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Why food and mobile are the next engines of growth for Starbucks

Xun Yao Chen

Starbucks' Q1 FY2014 earnings call in numbers and charts (Part 4 of 7)

(Continued from Part 3)

Lunch and breakfast

Lunch and breakfast are a sweet spot for Starbucks Corp. (SBUX). Given an already saturated market for dining hours, restaurants are trying to increase sales during lunch and breakfast hours. But casual dining brands like Red Lobster or Olive Garden under Darden Restaurants Inc. (DRI) have trouble competing during lunch because people don’t have time to eat large meals. A more value-conscious consumer doesn’t help either. Fast food options like McDonald’s (MCD) aren’t favored either because of their unhealthiness.

Starbucks will be nicely positioned for breakfast, lunch, and afternoon indulgences. Since more than half the people in the United States drink coffee to start the day, breakfast is one area that Starbucks can substantially increase traffic in if it can find products that resonate with consumers. During lunch hours, Starbucks can offer “affordable luxuries” like those at fast-casual chains such as Chipotle Mexican Grill Inc. (CMG) and Panera Bread Co. (PNRA).

Throughput

Starbucks’ sales could slow due to a higher wait time. One analyst questioned whether the lower comparable sales growth in the United States for the first quarter was a throughput issue at stores with La Boulange. Management dismissed this idea but acknowledged the need to continuously improve in-store logistics and invest in the right part of the business to drive volumes, meet customer needs, and grow profitability.

Cards and mobile

Starbucks cards and mobile payments are also at the center of speeding up services, according to management. The value loaded onto cards as a percent of last-12-month revenue rose to a record 6.61%, driven by gift-giving and card reloads, and this suggests higher revenue ahead.

Whether those (mobile) cards are more efficient than the cashiers swiping credit or debit cards at Chipotle is debatable. But the mobile app certainly opens up an opportunity for targeted promotion programs and could allow customers to make orders via mobile apps in the future, which should drive higher traffic and efficiency across the board if implemented successfully. Management won’t say when that’s going to happen but said, “If you look at how quick we were and how early we were to adopt mobile payment in our stores, you can assume that over time we will lead in this area.”

Continue to Part 5

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