McDonald's java roaster Gavina eyes premium market

* Targets upscale coffee drinkers with "Family Reserve"

* Weighing some price increases as coffee costs rise

* McDonald's accounts for about 18 percent of revenue

By Lisa Baertlein

LOS ANGELES (Reuters) - When you're sipping a McDonald's brew on the U.S. West Coast, chances are you're really sampling coffee from F. Gavina & Sons Inc.

The little-known Los Angeles roaster, which started decades ago with a focus on ethnic markets and has expanded to supply major companies like McDonald's Corp and Costco Wholesale Corp, now has its eye on the fast-growing premium market.

The family-run seller of grocery brands like Don Francisco's and Cuban coffee staple Cafe La Llave espresso in July introduced its Don Francisco's Family Reserve line in Southern California, ahead of a national launch.

The move, which pits the company against formidable players like Starbucks Corp and Peet's Coffee & Tea Inc in the supermarket aisle, reflects how U.S. coffee drinkers are graduating to higher-quality brews -- from home.

"Once you taste good coffee, you don't go back," said company President Pedro Gavina, who like other roasters compares the trends in the coffee market with the increasing sophistication in the U.S. wine market.

Deep ties with growers should benefit the company as it moves upmarket and competes for ever more limited supplies of specialty beans, he said. "We have the heart of a coffee farmer," Gavina said.

Market researcher Packaged Facts projects U.S. coffee market growth of more than 25 percent between 2009 and 2014, with annual sales increasing to $59.6 billion from $47.5 billion. But demand for upscale coffee far outpaces that: the Specialty Coffee Association of America said sales of upscale coffee are growing at about 5 percent to 6 percent a year.

"The shift towards upscale coffee is continuing, but an increasing number of consumers are preparing upscale coffee at home due to the recession," said Ed Weiss, author of a recent study for Packaged Facts.

"The upscale coffee business at retail is extremely competitive, but smaller marketers such as Peet's have made impressive gains in recent years," Weiss added.

CUBA TO LOS ANGELES

Founder Francisco Gavina abandoned a thriving coffee business in Cuba after Communist revolutionary Fidel Castro seized power in 1959. He found his way to Los Angeles and set up the roasting business that is now run by his children.

"We started with the Cuban coffee. Then we realized there were other markets" like Middle Eastern and Vietnamese, said Pedro Gavina. "If you cater to them, you have a small section that is solid. They're very loyal customers and they stay."

The family now roasts 40 million pounds of coffee a year -- more than Peet's 25 million to 30 million pounds, but significantly less than Starbucks' 367 million pounds.

Last year, sales were up about 5.5 percent to roughly $114 million and 2010 growth is trending higher, executives said.

The company gets around 18 percent of its revenue from a deal that makes it one of a handful of drip and espresso coffee suppliers to McDonald's, said Leonor Gavina-Valls, the roaster's vice president of marketing.

Its core grocery brands, which are sold at Wal-Mart Stores Inc, Safeway Inc, Kroger Co and CVS Caremark Corp , already are priced at the high end of the mass market dominated by J.M. Smucker Co's Folgers and Kraft Foods Inc's Maxwell House.

Gavina is reviewing pricing on all brews except Family Reserve on the heels of price hikes by the majors.

"We'll do what it takes to maintain our market share," Pedro Gavina said. (Editing by Gerald E. McCormick)