Move over, doughnuts and Danishes. Retail space for coffee-paired products may get a lot more crowded, competitive and calorie-conscious now that Starbucks—the java king supreme—is headed toward a healthier, fresher menu direction.
If you haven’t been in a Starbucks for a while, be prepared for a culinary shock. In addition to its expansive array of hot-beverage choices, the chain has supplemented its brews with fresh juices and salads, hot sandwiches, and less-guilty sweets and snacks.
This shift has been strategic and well planned by the Seattle-based retailer. The company has forked over $750 million over the past two years to add three key new businesses to its arsenal: La Boulange cafe, which expands Starbucks’ pastry and baked-goods offerings; Teavana, which, coupled with Starbucks’ Tazo brand, ups the retailer’s edge in tea sales; and Evolution Fresh juices, which signals the chain’s foray into the $50 billion health-and-wellness arena. And to further attract health-conscious consumers, last fall Starbucks rolled out Evolution Harvest snack bars and trail mixes to vie with national brands such as Kind and Naked.
New Age of Nutritious
The notion of a national coffeehouse franchise embracing healthier may at first glance threaten sales of the chain’s array of scones, muffins and other fatty treats. But many experts, including Joseph Michelli, chief experience officer for The Michelli Experience in St. Petersburg, Fla., and author of “Leading the Starbucks Way,” say healthier foods are a perfect fit for Starbucks.
“They appeal to Starbucks’ primary core demographic of urban, young, mobile people who are attracted to healthier lifestyles,” Michelli says. “They’ve done an excellent job at adding certain items to their menu that allow people to make healthier choices on a ritualized, daily basis.
“You can now go into any Starbucks store at any day-part and make sound, healthy choices.”
Starbucks’ move toward healthier snack options has been incremental and varies by markets, with items such as whole grain oatmeal, Bistro Box protein plates, whole-wheat bagels, and spinach and feta breakfast wraps paving the way.
“This is due to a confluence of factors, including the refocusing they did after the economy struggled starting in 2008,” Michelli says, “and also due to the general trending in our culture for more nutritious offerings and wider consciousness of consumed calories.”
Tim Powell, vice president of strategy for Big Red Rooster, Columbus, Ohio, agrees.
“Since 2008, Starbucks has made serious inroads into offering not just two pricing tiers of items, but also ensuring that it provides low fat, non-dairy options,” Powell says. “And its snacks have evolved from muffins to parfaits and fruit cups. With the societal pressures and greater consumer awareness of obesity-related ailments, it is extremely important that restaurants do the right thing and offer healthy options. Even if consumers don’t buy them, they have to be there.”
CONTINUED: Responding to Demand
Starbucks declined comment for this story, but numerous retail and snacking experts say Starbucks’ strategy has been a methodical repositioning that stretches its core beyond $4 gourmet coffees.
“Starbucks has always had its customers asking for healthier options,” says John Moore, COO of Brains on Fire, Greenville, S.C., and a former marketing executive for Starbucks. “What is different today is there is a greater emphasis being placed by society and other outside forces on companies to offer ‘healthier’ foods to combat a slew of obesity issues.
“Starbucks has long believed coffee is the core and food is the opportunity,” he continues. “It’s not just that Starbucks has focused on healthier food options, it’s that the company has focused on offering better food options, healthy or not.”
Bethany Wall, foodservice analyst for Chicago-based Mintel, suggests that Starbucks is wisely responding to the increased demand among consumers for better-for-you (BFY) offerings and easily consumed on-the-go selections.
“Healthy can mean a variety of things, depending on the specific consumer,” says Wall. “Over the past few years, the largest trends in BFY include a focus on smaller portions and snacks, customization, freshness and high-quality ingredients, breads, protein and calorie count.”
The latter has particularly put a spotlight on healthful eating and gotten the attention of consumers, Wall says, especially with the push to post calorie counts at restaurants. Calorie disclosure legislation (which has been delayed by the FDA but is part of the Affordable Care Act passed in 2010) will require all chains with more than 20 locations to post calorie counts on their menus for all permanent items, although many restaurants are already doing so.
Responding to Demand
Consumers say they want coffeehouses to offer healthier items (39%), more food items (23%) and customizable food (12%), according to Mintel data released in 2013. In response, since last year Starbucks has added whole-grain sandwiches under 500 calories, salad bowls, gluten-free Evolution Harvest bars, and a line of nonfat, protein-rich Greek yogurt parfaits. The chain also offers a mixed fruit plate and three different Bistro Box offerings: cheese and fruit; chicken and hummus; and a “protein” assortment featuring a cage-free egg, white Cheddar cheese, honey peanut butter spread, multigrain muesli bread, apples and grapes.
And its competitors are jumping into the healthy fray, too. Dunkin’ Donuts introduced gluten-free pastries in 2013, a menu of BFY items in January, and a chicken apple sausage sandwich in April. Caribou Coffee now offers quiches under 350 calories, a fresh-food platform and new lunch sandwiches.
Bonnie Riggs, restaurant industry analyst for the foodservice division of Port Washington, N.Y.-based The NPD Group, says that while it’s important for quick-service restaurants to cater to BFY demand, proper nutrition may not exactly be top of mind among customers.
“When you step into a QSR, you’re not necessarily going there to eat healthier,” she says. “You’re usually going for a particular item. But you have to have [healthier food items] available for those that want them.”
NPD data from 2013 shows that only 9% of consumers chose “looking for a healthy/light meal” as the primary reason for going to a restaurant. While it may not seem like a large percentage, that number constitutes around 5.5 billion annual restaurant visits.
CONTINUED: Leader of the Snack
Leader of the Snack
To further appreciate Starbucks’ BFY foods focus, it’s also important to examine modern snacking behaviors.
The traditional meal structure of three meals daily has morphed into a more modern, flexible model that includes endless combinations of snacks and meals staggered throughout the day, says Laurie Demeritt, CEO of The Hartman Group Inc., Bellevue, Wash. Per the results of a Hartman Group study published in 2013, 50% of all eating occasions now are snacks, 80% of which occur at home; 37% of consumers plan and shop for snacks in advance so they always have an edible ready; 90% of consumers snack multiple times throughout the day; and 65% of snacking occurs after lunch.
“Snacking is becoming more a part of daily life rather than being something special,” Demeritt says. “We’ve seen planning for meals and snacks on a general decrease because lifestyles are hectic. People like the idea of being able to eat on a whim or upgrade on a moment’s notice. That’s been enabled because of the accessibility and availability of food, not just at grocery stores but at mass discount, convenience and dollar stores.”
Other research conducted by The Hartman Group in 2013 reveals that:
▶ 50% of snacking activities today are occasions in which consumers want healthier choices.
▶ Consumers are eating fresh fruits and vegetables (64%) and healthier choices (61%) more often.
▶ Fruit/fruit snacks (eaten by 12%) as well as bars and nuts/seeds/trail mixes (consumed by 10%) are among the top snack foods throughout the day.
To feed into the demand for healthful snacking, Starbucks launched its Evolution Harvest line of premium snacks, available at all of its U.S. retail locations, including:
▶ Three flavors of snack bars: roasted soybean, pepita and almond with vanilla and sea salt; pepita, almond, raisin and cranberry with agave syrup and sea salt; and almond and cocoa with agave syrup and sea salt.
▶ Three varieties of trail mix featuring dry-roasted nuts and seeds, along with sweet and tangy dried fruit sweetened with fruit juice.
▶ Three freeze-dried fruit snacks offered in mango pineapple kiwi , mandarin orange strawberry cantaloupe and strawberry blueberry.
“Snack bars and trail mix are not material drivers for [Starbucks’] business, but they fit their strategy of having their own internal brands,” says Andy Barish, managing director for Jefferies LLC, San Francisco.
Whether restaurants are offering snack bars or mini meals, the message is clear: All channels are realizing that consumers today perceive snacking options as relatively accessible and interchangeable, and are pursuing these consumers without worrying about the boundaries between specific day-parts.
“So if I’m a retailer or foodservice provider, I’m thinking about offering options within different eating occasions, especially those outside of traditional meals,” says Demeritt of The Hartman Group.
CONTINUED: Delving into Day-Parts
Delving into Day-Parts
It’s no secret that Starbucks’ strongest sales are at breakfast, when patrons line up faithfully for their morning caffeine boost. But it faces increased competition during this lucrative day-part from other QSRs trying to entice on-the-go consumers with expanded breakfast menu items, the most recent example being Taco Bell.
“The morning meal is where a lot of fast-food chains are trying to capitalize on opportunities, because that’s where the growth has occurred,” says Riggs of NPD. “For instance, breakfast sandwich offerings have been growing, and QSRs want to get a piece of that action.”
To keep up with the Joneses, and also differentiate from its rivals, Starbucks recently introduced four new breakfast sandwiches: reduced-fat turkey bacon, vegetable and fontiago, egg and cheddar, and slow-roasted ham and Swiss cheese.
“There’s been a strong commitment from Starbucks to expand its breakfast menu,” Michelli says, “which is why they’ve also been focused on a wider range of La Boulange bakery offerings in the morning,” including several BFY choices such as flourless chewy chocolate cake, reduced-fat berry coffee cake, and a wheat spinach savory square.
But for the company to make strides beyond the a.m. hours, it has to offer viable choices at later meal and snack times. The strongest day-part growth in the gourmet coffee and tea channel has occurred at lunch, with a 15% and 19% increase in lunchtime traffic realized in the years ending March 2013 and March 2014, respectively, based on CREST data.
The good news for Starbucks is that food sales at its stores during the lunch hour and afternoon outpaced other day-parts in the first quarter of 2014. In addition, sales of afternoon and evening snacking at gourmet coffee and tea channel QSRs were up 7% in the year ending March 2014, per CREST data.
The chain has also introduced Starbucks Evenings, a program testing in markets such as Seattle and Chicago that give consumers a more upscale fast dining experience, complete with food, alcohol and entertainment that cannot be easily duplicated elsewhere. Michelli says Starbucks Evening patrons are tempted by offerings such as blue Brie apricot preserves and Parmesan-crusted chicken skewers, in addition to regional wine varieties.
“It is increasingly important for operators to differentiate themselves among their competitors. The bottom line is that they must create some sort of draw, giving consumers an experience they can’t get elsewhere,” Wall says. “Brands like Starbucks have pushed to become lifestyle brands so they can cater to the changing needs of their core consumers throughout the day. This has meant adding food and drink variety for breakfast, lunch and beyond.”
Sara Senatore, restaurant senior analyst for Sanford C. Bernstein and Co. LLC, New York, says expanding its food offerings, including healthful fare, throughout the day will continue to be a priority for Starbucks. “Food is an important piece of the strategy to continue to grow same-store sales and leverage the existing asset base of stores across all day-parts, effectively smoothing utilization rather than having it all concentrated in the morning,” says Senatore.
What C-Stores Can Learn
Although it may be a stretch to expect c-stores to shoehorn the best practices and products of a giant such as Starbucks into their operations, many industry insiders believe there’s much that convenience retailers can learn and emulate from the coffee chain.
“Culture is a tough match in c-stores, because turnover is so high and the customer is different,” says Powell. “But I think the best c-stores—including Wawa, Sheetz, Rutter’s and QuickChek—have all taken a cue from Starbucks. They’ve learned the role staff friendliness, customer engagement, an inviting atmosphere, clean stores, hot, good coffee and fresh food play in the overall customer experience.”
Convenience operators should look to Starbucks for what it does best, says Michelli, “which is provide clarity of focus, reduce clutter, train staff on delivering a good experience. C-stores should try offering an array of healthier products and a friendly barista and add value through enhanced awareness of the branded customer experience they need to train their staff to deliver.”
And convenience stores need to continue to improve upon their foodservice offerings, as Starbucks has.
“C-stores must create a perception of upscale, fresh items,” says Wall. “The one advantage that c-stores have over many restaurant operators is that they deliver on speed and convenience. This is an attribute that coffeehouse consumers value, as 63% choose to-go items and 36% choose drive-thru for ordering.”
CONTINUED: Obstacles and Opportunities
Obstacles and Opportunities
For Starbucks to thrive in the better-for-you space, it must overcome several challenges, experts say.
According to Andy Barish, managing director for Jefferies LLC, food makes up about 20% of sales at a typical Starbucks, and about a third of customers attach food to their beverage orders, numbers that the chain can improve on. “It’s still a beverage-led company, but I think they can do a better job of meeting consumers’ needs on the food side,” says Barish.
Bonnie Riggs, restaurant industry analyst for The NPD Group’s foodservice division, sees the primary challenge for players in the gourmet coffee and tea channel less as competition than as post-recession burnout.
“Heavy users, including millennials aged 18 to 34, are still hurting from the recession and not visiting restaurants as they had in the past. They want to get the best value for their money spent,” says Riggs. “The more creative and innovative companies can get at better understanding consumers’ needs and meeting those needs, the better the opportunities.”
Joseph Michelli, chief experience officer for The Michelli Experience, says Starbucks must persist in growing its own brands, “especially Evolution Harvest and Evolution Fresh, and push for a broader implementation of these products into other distribution channels.” He cites the chain’s recent partnership with Whole Foods, which began stocking Starbucks’ cold-pressed bottled juice and snack bar products in its stores last year.
Starbucks by the Numbers
The Basics
▶ Founded: 1971
▶ Top executive: Howard Schultz, chairman/president/CEO
▶ Number of stores: More than 20,500 in 64 countries
▶ Employees: More than 182,000
▶ Market share: 37% vs. Dunkin Brands (25% share), McDonald’s, Costa Coffee, Tim Horton’s, Peet’s Coffee, mom-and-pop coffee stores, etc. (38% collectively)
▶ Average sale: $5 per customer
▶ Sales by category: beverages (75%), food (19%), other (6%)
▶ Customers served: More than 70 million weekly
In the Second Quarter of 2014:
▶ Global comparable store sales increased 6%.
▶ Consolidated net revenues rose 9% to a record $3.9 billion.
▶ Channel development revenues grew 10%.
▶ Consolidated operating income rose 18% ($100 million) to a record $644 million.
In Fiscal Year 2013:
▶ Record revenues of $14.9 billion (12% growth) and record earnings per share of $2.261 (26% growth).
▶ $2.5 billion in net operating income (23% growth).
▶ 55% total shareholder return, up from 38% and 46% returns in FY2012 and FY2011, respectively.
▶ $1.2 billion in cash returned to shareholders via dividends and share repurchases.
Over the Past 6 Years:
▶ Stock price growth of 948% (stock currently trading around $73 a share).
▶ Market cap expansion from $5 billion to $57 billion.
▶ A more than tenfold increase in total shareholder return.
Sources: Starbucks Corp., IBIS World Report, New York Times
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