Watch out Panera! Starbucks Is Expanding Hard and Fast Into Food

For years Starbucks has been making food a bigger part of its overall strategy, but it has ramped up its efforts lately and this could cause major problems for competitor Panera Bread.

Jul 11, 2014 at 9:00AM

Answer this question in one word: what does Starbucks (NASDAQ:SBUX) sell? Easy right, coffee. For the most part, you'd be right. In 2013, 74% of the sales in Starbucks' company-operated stores came from beverages. Another 6% came from the combination of packaged and single-serve coffee as well as coffee-making equipment.

That leaves 20% remaining, and you may have already guessed that Starbucks attributed it to food sales. This isn't a real surprise if you're currently a Starbucks customer, but it could come as a shock to anyone who hasn't popped their head into a store lately.

Today Starbucks offers a wide array of bakery items, primarily made possible by its La Boulange acquisition, and has even started to offer more lunch-oriented items such as bistro boxes, salads, and paninis. That's pretty incredible considering that only a few years ago Starbucks' food offering consisted of nothing more than a few cinnamon rolls and muffins.

What's even more exciting is that Starbucks has no intention of stopping there, which is great for Starbucks investors, yet could cause major problems for Panera Bread (NASDAQ:PNRA).

Starbucks makes food a top priority
Back in 2006, food only accounted for 15% of sales in company-operated stores for Starbucks, compared to 20% last year. This didn't happen by mistake. For years Starbucks has placed a heightened emphasis on expanding its food business, with executives such as COO Troy Alstead viewing food as "a huge opportunity and future growth driver."

Food is not only a "future growth driver," it is a present growth driver. In fact, last quarter it was "the single largest incremental driver of comp growth in the second quarter," according to Alstead.

Much of this recent success has resulted from the successful roll-out of La Boulange (acquired by Starbucks in 2012) items, which include various types of pastries and other bakery items. Starbucks has also recently rolled out several lunch items (Bistro boxes, salads, and paninis) in an attempt to entice more customers into stores later in the day. Meanwhile, new beverages (Fizzio soda and Teavana iced tea) have supplemented Starbucks' food advance into lunchtime hours.

On top of all that, Starbucks has also expressed its intent to expand its food offerings into the evening hours, and again plans to buttress its advance with corresponding beverages such as beer and wine.


Credit: Starbucks

Why Panera might want to take notice
Much like Starbucks, Panera prides itself on the premium quality of its items, and thus attracts many of the same consumers who go to Starbucks in the morning. If Starbucks is able to successfully expand its menu to include all-day food offerings, Panera could be in trouble.

In essence, what Starbucks has already rolled out, and presumably will continue to roll out in the future, is a food menu that mirrors that of Panera. Both offer salads, sandwiches, bakery items, and other stuff along those lines. When (notice not "if") Starbucks establishes itself more predominantly in the lunch and evening hours, those premium consumers will now have a tougher choice to make.

Panera should continue to have the upper hand in the food space on a side-by-side comparison, but a high level of uncertainty exists as we are still in the early stages of Starbucks' expansion into food. While Starbucks establishing itself in the food space will certainly not bankrupt Panera, such a development will certainly not help the company's growth.

The foolish takeaway
If Starbucks is able to capitalize on its food aspirations, loyal customers could soon have breakfast, lunch, and dinner at their local locations. If you're wondering why Starbucks would stray from its core beverage business in favor of the often lower-margin food space, you're looking at this the wrong way. By expanding its food offerings, Starbucks is in turn fueling its beverage business. Think about it; when you have something to eat, you get thirsty and then buy a drink.

Food helped drive Starbucks' comps growth last quarter, and I fully expect that it will continue to fulfill this role and will increasingly become a larger and more important part of Starbucks' business.

As for Panera, Starbucks' expansion into food is not a good thing. It's not catastrophic, but it's hard to imagine a scenario in which Starbucks' massive size and revolutionary loyalty program does not tip the scale in its favor if the two companies offer similar products.

On July 24 we will get a checkup on how Starbucks' food operations are faring when the company reports its third-quarter earnings.

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Ryan Guenette 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information