Starbucks Puts Breakfast Strategy Into Drive
Starbucks helps a lot of consumers get their mornings jump-started with its coffee and now the chain is looking to drive some incremental business with its breakfast sandwich lineup.
Beginning today, Starbucks will sell its line of breakfast and lunch sandwiches at stores located in Boston and elsewhere in New England. It will also introduce the sandwiches at some shops in Los Angeles.
The coffee shop chain has been rolling out the sandwiches on a market-by-market basis. The company currently offers the sandwich menu in Chicago, New York, Washington, D.C., Portland, Oregon and Charlotte, North Carolina. Today, more than 70 percent of Starbucks in North America serve either lunch or lunch and breakfast sandwiches.
In a November conference call with analysts, CEO Jim Donald was bullish on the company’s progress on the food front.
“Food continues to be a growing part of our business, and fiscal 2006 demonstrated significant progress in capturing some of the potential opportunities we have identified,” he said. “We’ve enhanced our offerings introducing additional reduced fat options in bakery and our new yogurt parfait. We’ve added new lunch items, we’ve expanded our grab-and-go lunches into new markets and to more stores, and we saw substantial expansion of our warm breakfast sandwich program, more than tripling the number of stores in which it is offered year-over-year.”
Starbucks’ positioning of its sandwich line is consistent with its beverages offering, a product that it touts as “superior” to the standard fare of fast food competitors such as McDonald’s, Burger King and Dunkin’ Donuts.
In addition, the coffee chain is looking to stake out a convenience position with sandwiches being sold at units with drive-thru windows. In Chicagoland, for example, 71 of Starbucks’ 214 locations have drive-thru windows. At the end of 2005, about 15 percent of Starbucks had a drive-thru. Since then, roughly half of all new Starbucks have been built with a drive-thru.
If Jim Skinner, CEO of McDonald’s, has any worries about Starbucks selling breakfast sandwiches at its stores with drive-thru windows, you wouldn’t know it. At last week’s earnings call, Mr. Skinner said it was testing new breakfast sandwiches and specialty coffee drinks. McDonald’s, he said, succeeds in the breakfast segment because it is “unparalleled in our delivery of breakfast, and we continue to work to protect that.”
Discussion Questions: Do you see the breakfast segment at foodservice heating up as operators such as Starbucks and Wendy’s begin to make a big push for share of stomach? Do you see further decline in the in-home breakfast business?
I’m with Art and Camille (together). Starbucks is competing for dollars that are different from McD’s. At the same time, my concern would be the customer experience. The coffee lines (esp. in urban locations) are long enough with customers’ orders for cookies/muffins. Breakfast sandwiches will surely make these lines longer. They will probably need to re-engineer logistics, so to speak, in their locations to make this work.
Starbucks needs to be careful about what it is trying to accomplish in their outlets to be certain that they don’t endanger the fundamental customer experience…..
Let’s see…a venti latte and a breakfast brioche…that’ll be $14.95…please. On a more serious note, obviously when effective marketers enter a market, that market–by definition–heats up. As to whether or not it will cut into breakfast at home, that seems to depend on who the target market is. Are all those Starbucks folks cooking up their own oatmeal before they stop for their MachCarmalChocolateFrappeLattisimo? I think not. On the other hand is the single mother or father of four working a minimum wage job going to stop making breakfast for the kids at home because Wendy has a new $1.00 breakfast meal? Maybe, if the cost differential is enough.
McDonald’s winning strategy has been to leverage its existing units to serve customers 24 hours a day. Breakfast is now the #1 meal at McDonald’s, with 30% of sales. It’s got to be among the more profitable meals, since coffee probably has the best margin percentage of any item on the menu. For generations, Dunkin’ Donuts stores have made most of their profit from coffee, not donuts. To sustain its coffee business, Starbucks will sell breakfast sandwiches. The margins will certainly be inferior to coffee. When Wendy’s rolls out its breakfast business, they’ve also got to feature great coffee. Otherwise, the profits won’t be optimal.
The challenge for Starbucks is the nature of the existing consumer experience, particularly at breakfast. Prior to this effort, if a consumer wanted substantial breakfast food, and also stopped at Starbucks for coffee, they would have to eat elsewhere. That consumer has become in the habit of either eating first, eating later, or not eating in conjunction with Starbucks, particularly before work. I don’t know the real statistics, but I’d bet the house that the average consumer stops no more than once on average on the way to work, particularly when errands such as the cleaners are excluded.
What this means for Starbucks is that existing consumer behavior patterns mitigate against becoming a destination food source for breakfast. If the existing customer group must be re-trained, then any significant business must come from current customers of other breakfast QSRs. The value proposition is this: these consumers would have been at Starbucks all along, if only we’d had food. All other things equal, if we offer food, they’ll come.
I think this is a huge stretch, and most probably, will result in a limited amount of volume. I do not think this will position Starbucks as a breakfast QSR.
Breakfast sandwiches at Starbucks seems like a sure winner to me. But it gives me a chance to comment on how retailers approach innovation. Changing effectively must be a core competency of great retailers. The bigger you are the harder it is to change. Yet with size you have far more opportunities to test. And you have the resources to really control the test. During the course of a new year, your company produces many promising ideas: technology, promotion, display, product and pricing. How many are actually tested before you roll them out? A purely tested innovation can be disastrous.
Retail execs should take stock. Do you have the skills and tools to test your innovations in a controlled situation? How long does your process take? Do you limit your testing to the same test store? Or do you bring your new idea into realistic market conditions such as a conventional store? Can your Business Intelligence system isolate performance information captured during the test and compare it to a control? Do you have a team that understands this stuff?
The better you test, the better you innovate. And successful change, as Starbucks is teaching us, is at the heart of successful retailing.
Consumers like choices. Price and value are important so having Starbucks, Wendy’s or McDonald’s offer more breakfast selections is a good thing. Starbucks reaches a somewhat different market than Wendy’s or McDonald’s so there should be room for lots more competition in this area. Offering lower fat, lower calorie, vegetarian, whole grains, and even kids meals as well as fresh fruit and juices are a step in the right direction. And of course, taste is paramount.
And besides, nutritionists have long told us that breakfast is the most important meal of the day and having more nutritious choices benefits the consumer and increases sales, as McDonald’s and others have discovered.
The biggest challenge for Starbucks may be that their current counter set-up is not conducive to moving customers along quickly enough. Customers don’t want to wait longer for their latte just because the person in front of them is ordering three breakfast sandwiches. I have not usually found a drive-thru window to be faster necessarily, but it provides the convenience of staying in your car.
Breakfast is a major source of McDonald’s sales and profits so any move by Starbucks is going to felt by them. Where Starbucks may be able to distinguish themselves is if they can position themselves as the place to stop at on the way to work to not only purchase a venti and breakfast but another food item to be consumed at noon. If they can pull this off then they will have been able to develop a significant source of incremental sales which will force McDonald’s to develop food items that do not have to be consumed right away to remain competitive.
Starbucks will do well with breakfast; it is a logical add-on. As the company matures location-wise, growth must come from mining more sales out of existing locations. Much of this add-on and impulse related business will be with existing traffic and will not impact direct competitors.
Adding breakfast sandwiches to the Starbucks menu will grow the overall breakfast market. Almost by definition, we can assume 100% of this volume to be incremental, since the customer picking up a Starbucks coffee most likely is not then heading to the McDonald’s for an Egg McMuffin to go with it.
Wendy’s will be less obviously incremental, but there is always the “convenience factor.” If I drive by a Wendy’s on the way to work every morning, but not a McD’s or a DD, might I now stop for a breakfast sandwich and (another) coffee? Maybe.
But these are two distinctly different plays. One is simply making something more conveniently available to consumers, and that will impact some consumer’s habits. The other is about “building the basket” with a consumer you already have.
While I am obviously in a distinct minority based on the comments already posted, I just can’t seem to get my head around this idea. For myself and for most people I know the ritual cup of Starbucks on the way to work (or just before entering work) is at least the second cup of the morning. (The first or second was at home.) The later Starbucks is consumed from a commuter cup while driving, while commuting on the train, or picked up in the Starbucks outlet in your building lobby just before going in to check the morning’s e-mail or to attend the first meeting of the day. None of these activities seem very conducive to using the other hand to eat a breakfast sandwich. Even attempting to eat a muffin under those conditions is often a stretch.
Also, one of the most absolutely identifiable “good smells” in the world is what you get the instant you walk into a Starbucks any place on the planet. Won’t the addition of cooking and preparing breakfast sandwiches alter this trademark Starbucks coffee smell? And are they really sure they want to do so?
For what it’s worth I rolled this by a young friend who works as an assistant manager at a busy suburban Starbucks and she thinks it’s a “stupid” idea!
I think that this move makes sense for Starbucks, but agree with others about its impact. I doubt if Starbucks and Wendy’s or McDonald’s are competing for the same consumer when it comes to breakfast. I believe Starbucks will sell incremental food items that will supplement its highly profitable coffee and other beverages. I can’t imagine they will take any business away from the other fast food chains mentioned. Plus Starbucks has a very limited children’s menu and primarily appeals to adults.
Research shows that more people are eating breakfast on the go. Being able to get breakfast and coffee in one spot makes sense, so Starbucks’ decision to add sandwiches at breakfast makes sense. I just hope it doesn’t make the line go slower.
When you look at the foodservice dollars being generated by the convenience store industry, it’s no surprise that Starbucks is shifting its food business into high gear. The one crucial difference is that convenience stores have perfected the quality-price ratio. Many, many convenience store chains, including the likes of Wawa, Sheetz, Valero, Rutter’s, Nice N Easy, etc., are offering quality breakfast, lunch and dinner meal solutions at affordable enough prices to keep customers coming back several times a week. Starbucks likely isn’t going to try to compete with the convenience store model, and has already said it is going to offer a “premium, quality product.” The problem with that theory is that they are very late getting into the game and, as I understand it, they are going to be doing it with a prepackaged product.
Forget for a moment that c-stores already offer quality and value (and a huge prepackaged sandwich clientele). There are already plenty of good chains out there that offer freshly- prepared sandwiches of high quality at a price point very similar to what Starbucks will be charging, such as Panera Bread, Baja Fresh and Quiznos. The big question remains, “Is the prepackaged sandwich model consistent with Starbucks’ clientele and will the offering have enough value to lure customers away from the Panera Breads?
Prepackaged has its audience–a big one at that. But Starbucks has built its reputation on offering a superior product at a relatively high price point. While these sandwiches are probably high quality as well, I’m not sure enough of Starbucks’ customers, the majority of whom have shown a propensity to pay higher prices for a quality offering, will buy enough sandwiches to make the offering profitable.
It is the next logical and opportune category to pursue for related beverage and fast food offerers! McDonald’s has made great strides in building a very lucrative breakfast business.
Why? Consumers are more rushed and activities-driven in the AM. Unless you get up at 5 AM and prepare breakfast, and hassle the kids to eat, when would you have time for the most important meal of the day?
So to further adjust to consumers’ lifestyles, people stop at Starbucks for their favorite AM energizer, and now a breakfast sandwich, or breakfast burrito. Wendy’s and soon the others will enter the fast paced, AM consumer world to offer a substitute for home cooked breakfast.
Starbucks should have the advantage over most of the fast foods operations, with its morning drive thru following. But who else may enter this business that have drive thru window capacity, or would build this consumer convenience?
The key criteria to success in the breakfast-fast food arena will be: 1) time to get through a drive thru window line, even if you are returning calls, or e-mailing; and 2) if the morning products are above consumers’ expectations.
Who will win the battle? McDonald’s or Starbucks? Or might IHOP capitalize on their breakfast business with drive thrus and hand held breakfast products? Hmmmmmmmmmmmmmmmm
Is anybody, sitting down to eat, without driving or rushing?