Starbucks (NASDAQ:SBUX) has a food problem. The company has enjoyed tremendous success with coffees, teas, and other beverages, but despite the company's high and growing foot traffic, food sales have remained stubbornly low. Since founder Howard Schultz returned to the CEO position in 2008, food sales have stayed stagnant at just under a fifth of revenue. Despite millions of loyal customers who consider a coffee run to Starbucks a necessity for their morning routine, McDonald's (NYSE: MCD) remains a more popular breakfast food choice than Starbucks even among Starbucks customers. Now, Starbucks is gearing up to challenge the status quo and provide its own food offerings to its coffee-swilling clientele.
Schultz has long been concerned that Starbucks' couldn't provide food offerings of the same quality as its coffee, and that's why last year Starbucks shelled out $100 million to buy up the San Francisco-based artisinal La Boulange bakery brand. After testing out La Boulange products in Bay Bread's home turf of the San Francisco Bay area, Starbucks is now rolling out the new food offerings from coast to coast. In August, Chicago got a taste of the new food offerings, and now Starbucks has La Boulange pastries and baked goods in its largest American market, New York City. The hope is that Starbucks drinkers will become Starbucks eaters as well.
The man behind La Boulange, French-American baker Pascal Rigo, didn't ride off into the sunset when Starbucks bought his company. He now oversees his brand as senior vice president of Starbucks food category and general manager of La Boulange. Before the buyout, La Boulange not only served up pastries at its own restaurants, but it also provided breads and pastries to local Whole Foods (NASDAQ: WFM) and Trader Joe's stores. La Boulange's key to success with the upscale, health-conscious crowd that frequents Whole Foods was eschewing preservatives in favor of simply baking products that froze well, and shipping freshly baked but frozen products to its retail customers.
The strategy of distributing freshly baked, freshly frozen food to retail locations should suit Starbucks well, as its stores aren't set up for on-location baking. Starbucks is now expanding a large research and development facility in San Francisco to work out recipes that can be frozen without loss of quality, that satisfy consumers, and that reflect regional tastes. Starbucks plans to cater to local cuisines by, for example, using local apples in its fruit pastries in the Northeastern markets, offering sausage rolls in Chicago, and selling pastrami sandwiches in New York.
Part of the desire to offer more attractive food is, of course, the acknowledgement that many Starbucks coffee customers are going elsewhere for food, and those dollars could be captured in-store. However, Starbucks also hopes that adding food in stores will persuade more commuters to head to a Starbucks drive-through location. Not only would Starbucks like to attract some of the traffic that goes through fast food stores' drive-throughs, but drive-through locations also boast higher margins than foot-traffic stores. Only about 40% of Starbucks' U.S. locations offer drive-throughs today, but management hopes that prioritizing drive-throughs will allow locations in new places, with a goal that 60% of newly opened locations will offer a drive-through. Starbucks hopes to position itself as an attractive and reasonable breakfast-on-the-go alternative. If it can do that, it could see its domestic food sales become as remarkable, and as profitable, as its coffee sales.
Fool contributor Daniel Ferry owns shares of Starbucks and Whole Foods Market. The Motley Fool recommends and owns shares of McDonald's, Starbucks, and Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. 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.