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McDonald's hits rival where it hurts: the lattes

(TIM BOYLE/GETTY IMAGES)

GREENSBORO, N.C. - When Charles Ruppert has a yen for a white-chocolate latte, he doesn't head to Starbucks. He goes to a McCafe in a McDonald's restaurant - and pays 26 percent less.

"McDonald's got a real winner," said Ruppert, 55, a car-repair shop owner in Greensboro.

McDonald's Corp. has added the frothy drinks at two-thirds of its 13,794 US stores since introducing a stronger brew in 2006.

Shares of Starbucks Corp., the largest coffee-shop chain, are down 24 percent in 2007, on track for their worst annual performance amid the slowest sales growth in more than five years at stores open at least 13 months.

McDonald's is "being extremely aggressive," said Peter Kwiatkowski, who helps manage $21.9 billion, including 1.3 million McDonald's shares, at Fifth Third Asset Management in Cincinnati. "They're a lot cheaper than Starbucks coffee in general, and they have the high quality to go with it."

Ruppert paid $3.31 for a 20-ounce latte at the McDonald's in Oak Ridge, compared with the $4.48 cost for the same size at Starbucks.

McDonald's coffee is drawing new customers and spurring food sales, especially at breakfast, said president Ralph Alvarez.

"Coffee, by itself, is a very high-margin business," said Alvarez, who drinks two McDonald's coffees a day. "But it doesn't compare to what we get selling a full meal."

McDonald's said yesterday that August same-store sales climbed 8.1 percent, helped by coffee and breakfast items. Sales on that basis have advanced 7 percent in the first eight months of the year. Alvarez declined to disclose breakfast results.

The chain offers lattes, cappuccinos, and iced brews in 9,000 US restaurants where consumers order coffee primarily at drive-through windows.

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