Starbucks' New Menu Disappoints Loyal Customers

Starbucks' new food menu is catching some flack for what's NOT on the menu. Find out what the commotion is about -- and what McDonald's is doing to take advantage.

Apr 6, 2014 at 10:00AM

Starbucks (NASDAQ:SBUX) is rolling out a new food menu in its U.S. locations, and not all customers are pleased. Some loyal customers are upset that old favorites have been replaced by fancier (and pricier) alternatives. The new menu is part of a strategy to draw more customers later in the day and have them spend more per transaction. This has important ramifications for shareholders as the last thing Starbucks wants is to send loyal customers to McDonald's (NYSE:MCD) in protest.

Customer loyalty at risk
Bloomberg relays several anecdotes of longtime Starbucks customers who are frustrated with the new food menu. Jeff Pavia, a 53 year-old Starbucks customer from Chicago, told Bloomberg that he may not visit the store as often now that his mother's favorite coffee cake and morning buns are no longer available. Another unhappy customer told Bloomberg that the new options were too fancy for his taste.

Most alarmingly, 32-year-old Leslie Fireman told Bloomberg that she used to visit her local Starbucks four to five times per week before it stopped serving her beloved double-chocolate brownie. Without the lure of a cheap and satisfying snack, Ms. Fireman now only visits once per week.


Image courtesy Starbucks

Starbucks grew comparable-store sales at a brisk 7% to 8% per year over the last four years largely by driving more traffic through its doors. Its loyalty card and mobile- payment app aim to capitalize on customer loyalty and drive even more visits through rewards and convenience. However, customer complaints about the La Boulange menu must be addressed in order to keep up the momentum.

Starbucks has battled through this before
This is not the first time that Starbucks has had to adjust its food menu in response to customer criticism. When it redid its breakfast menu in 2008, customers complained that the smell of the breakfast sandwiches overpowered that of the coffee.

In order to appease miffed customers this time around, Starbucks is bringing back old favorites like sliced lemon cake and pumpkin bread. It is a small concession to customers who are uninterested in the newer, fancier La Boulange pastries. However, it is important that frequent customers like Leslie Fireman continue to have a reason to visit a Starbucks several days per week. Bringing back old favorites is a good way to ensure continued loyalty.

A vital strategy
The La Boulange menu rollout is vital to Starbucks' ongoing growth in the U.S. With two-thirds of its stores located in the Americas, 80% of Americans live within 20 miles of a Starbucks. There is hardly any room to increase store count in the vital U.S. market. This makes the food menu a vital source of higher store traffic and higher breakfast tickets.

Breakfast is becoming particularly contentious as McDonald's goes all-in to grow its leading share of the breakfast daypart. The fast-food burger chain, which has a 25% share of the fast-food breakfast market, is offering customers a free small cup of coffee during breakfast hours during the first two weeks of April.

In addition to solidifying its share of the breakfast daypart, McDonald's may be trying to entice disaffected Starbucks customers to try its value-priced coffee. Foolish contributor Dan Moskowitz even suggests that McDonald's is slowly transforming itself into a coffee shop. As a result, Starbucks' breakfast menu will become an even more important differentiator in the years ahead.

Bottom line
The stereotypical Starbucks customer -- a young affluent professional -- does not describe all, or even most, of the coffee chain's customers. Not everyone is willing to pay $3.25 for a small breakfast sandwich; given the uproar about the higher-priced La Boulange items, many Starbucks customers are turning out to be more price-sensitive than the conventional wisdom suggests. This provides an opportunity for McDonald's to steal breakfast share, but it also enables Starbucks to serve a wider constituency by bringing back lower-priced favorites from the old menu. This is just another chapter in the never-ending breakfast war.

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Ted Cooper has no position in any stocks mentioned. The Motley Fool recommends McDonald's and Starbucks. The Motley Fool owns shares of McDonald's and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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