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NEW YORK (Dow Jones)--AFC Enterprises Inc.'s (AFCE) Popeyes is coming out with gallons of lemonade and seasonal monthly soda concoctions as it transitions chainwide to Coca-Cola Co. (KO) and Dr Pepper Snapple Group Inc. (DPS) products.
By July 1, Popeyes Louisiana Kitchen, known for its fried chicken and Southern fare, will complete the rollout of Coke and Dr Pepper products to nearly all its roughly 1,500 restaurants, as part of a five-year deal for Coke and Dr Pepper products, signed in December. Some franchisees have contracts with Pepsi that will continue until those agreements expire.
Popeyes is ending its ties with PepsiCo Inc. (PEP) and making the move to its first uniform chain-wide drink system to receive better rebates and to increase product innovation so it can capitalize on higher beverage profit margins.
Pepsi, which had partnerships with various Popeyes franchisees for years, was the beverage of choice in about 40% of Popeyes stores at the time the national contract was signed. The rest of the primarily franchised chain already sold Coke and Dr Pepper products.
Popeyes said the chicken industry has traditionally lagged the competition in drink sales because of its heavy drive-through business, leading families to resort to drinks at home when they buy their bucket of chicken or box of shrimp.
However, the company began to see some improvement after launching Popeyes' sweet tea about a year ago. Now, it's looking to capitalize on the higher margins beverages bring.
"Beverages are much more profitable than food, so it's in the best interest of our business to do more drink sales," Chief Marketing Officer Dick Lynch said. "A big opportunity we saw was selling our sweet tea in gallon sizes for people ordering take out...It's been extraordinarily successful for us, and it's nearly 100% incremental."
As a result of the success, Popeyes launched gallon-sized Minute Maid lemonade this month and is now testing peach tea in certain markets. "Programs like this would have been more difficult if we were still a split system," Lynch said.
Popeyes also said industry data suggests fruit-flavored drinks, such as orange or strawberry soda, were selling more than traditional soft drinks.
To bank on the trend, Popeyes is rolling out a marketing campaign in July that will feature a monthly "Flavoriety" combination of flavored drinks to go with each month's food promotion. July's mix of choice is the Big Easy Cooler, made with Fanta Strawberry with Minute Maid Lemonade, to complement July's Firecracker Butterfly Shrimp. Popeyes found that Coke was more appropriate for the deal, with its ability to provide more flavor combinations than Pepsi, Lynch said.
Popeyes first began exploring ways to capture a bigger a piece of the growing beverage market about two years ago, Lynch said, and moving to a single provider became the clear choice financially.
Beverage companies allot marketing funds and rebates to restaurants using their products, and Lynch said the company couldn't get the full benefits of these deals with just half its chain on board.
"This was not just a contest of who can sell us soft drinks the cheapest and who can transition the system faster," Lynch said. Popeyes was instead focused on strategies for innovation of flavors and getting customers to "pour more."
Lynch said he couldn't disclose specific terms of the deal.
The leader in beverage sales within the quick-serve category has traditionally been Sonic Corp. (SONC), where fountain beverages and frozen treats comprise 39% of sales. Since McDonald's Corp. (MCD) has spurred increased interest in the beverage business with the formal launch of its McCafe line two years ago, other players have been scrambling to get a foot in the door before it's too late.
"We can't ignore the work McDonalds is doing, and other competitors, with beverages and mixology," Lynch said. "Going back two years, we started looking at all the ways we could drive beverage business, and of course we looked across the aisle at our competition too."
-By Annie Gasparro, Dow Jones Newswires; 212-416-2244; email@example.com