Starbucks steps up to the plate

by Monica Watrous    View Me on Google+
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Starbucks has been fine-tuning its lunch program in an effort to drive higher traffic and transaction growth.

 

SEATTLE – Starbucks Corp. may be the first to admit food hasn’t always been a strength at the coffee chain.

“Food at Starbucks, I think we could all admit that for many, many years, was a weakness and a challenge for us,” said Howard Schultz, chairman, president and chief executive officer, during a July 24 call with financial analysts to discuss third-quarter earnings. “And I would say unequivocally, with the acquisition of La Boulange and the execution of Cliff (Burrows, group president EMEA and Teavana) and his team, has now become a significant strength and a driver of multiple occasions, need states and the opportunity for Starbucks to leverage day parts that we did not have access to before. And we're just getting started.”

Besides adding La Boulange bakery products in more of its stores, Starbucks continues to refine its menu offerings across morning, afternoon and evening day parts. Earlier in the year, the company introduced four new breakfast sandwiches, which include slow-roasted ham and Swiss cheese on a croissant bun, vegetable and fontiago cheese on a ciabatta bun, egg and cheddar on multigrain toast, and reduced-fat turkey bacon with egg whites and reduced-fat white cheddar on an organic wheat English muffin.

New breakfast sandwiches delivered 40% growth during the third quarter.

 

“A major contributor to our success in food is our breakfast sandwich platform, which delivered 40% growth in the third quarter,” said Troy Alstead, chief operating officer. “The bakery roll-out of La Boulange in our U.S. stores is nearly complete, with remaining stores slated to be converted by mid- to late- August. Throughout the roll-out, we continue to make enhancements to the lineup and leverage operational earnings for all day parts as we go, including our lunch program.”

At the end of June, the chain debuted a grilled cheese sandwich, featuring a blend of aged white cheddar, yellow cheddar and mozzarella on multigrain bread, and a turkey pesto panini, which has sliced turkey and provolone cheese with roasted peppers and basil pesto on a toasted focaccia roll.

“Customer response to the two new sandwiches we introduced at the end of the third quarter has been very positive, leading to an uptick in sales and attach rates to our lunch offerings,” Mr. Alstead said. “This recent success has encouraged us to introduce new s.k.u.s to the lunch lineup going forward, and we'll continue to evolve our lunch program with this disciplined, measured approach, which minimizes disruption to both store operations and customer routines. It also allows us to test and adjust products as necessary. By the end of fiscal 2015, we expect the lunch program to look very different than it does today and will continually evolve and enhance our lunch offerings in the years ahead.”

But Starbucks has not turned its back on beverages. During the quarter, new handcrafted tea and Frappuccino products, as well as the launch of Fizzio handmade sodas across several markets, contributed to higher traffic in U.S. stores.

“These innovative beverage offerings, along with our new lunch sandwiches, are part of our bigger initiative to consistently grow across all day parts, including afternoons, which have shown the strongest comp growth over the last few quarters,” Mr. Alstead said.

In the United States, Starbucks drove a 7% increase in comparable sales during the quarter, reflecting continued strength from food sales, the company said.

“(Food) has been a contributor of 2% to the comp in the quarter,” Mr. Burrows said. “It has been underpinned and supported by beverage innovation, whether it is the iced teas from Teavana or whether it is Fizzio in its early days in the Sunbelt region. And also the Frappuccino limited-time offers this season also performed strongly, so really, really pleased in company-operated, in licensed, and with our new store performance. So all around, very strong performance in the U.S.”

For the third quarter ended June 29, net earnings attributable to Starbucks increased 23% to $512.6 million, equal to 67c per diluted share on the common stock, which compared with $417.8 million, or 55c per diluted share, in the prior-year period.

Net revenues totaled $3,057.7 million, up 10% from $2,776.5 million.
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