Starbucks Scores With Breakfast, Aims for Lunch

The coffee giant is winning the breakfast wars and is now ready to target the lunchtime crowd.

Aug 8, 2014 at 6:28PM

After some early victories in the breakfast war, Starbucks (NASDAQ:SBUX) wishes to expand its conquest to the next battlefield -- lunch. The beverage giant trounced the performance of most other quick-service chains by posting a 7% jump in comparable-store sales last quarter. Caffeinated beverages played a role in that success, but it was breakfast food sales that really jolted Starbucks' growth past its competitors this spring.

Sbux Breakfast Sandwich

Source: Starbucks.

Winning in a tough market
That's all the more impressive given how tough it has been to compete at breakfast. Just ask Dunkin' Brands. CEO Nigel Travis said in a recent call with investors that the "competitive intensity" around that meal is hurting Dunkin's business. Management took that opportunity to scale back its full-year guidance for sales growth. Even Yum! Brands' Taco Bell, which directed a huge marketing budget toward supporting its jump into the breakfast market, only managed lukewarm gains in the early morning hours. Despite the extra meal, Taco Bell posted just 2% comps growth, the same gains it had managed in three of the last five quarters. 

Breakfast king McDonald's (NYSE:MCD) has been taking a hit as others have entered the breakfast fray. As the breakfast leader, and with an outsized portion of profits coming from those early hours, the fast-food giant can't afford to cede the meal to competitors. Mickey D's doesn't break out its sales details, but it seems likely that breakfast isn't growing since revenue and profits were down overall last quarter as customer traffic levels dove.

Starbucks had no such struggles. After a major ingredient upgrade, its breakfast sandwich platform delivered 40% growth over the prior year. That boost enabled food sales to contribute 2 percentage points of Starbucks' hefty overall 7% comps gain.

The sales improvement didn't just come from higher prices, either. Transaction volume also improved, which suggests that customer traffic levels are still growing at a steady clip.

Sbux Transactions

Starbucks' transaction growth. Source: Company financial filings.

Just the start
From that strong start, Starbucks has plans to boost its food offerings into the p.m. hours. And there is every reason for investors to expect similar results there. In fact, two lunch sandwiches introduced recently led to a quick jump in sales and higher food attachment rates.

Sbux Panini

Panini sandwich. Source: Starbucks.

Chief Operating Officer Troy Alstead told investors in a conference call that they can expect a big upgrade to Starbucks' lunch program over the next year that is patterned after wins like those. "This recent success has encouraged us to introduce new [products] to the lunch line going forward, and we'll continue to evolve our lunch program with this disciplined, measured approach," he said.

The food opportunities don't stop there. Extra menu options in the evening hours already include wine and beer in some locations, with dinner-type offerings likely to bring growth as well. 

Foolish takeaway
Starbucks is far from running out of growth drivers. Its success in the breakfast hours provides a playbook for steady expansion into lunch -- and eventually evening -- food offerings.

The coffee giant's food sales have been stuck at 19% of revenue for years, while management has said that the figure should be closer to 25%. Investors saw the first signs of change there last year, as food sales ticked higher, to 20%. But that's likely just the beginning of a steady boost in the importance of food to Starbucks' future.

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Demitrios Kalogeropoulos owns shares of McDonald's and Starbucks. The Motley Fool recommends McDonald's and Starbucks. The Motley Fool owns shares of 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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