Starbucks’ food, tea strategy taking shape

by Keith Nunes
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NANTUCKET, MASS. — Starbucks’ move into the food and tea categories is designed to increase check size and improve day-part performance, said Troy Alstead, chief financial officer and chief administrative officer for the Starbucks Corp. While the strategy may be simple, the scale of implementation is a significant undertaking for the company.

Mr. Alstead spoke about the company’s strategy June 18 at the Jeffries Global Consumer Conference in Nantucket.

“Since the difficulties of 2008 and 2009, we have really diversified and matured our growth strategies, crafted a whole new set of strategies and plans and initiatives around driving growth multi-dimensionally throughout the business,” he said.

In the United States, food makes up about 19% of the sales mix of a Starbucks store.

“Approximately one-third of our transactions in U.S. stores have a food item on them,” Mr. Alstead said. “Two-thirds of those transactions do not have food on them, and that really represents the opportunity as we see it. Of those two-thirds of the people, 50 million to 60 million customers coming into our stores every week, many of those two-thirds of the people want food. We’ve already acquired that customer. They’ve come in the store. They are interested in food. They are ready to give us money. And yet the barriers historically to us capturing more of that two-thirds have really been twofold, as we understand our customer.”

Mr. Alstead conceded that in the past the food Starbucks offered did not meet the expectations of its customers. The second barrier has been that the food available in stores did not always match the day-part.
“In our early days, our food was primarily oriented toward that morning day-part,” he said. “We didn’t have lunch offerings. We didn’t have something that was appropriate in the afternoon if a customer was coming in.”

Mr. Alstead said the company is encouraged by the early results of its new food program, which features products produced through the La Boulange bakery business, and he expects the program to be rolled out company-wide in the United States within the next 18 months.

“What is important about food is it has two opportunities here,” he said. “One is to attach more food to those existing transactions, those customers who are already in the store. But we also know that food can be a driver of traffic. It can create an opportunity for somebody to come in in the afternoon at midday when perhaps otherwise they would have made a different choice. And better food also sells more beverages, so we see a tremendous opportunity here with food as a consistent driver of growth over time.”

Mr. Alstead said Starbucks will go forward with a two-prong approach regarding its recently acquired Teavana tea business. One prong of the strategy will include a new generation of stand-alone Teavana stores that will begin operating this fall.

“The second strategy and leg of growth for tea for us is to now deepen our tea presence within the Starbucks stores, or really use tea as a driver of another customer occasion, another customer visit,” he said. “It is a very complementary consumption time to coffee.

“Coffee to the American consumer tends to be busy and rapid and skewed toward the morning. Tea is a little more relaxing and Zen-like, and skews to the afternoon and evening and weekends, very complementary to that existing asset we have. With Teavana’s capabilities around tea and our ability to bring beverage innovation in a focused way to tea, just as we have to coffee and now to food, we believe we have an increasing opportunity to use tea as another layer of growth within the Starbucks store over time.”

Starbucks also is focused on growing its presence in the home with its move into the single-serve coffee segment.

“While Starbucks has a nice share of coffeehouse consumption in the U.S. and something we’ll continue to deepen, we believe, over time, we have opportunity to grow even further. We’ve always been underrepresented in at-home coffee consumption.

“And when historically we’ve asked customers why that is … it is because we weren’t in the form factor that they were looking for at home. And that has led us over the last several years to really aggressively innovate into this space, providing more at-home opportunities in packaged coffee, Starbucks high-quality flavored coffees, increasingly things like VIA, and then a couple years ago on the K-Cup platform.”

Mr. Alstead admitted Starbucks does not have aspirations to become a “deep equipment company,” but it does have a goal of having the brand available on the wide variety of single-serve platforms that are available.

The issue of the Food and Drug Administration’s recent inquiry into the addition of caffeine to food and beverage products was raised during Mr. Alstead’s presentation and he said Starbucks is watching the situation closely.

“…If you step back and really watch Starbucks, we have never significantly targeted high-energy kinds of beverages,” he said. “We’ve never made a point that we are going after the youth market with caffeine beverages. We’ve been very cautious representing what our concept represents.

“Coffee and caffeine (has been) one of the most steady beverages for centuries. In fact, it has been around a long time. We are quite confident that in the right use among our customers … that it is a very complementary, healthy beverage and not something we are concerned about with any regulations around. And again, I think it is largely about how we positioned our brand and our products historically and how we intend to position it going forward.”

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