UPDATE 3-INTERVIEW-McDonald's to launch bagged coffee in Canada

Allison Martell and Lisa Baertlein

* Bagged, ground coffee sales to start in Canada early November

* About 30 new Canadian stores in 2012, ramping up next year

* Follows disappointing earnings last week

(Adds background on ground coffee market, analyst's comment.)

Oct 25 (Reuters) - McDonald's Corp will start selling bags of its ground coffee in major Canadian stores in November, its Canadian chief told Reuters on Thursday, in a likely challenge to rivals like Starbucks Corp and Dunkin' Donuts.

The McCafe-branded coffee, priced at C$6.99 for 340 grams, is being launched as McDonald's steps up its expansion in Canada after holding back for more than five years.

Canadian spokeswoman Jessica Greasley said the Canadian unit is not aware of any other McDonald's markets selling bagged coffee.

Earlier this month, market watchers noticed McDonald's had filed with the U.S. Patent and Trademark Office to use its McCafe brand for ``ground and whole bean coffee.'' Some speculated that the company might launch bagged coffee in the U.S. market.

McDonald's U.S. operations could not immediately be reached for comment.

Speaking in an interview, Canadian President John Betts credited the coffee business for a turnaround at his unit and said there was the potential for a much larger footprint across the country.

``This year, we're going to build more restaurants than we've built in the last seven or eight years,'' he said on Thursday. ``Next year, it's going to ramp up from that.''

Around 30 new stores will open by the end of 2012, Betts said. He did not give specific figures for future periods. McDonald's has about 1,400 outlets in Canada.

Coffee is not an obvious point of entry in Canada, where Starbucks is ubiquitous and doughnut and coffee chain Tim Hortons Inc borders on a national symbol. But between McDonald's coffee push and Tim Hortons' expanding lunch menu, the two chains are increasingly going head to head.


Betts' upbeat message stands out against last week's earnings release, when McDonald's reported its worst quarterly restaurant sales growth in nine years thanks to tough competition in the United States.

All the Canadian stores will give out free takeout coffee next week, Betts said, the eighth round of that promotion, which the company has also run in some U.S. stores.

In the company's home market, fast-food players are dueling for customers with aggressive promotions, and bagged coffee and similar products have become a significant line of business.

In Starbucks' last fiscal year, ended Oct. 2, 2011, bagged coffee, bottled drinks and coffee served in hotels and offices accounted for $1.06 billion of its $11.70 billion in overall revenue.

Still, Bernstein Research analyst Sara Senatore said a McDonald's entry into the bagged coffee market would not necessarily shake up the U.S. market.

``It's a different price point, flavor profile, and customer'' than Starbucks, she wrote in an email. ``The others may be closer in flavor profile but again, (Dunkin's) business seems to have held up well in the face of (McDonald's) entry into specialty coffee.''

McDonald's started rolling out its McCafe line, which now includes espresso-based beverages and smoothies, in 2009.


Over the long term, Betts said, McDonald's may also look at the expanding market for single-cup coffee brewing.

The company does not currently sell K-cups, used in Green Mountain Coffee Roasters Inc's Keurig machines, or similar products for competing systems.

``Down the road, as our coffee journey and beverage journey evolves, we'll look at other things, certainly grocery, and K-cups and all those kind of things,'' said Betts.

Tim Hortons recently entered the single-serve coffee market, joining chains like Starbucks and Dunkin' Donuts, a unit of Dunkin' Brands.

(Reporting by Allison Martell in Toronto and Lisa Baertlein in Los Angeles; Editing by Andre Grenon, Andrew Hay and Kenneth Barry)