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.

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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.

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