1 Thing Starbucks Absolutely Has to Fix

It's an understatement to say that Starbucks (NASDAQ: SBUX  ) has been doing some things right lately.

Valued at below $10 a share right after the financial crisis, the coffee champ posted a blockbuster recovery in a business that Wall Street had just about written off. Investors who held their shares were rewarded for their faith, though. The stock is now near $60 a share -- up more than 500% since early 2009.

Here are a few examples of the stunning rebound in operating metrics that fueled Starbucks' great run:

  • Profit margin: Since hitting a low in 2009, operating profit margin has more than tripled to more than 15% now. That's a better than 10-year high for the company.
  • Comparable sales: After posting a 6% drop in comparable sales in 2009, growth has returned to Starbucks -- with a vengeance. The company logged a 7%, 8%, and 7% increase in same-store sales for 2010, 2011, and 2012.
  • Operating cash flow: Starbucks is now swimming in cash. Annual cash flow has doubled in five years, climbing to a rate of more than $2 billion per year.

However, there's one number Starbucks hasn't managed to improve at all over the past three years. And it's something that the company absolutely needs to fix if it wants to keep the great run going.

Feed me
We're talking about food.

Take a look at Starbucks' food sales as a percentage of the company's total sales for the past three years.

Item

2012

2011

2010

Food

19%

19%

19%

Source: Starbucks financial filings.

Beverages account for the lion's share of Starbucks' sales. And after ticking up by 1 percentage point in 2009, and by another in 2010, the fraction of sales that Starbucks gets from food has been stuck at 19%. That's not too surprising, considering the limited food options available at most locations.

And that's too bad, because food could drive major growth at Starbucks. For an idea of that growth potential, take a closer look at Panera's (NASDAQ: PNRA  ) results. The baker clocks weekly sales of more than $45,000 for each of its bakery-cafes, boosted by a healthy midday business and super-high check averages. And its large food menu has helped ignite comparable-store sales increases lately. For example, last year Panera's menu mix changes added 3% to the company's sales growth.

It makes sense, then, that Panera is encouraged by its expansion into more of what you might consider restaurant-level food. The company has doubled down on those heftier food choices and has just added a new line of pasta options to its menu.

Of course, Starbucks isn't blind to the potential that food brings to its business model. That's one reason the company shelled out $100 million in cash last year to buy the La Boulange bakery brand. A Starbucks executive said at the time that the new brand would "help us expand day-parts, drive customer loyalty, and ultimately grow the overall business."

Still thirsty
Sure, drinks have always been Starbucks' strength, and that's not likely to change anytime soon. But one reason the company needs to broaden its menu is that the competition over coffee dollars is fierce. And it's leaving less room for sales growth in the category.

McDonald's (NYSE: MCD  ) , for one, credited premium beverages such as the new Chocolate Chip Frappe for helping drive revenue growth last year. The fast-food giant plans to keep leaning on its McCafe lineup as a big part of its growth strategy for 2013. And Dunkin' Brands (NASDAQ: DNKN  ) pointed to "strong beverage sales growth" at its Dunkin' Donuts stores in the U.S as a major reason for the sales spike it booked last year.

Yes, Starbucks will need to continue fending off those rivals in its core drinks business. But it's clear that the beverage business can't power big sales growth on its own. 

Looking ahead
The company has started testing a deeper food menu by adding La Boulange options in some of its Northern California stores. CEO Howard Schultz said the results were strong so far, calling the food "significantly better than what we have right now, candidly."

That's a good sign, and it means that the likely next step will be for those menu options to be rolled out nationally. That should help food finally climb to a higher percentage of Starbucks' sales, potentially boosting revenue and profitability at the same time.

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Read/Post Comments (29) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 24, 2013, at 1:03 PM, lilyvonshtupp wrote:

    Never been there, never will . Or Tim Hortons.

  • Report this Comment On March 24, 2013, at 2:02 PM, revac777 wrote:

    Realizing that this is not an issue for many (maybe even most) I am still offended by Starbuck's CEO "in your face attitude" over the pro-homosexual stand they have taken. With so many other options for where to purchase a good cup of coffee, it is easy for me not to buy stock, purchase products or give them business in any way anymore.

  • Report this Comment On March 24, 2013, at 2:11 PM, Shandon65 wrote:

    Don't start getting to GREEDY Starbucks. as it is I only buy 1 or two cups of coffee from you in a 4 or 5 month period. You are just too damn expensive that why we go to Mcdonalds. (Price) dont let your Metrics Fool you!

    Eric

  • Report this Comment On March 24, 2013, at 2:37 PM, coeruleo wrote:

    revac777, so a company stands up for people's liberties and supports fair treatment and dignity and you get upset and threaten to buy coffee somewhere else? but otherwise you're perfectly happy to spend like 400% too much money on coffee?

  • Report this Comment On March 24, 2013, at 2:44 PM, KW35 wrote:

    Funny how Starbucks is the Greedy one.... Check out How they give back! They help start business in America, pay for college, pay the biggest chunk of the health insurence for their employees the list goes on. Apple is the most expensive computer but they are the best. Starbucks is the best at other things. If you don't want to go there don't . Others do and will.

  • Report this Comment On March 24, 2013, at 3:08 PM, mediamaniac wrote:

    Realizing that this is an issue for many (maybe even most) I am very encouraged by Starbuck's CEO "in your face attitude" over the pro-lesbian, gay, bi, trans, and questioning stand they have taken. With so many other options for where to purchase a good cup of coffee, it is easy for me to buy stock, purchase products and give them business both now and in the future. In fact, since they've been willing to take such a principled stand, I've become a greater contributor to them and am on my way to my first Gold status! Another cup of equality please!

  • Report this Comment On March 24, 2013, at 3:15 PM, irishplayerkc wrote:

    1 thing Starbucks needs to stop concerning itself with is FOOD! We don't go to Starbucks for food, we go for the best darned coffee on the planet. Your product model and strategy was to provide the customer with great coffee, so why now do you want to veer course and become McDonalds? If we want greasy food and bad coffee; there's plenty of places for that. Stay the course; continue providing us the best coffee and forget the pundits who say you need better food.

  • Report this Comment On March 24, 2013, at 3:42 PM, shepherdgirl wrote:

    No one is forcing anyone to buy their coffee at Starbucks. If you don't like it, or the price, then go elsewhere. Their food does need some expansion, but at least what they do offer is all natural or organic. While I would not like to see them offer food at a low quality just to offer food, I would like to see some more light menu offerings. If you have ever gone to Whole Foods, and look in their prepared and packaged food sections, they have single serving size of cold cous cous citrus salad, egg salad, chicken salad, grilled veggie salad. Again, in single serving amounts which is all that is needed at this establishment. The only BIG ticket item I would love to see them add is some liquor shots to their coffee for after dinner drinks (Bailey's, etc... ) with I.D. checks of course.

  • Report this Comment On March 24, 2013, at 3:58 PM, HollywoodJacks wrote:

    I was just happy when Starbucks finally got a toaster.

    A 500% increase on share value and its not enough? When is enough, enough? Ever?

    The thing about the food is that its really expensive for what you're getting. But there are some fairly healthy options. Hope they maintain that at least.

  • Report this Comment On March 24, 2013, at 4:23 PM, redwineking wrote:

    I really wish that Starbucks would go back to the food they had. It's become too "fancy." Lots of flaky stuff that just doesn't look at all enticing. I enjoyed the old menu. I wouldn't get stuff all the time, but sometimes I would have an old fashioned donut, a slice of whichever loaf breads they had that day, or even just a blueberry scone.

    As for McDonald's...no competition. I tried to their coffee when it was a "try us for a dollar" thing. The coffee was awful, there was no place to sit and their was the feeling of grease in the air. Yuck.

    I will ALWAYS be a Starbucks person.

  • Report this Comment On March 24, 2013, at 4:38 PM, 1wiseoldfool wrote:

    Their unwise stance on gay marriage is another "thing they need to fix"

  • Report this Comment On March 24, 2013, at 4:59 PM, fuskiegirl21 wrote:

    I use to spend $20 a week or more at Starbucks and I frequently took and met clients there. After I found out Schultz (CEO) supported Obama, I have boycotted them. I have not had a Starbucks in over a year and half. I have not missed spending $4-$5 bucks a pop on a coffee at all. Hope when inflation hits, Obamacare sinks in that no one can afford your coffee.

  • Report this Comment On March 24, 2013, at 5:16 PM, Jat1985 wrote:

    Reasons why the company may now want to offer wider food options:

    1. Brand dilution

    Providing consumers with wider food options could result in a diluted brand. The company offers consumers a sophisticated experience together with a high quality product. This has been one of the main drivers behind their growth.

    2. Gross margins

    The company current gross margins are around 60%. Panera Bread has current gross margins of around 35%. The company may believe that increasing food as a % of revenue may negatively affect their gross margins.

    Providing consumers with the current lited food options may be a company decision based on understanding their revenue streams and customer segments. Any offering similar to Panera's may alter the business model and negatively affect their operations.

  • Report this Comment On March 24, 2013, at 5:52 PM, Nyckate132 wrote:

    Do they? Why? People go in for their coffee. But if they're right, and they need to add more food, then there's really not much choice, spend hundreds millions revamping stores or enter into partnership to area food providers. For instance in NYC, perhaps with Pret or Cosi to provide small selection of ready-made breakfast or lunch sandwiches ...

  • Report this Comment On March 24, 2013, at 6:37 PM, horacekent wrote:

    If Starbucks does food, it would be a grave mistake.

  • Report this Comment On March 24, 2013, at 6:49 PM, marilou8 wrote:

    I am appaulled to see a homosexual from starbucks on a commercial on MY tv. I visualize the children of our country getting totally confused as to whom they are. "mommy, is that a boy or girl?" Because they cannot tell. When I was growing up, We knew the true sex of a person. EVEN WITH THE LONG HAIR of men. WE KNEW. Yes and I do buy my coffee elsewhere, because of that reason and the EXPENSE of a cup of coffee there! But most of all, the reason is the future s of our children.

  • Report this Comment On March 24, 2013, at 7:17 PM, Parsley07 wrote:

    I don't care for coffee. My son hates Starbucks because of the taste of the paper cups! He will occasionally purchase it and brew it at home, but he prefers Keurig.

  • Report this Comment On March 24, 2013, at 7:53 PM, doawithlife wrote:

    1) In the next few months Starbucks is due for a stock drop. They messed up on a promotion and many many people got between $1k and $20k free in starbucks gift cards. For the first few days of this month you could get a free $5 gift card every 45 seconds or so. A lot of people abused it.

    2)I hate the food they have their now. It use to be much better. If I want three pieces of turkey on two slices of bread I will go the store pay $5 and eat one every day for the next 5 days instead of getting just one really basic sandwich from SB's.

    3) HAHAHA wont shop at SB because they support gays. Being gay doesn't really hurt you. When was the last time some gay person caused you to waste your money? Buying $4 coffees tells me you are more damaging to yourself or your children then any gay person has ever been. I'd be more likely to take advice from a gay person who saves their money, then your children who learned $4 for coffee is normal.

  • Report this Comment On March 24, 2013, at 8:01 PM, Aloanstar wrote:

    I don't see why some people think it is any more "offensive" for Starbuck's CEO to support same-sex marriage as it is for Chick-fil-a to oppose it. I think it's fine to boycott businesses that don't go along with your personal politics. I would never eat at Chickfila, Domino's, or Papa John's. I have a few more on my list and I add as time goes on and companies make statements about where their heart and money goes. I don't want the money I spend, going to a company that in turn uses it against me.

    When Prop 8 passed in California, all businesses that supported ending same-sex marriage threw a fit about making it public knowledge and said how unfair it was for people to boycott them because of it. All is fair in love and politics if the law works in your favor, but when it doesn't, well,....that just isn't fair. Civil Rights should never be up for a vote. It should just be a given that ALL citizens have the same rights, not just the ones that feel that are more deserving and have the right to control what rights others should be granted.

  • Report this Comment On March 24, 2013, at 8:04 PM, Aloanstar wrote:

    Actually, I don't make it a habit to spend money at a coffee shop, but because of the CEO's stance, I will be going there from now on. I like to spend my money on a good cause!!

  • Report this Comment On March 24, 2013, at 9:28 PM, 123spot wrote:

    I do vote with dollars. SBUX will continue to get plenty of mine. I like the food and coffee, too ; ) Spot

  • Report this Comment On March 24, 2013, at 11:07 PM, Sensitvesoul wrote:

    Starbucks doesn't have to "fix" their take on gay marriage any more than Chikfila does. They have a right to their opinions. For those who say Sbux is too expensive and they go to McDonalds...McDonald's specialty coffees are are only about $1 cheaper for a large. Not worth it considering they taste awful. Dunkin is good for iced coffee but I've never gotten a coffee drink there that was right. They either put no sugar/flavoring in it or it's so sweet it's sickening. Some Sbux in NE Ohio had lunch meals. They were very healthy. I'd like to see them expand that to all their stores. I'd buy lunch there.

  • Report this Comment On March 24, 2013, at 11:50 PM, sealiz wrote:

    the one thing Starbucks needs to fix? LOSE the ATTITUDE by their workers! No amount of food or other products has you losing people faster than being pissed off by snarky people who make it seem like you, the customer, are doing them a huge favor and they can't be bothered with a "hello" or "thank you," That's what made me go to another shop to get my three time daily iced team (and they do serve cookies there).

  • Report this Comment On March 25, 2013, at 12:24 AM, starpark88 wrote:

    I and a lot of my friends do our studying at starbucks. We'd love to eat there but are forced to go to other nearby places for a meal, or switch our studying locale to a different cafe that does offer food. Heck, the next door McDonalds gets my food business sometimes.

    Starbucks has okay breakfast options but the rest of the day it's snack food; a small prepackaged salad, chips, nuts, cheese, carb heavy pastries, a fancy hotpocket/panini, etc. I agree with you that SBUX could get a lot of revenue from people like myself if they expanded the menu. Even offering something as simple as a turkey sandwich, using the bagels they already stock as the bread, would work out for me. Throw a simple soup option in there for kicks. We've tried Panera for this but the food+coffee+tip is too costly for this to be an everyday thing for students. I think Starbucks has a good niche opportunity here to undercut Panera while still being able to price above McDonald's and give some sort of middle ground on quality. Maybe not on food selection as these are small stores. But at least add a quick and easy made to order sandwich.

  • Report this Comment On March 25, 2013, at 12:58 AM, randphill wrote:

    I'm an absolute coffee freak, but the one hard and fast rule I have is that I NEVER, EVER buy ANYTHING --- food, drink, products -- from Starbucks. The reasons are myriad. For one thing, I've yet to find a Starbucks outlet where the concept of customer services was even a passing issue. From barista to cashier, they act like they're doing me a huge favor if they notice I'm standing there. Second, they're product is only so-so, but it's priced like they really hope only lawyers, doctors, and bankers will patronize them. I'm with them there. Finally, Starbucks management is solidly in the pocket of the socialists who are trying to destroy the very free market that allowed them to grow big enough to have an outlet every thirty feet. They may be foolish enough to buy the rope that will hang them; I'm not foolish enough to help them. I know there are liberals reading this who are already pouncing their keyboards to tell me that Starbucks has the right to free speech and free opinion. They sure do. But so do I.

  • Report this Comment On March 25, 2013, at 2:10 AM, tomnatmom wrote:

    We enjoyed sitting in Starbucks for a cup of coffee and dessert after dinner for years. In the past year, however, our local Starbucks has one or two brewed coffee choices and no decaf after 8 pm. Isn't this suppposed to be a coffee shop? I can get decent decaf at the Parker's gas station down the street for half the price.

  • Report this Comment On March 25, 2013, at 5:59 AM, PhoenixJack wrote:

    I like most Starbucks. I am in one every day. I like the people that work there, they try very hard. But I don't buy food there. If I want something I stop off at SafeWay first. The one Starbucks that I go to most is one that people bring their kids, babies, and dogs. It is like an outing to these people.

  • Report this Comment On March 25, 2013, at 7:57 AM, pequerhead wrote:

    If you base your starbucks experience on whether or not they support gay rights, you are an imbicile. Starbucks is a beverage/food establishment. Not a gay club or gay magazine. If being around gay individuals gets you bothered, your problem isnt starbucks. Its you and your lil identity crisis. I am not gay or never had any thoughts about being gay, but to be offended by a group of individuals that are in no way offending you, is ludicrous. I love starbucks coffee. I can afford starbucks coffee. I have no problem sitting down drinking a cup of coffee with any gay individual that would like to converse as well as non-gay individuals. So all you shallow god fearing straight people, come back to earth. WE MISS YOU. (I dont fear god. I am god.)

  • Report this Comment On March 25, 2013, at 9:19 AM, mp75077 wrote:

    Starbucks CEO has no tolerance for traditional marriage supporters.

    I have no tolerance for intolerant people who preach tolerance.

    I'll get my coffee elsewhere.

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