Would You Like Fries with that Latte?

Jan. 9, 2008— -- McDonald's this year will begin to roll out one of its biggest and most expensive new product concepts ever in a bid to put the heat on Starbucks in the battle for upscale coffee drinkers.

The long-anticipated move comes as Starbucks announced Monday that CEO Jim Donald is out and that founder and Chairman Howard Schultz would retake the reins as CEO.

"This is the biggest endeavor for McDonald's since our introduction of breakfast 35 years ago," says John Betts, vice president of national beverage strategy.

He says McDonald's new beverage strategy could add up to $1 billion in sales.

Over the next two years, most of McDonald's 14,000 domestic locations will add near the cash registers McCafe coffee bars that create coffee beverages such as cappuccino, lattes and mochas.

McDonald's specialty coffees are generally 40 cents to 80 cents cheaper than coffee chains' $1.99 to $3.29. But the choices are far fewer than at Starbucks, with added flavors limited to vanilla, mocha and caramel.

In early testing, some franchisees have expressed concern about tepid sales of hot beverages, as well as large costs for the new equipment.

"It is certainly the biggest potential mistake in the history of the system," says Richard Adams, president of Franchise Equity Group, which consults for some McDonald's franchisees.

"McDonald's new product development has always been done in baby steps. This is a giant leap of faith," he says.

Some stores are selling only 30 hot beverages a day despite heavy local marketing, he says.

Lisa Essig, owner of six McDonald's in the Kansas City area where the new system is being tested, says she sells "several hundred" of the new beverages a week and that they attract new customers.

Besides the hot beverages, some Kansas City locations also are testing smoothies and sale of bottled beverages including Red Bull and Lipton green tea.