arches.

The Tyler plant, steeped in the pungent smell of coffee, is one of three roasters that provide espresso for McDonald's U.S. operations. The other two are owned by Gavina Gourmet Coffee and S & D Coffee, as McDonald's commonly spreads out its supply work.

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."

mhughlett@tribune.com

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