041034 McDonald's Rolls Out Deli Line

Oak Brook, IL - McDonald's Corp is moving into new menu areas as it takes aim at rivals. The latest foray is deli-style offerings. The company has started selling New York Reuben and Turkey BLT sandwiches at some U.S. and Canadian locations as it tries to take sales from Subway Restaurants.

McDonald's Chief Executive Officer Charlie Bell is entering a $17.3 billion market for deli sandwiches, which food-industry analyst Technomic Inc. calls the fastest- growing U.S. fast-food segment.

"They are bringing more customers to existing stores with improved products," said Win Murray, an analyst at Harris Associates. "That's so much better for asset allocation than opening new restaurants."

McDonald's focus on food at its namesake restaurant is paying off. The company's profits for the third quarter that ended in September shot up 42% to $778.4 million. Sales climbed 9.3% to $4.93 billion spurred by menu additions including salads and the $4 Oven Selects, the chain's most expensive sandwiches.

McDonald's also owns the Boston Market and Chipotle Mexican Grill chains. Subway has gained sales faster than McDonald's since 2000, when it began using dieter Jared Fogle to advertise its menu as a lower-fat alternative to McDonald's Big Mac hamburger. The chain, run by Doctor's Associates Inc., has 17,000 locations. McDonald's has 13,000.

McDonald's had $6 billion in U.S. sales last year. Subway had $5.7 billion, spokesman Kevin Kane said.

McDonald's decision to roll out Oven Selects, now in about 4% of the chain's U.S. and Canadian locations, depends on whether restaurant operators can make the sandwiches fast enough.

"The deli sandwiches are a little more complicated to slap together," said Janna Sampson, a money manager at OakBrook Investments in Lisle "It takes longer than the burger products."

The six sandwiches, made on crusty six-inch rolls, are priced to reflect higher ingredient and labor costs, said Claire Babrowski, McDonald's chief restaurant operations officer.

The sandwiches culminate 15 years of trials including a mid-1990s test of McStuffin's, which were too expensive to make for what customers were willing to pay, Babrowski said.

McDonald's has not advertised the sandwiches in five test markets, including San Antonio and Columbus, Ohio, partly to give employees time to learn the new routine.

At a McDonald's restaurant in Lisle this month, an extra employee manned the Oven Selects station at midday. Slicing and toasting a French roll, he added nine ingredients including smoked ham, mortadella, salami, lettuce and tomato in less than 90 seconds to make the Leaning Tower Italian.

Adding the sandwiches to McDonald's U.S. restaurants probably will take 12 to 18 months, Chief Financial Officer Matthew Paull.

Subway touts itself as a healthier option than McDonald's, saying six of its sandwiches including Roasted Chicken Breast contain 5 or fewer grams of fat. A nutritional guide on the back of a McDonald's tray says the Big Mac has 33 grams of fat.

Subway's yearly U.S. sales climbed 16% on average from 2000 through 2003, Kane said, while McDonald's rose an average of 4.4%. McDonald's U.S. sales gain of 11% in 2003, buoyed by the addition of meal-size salads, outpaced Subway's 8.8% rise.

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