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Changes Brewing at Jack in the Box

Jack in the Box hasn’t fully engaged in the better, bolder coffee war that is currently being led by McDonald’s, which is taking full aim at Starbucks with its cheaper, faster McCafe espressos.

McDonald’s rolled out its espresso beverages this fall and says it plans to offer them at the majority of its 14,000 U.S. restaurants by mid-2009.

But Jack, the funny-faced icon of the San Diego-based burger chain, smells the coffee and is wasting no time trying out new espresso machines to see which work best.

A push-button Concordia Coffee Systems’ machine that replaced the regular coffee maker at its test restaurant on Murphy Canyon Road is the latest of at least three brands being put through the paces, says Jim Smith, director of restaurant systems for Jack in the Box, which has 2,100 eateries.

It doesn’t have a device that makes milk foam, but it produces hot lattes to add to the iced variety that it introduced in the spring and the premium brew that replaced its regular cup of joe a year ago.

New menu items come and go from the test restaurant’s menu boards. Whether hot espresso stays depends “on how guests accept the new product offering,” Smith said.

The company doesn’t give projections for its test products.

Taking Stock

Stock in Jack in the Box, traded as JBX on the New York Stock Exchange, closed at $16.39 a share Oct. 15, down $2.10 from the previous day’s close.

According to Conrad Lyon of Global Hunter Securities, JBX stock, which has traded as high as $32.68 and as low as $15.41 in the last 52 weeks, is currently undervalued.

Jack’s fiscal year ended in September, and the consensus of analysts that cover it is that it will report earnings of $2.26 per share.

For the quarter ended in July, Jack in the Box reported net income of $29.9 million, or 51 cents per share. Earnings for the first three quarters were $1.54 a share, up from $1.44 for the same year-ago period.

Analysts who cover McDonald’s, traded as MCD on NYSE, predict that its per-share earnings for the fiscal year ending in December will be $3.54 and that per-share earnings for the quarter ended in September will be 97 cents, according to Yahoo Finance.

MCD shares closed at $51.55 per share Oct. 15, down from $56.02 the day before. Its 52-week range was $45.79 to $67.

Full Steam Ahead

According to Dennis Lombardi, executive vice president at restaurant consultant WD Partners, a host of fast-food chains, including Wendy’s International, Burger King and Carl’s Jr., are looking at fancy coffees as a way to steal share from Starbucks, which is retreating after a period of aggressive expansion.

So, Jack in the Box, in his opinion, has no choice but to enter the coffee war , full steam ahead.

“What we’re seeing is that most quick-serve brands are thinking about and testing new coffees, not just better brewed, but specialty coffee drinks,” Lombardi said.

Offering fancy coffees for less than Starbucks is not the primary challenge. Producing such beverages quickly is the key, he says.

“It can’t interfere with existing operations to the extent that it’s a deal breaker, such that the speed of service in the drive-through is hampered,” he said. “Can you expect a clerk at Jack in the Box to be a barista? The answer is yes.

“But can a barista put together a cheeseburger in 11 seconds? It all depends on the industrial engineering that goes into creating a workstation and the specialized equipment that allows a quick-serve restaurant to keep speed of service and consistency high.”

Lombardi expects the fast-food chains to find espresso machines that fit their needs and, eventually, specialty coffee will become “ubiquitous at attractive price points.”

Testing 1, 2, 3

The Murphy Canyon Road test restaurant is offering a small cup of bold roast coffee for $1.29; hot caf & #233; latte goes for $1.89; iced caf & #233; latte $2.29, and an additional shot of espresso costs 45 cents , less than half what Starbucks charges.

In the meantime, the restaurant’s continually changing “test” d & #233;cor was recently upgraded, in keeping with what spokeswoman Kathleen Anthony calls its “re-imaging program.”

New is a large, cushioned corner booth with a triangular shaped table by the main entryway, and in the center of the restaurant is another large booth that forms a semicircle with several small tables.

They’re being tested to gauge the reaction of customers, Anthony says, adding that 620 of the chain’s eateries, or 29 percent of the entire system, have been redecorated and refurnished, and plans are to upgrade the others in the next four years.


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