Will Starbucks Become the Hip Panera Bread?

We all think of coffee when it comes to Starbucks, and bread when it comes to Panera Bread. But those lines are blurring. What does that mean for each company’s competitiveness?

Apr 17, 2014 at 10:38PM

Starbucks (NASDAQ:SBUX) announced plans two weeks ago for serving wine and classy snacks within thousands of its stores. Starbucks' move toward serving food and booze takes the coffee chain one step closer to emulating sandwich franchise Panera Bread's (NASDAQ:PNRA) business model. Panera Bread's known for pastries, a niche upon which Starbucks already infringed by acquiring La Boulange for $100 million two years ago.

And while Starbucks' coffee is world famous, Panera Bread serves darn good coffee too. So will both chains suffer as each comes to resemble the other, a pastry-serving cafe? Not so fast, Fools: despite plans for serving food and booze, Starbucks will maintain a hipper, more urban customer niche than Panera Bread. Such differentiation leaves both firms plenty of room for growth.

Community space
Let's start with what Starbucks and Panera Bread have always had in common: a sense of community. Panera CEO Ron Shaich states, "Panera has always had a commitment to community." Starbucks CEO Howard Schultz agrees, saying that "the Starbucks Experience -- personal connection -- is an affordable necessity. We are all hungry for community."

Both Starbucks and Panera serve as more than food chains in this sense, bringing friends, families, and colleagues together for meetings, Sunday brunches, and reunions. These two companies share a similar core vision, even though one specializes in bread and the other coffee.

But Fools who dig deeper are hip to four key differences between Starbucks and Panera.

Demographic divergence
Starbuck's core customers are on average age 42 with an income of $90,000. Panera Bread customers have an average income of $75,000. That may be because many Panera Bread customers are older retirees (a major Panera demographic by this Fool's observations). But Panera Bread's older, lower-income customers may not hinder profits: elderly Americans are more likely to drink coffee, with consumption peaking at 69% of 55-64 year olds.

So even though Starbucks attracts plenty of people, Panera's older customers could be a more profitable coffee drinking demographic. It depends on whether elder customers purchase more coffee outside the home than young customers.

Suburban sandwiches
At the same time, Starbucks may have a store location advantage over Panera Bread. While Panera Bread's stores are confined to lower-traffic suburbs and strip malls, Starbucks rules higher-rent, higher-traffic urban cities, where there's seemingly a Starbucks on every block.

Even Panera Bread executives admit that "urban areas where [Panera has] little operating experience" are "certainly more difficult than the suburb[s]" for Panera's slower restaurant experience. Starbucks should heed Panera's slow urban stumbling as it ventures into food. I doubt the typical hip Starbucks customer would wait five minutes for a Panini with coffee.

Amorphous rewards
Starbucks and Panera also diverge in rewarding customers. Whereas Panera pushes the MyPanera rewards card on every customer at the register, Starbucks has focused efforts on a mobile application. Instead of holding a plastic card, Starbuck's hipper customers reap rewards in the amorphous digital space, scanning their iPhones when buying a latte.

Expect Starbucks to become more tech-savvy. Since February, CEO Howard Schultz has focused on expanding Starbucks' mobile technology and e-commerce platforms. Starbucks' digital rewards match better with its younger, hipper customers than Panera's plastic.

Merlot by the glass
There's a fourth hip difference between Starbucks and Panera that guarantees these chains will hold distinct niches, even as Starbucks expands into food and Panera's coffee improves. That's the fact that Starbucks will be serving booze soon. Can you imagine wine at Panera?

Foolish bottom line
Starbucks, seeking revenue growth in a saturated American coffee market, has taken a leaf out of Panera's book by serving pastries and putting more food and booze on the docket. Yet due to variances in customer demographics, store locations, rewards systems, and Starbucks' boozier menu, investors need not fear that these chains will disrupt one another. Starbucks reigns hipper than Panera Bread, but the hipper investment remains to be seen.

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Glenn Singewald has no position in any stocks mentioned. The Motley Fool recommends Panera Bread and Starbucks. The Motley Fool owns shares of Panera Bread 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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