Starbucks To Add More Food On The Menu As Sales Continue Decline
According to Credit Suisse analysts, sales at Starbucks have been on a downward trend even as the benefit costs and hourly wages of employees go up. The costs of opening new locations have also been on the rise. This could have a negative impact on the growth prospect of the stock going forward.
One of the things that Starbucks could do to turn around the situation is raise the price of its products. This, however, would present the risk of its customers fleeing to rivals. Alternatively Starbucks could choose to introduce new products, a move which would either widen the customer base or increase the amount of money spent by each customer on average.
“Every time we attach food to a beverage order, profitably goes up on a percentage basis in the stores,” Starbuck’s CFO, Scott Maw, said in an interview with CNBC.
Adding more products, however, also comes with the risk of slowing up order flows and this too could send its customers fleeing. But even though revenues at Starbucks have been falling, and even missed consensus estimates in the last two quarters, the management of the coffee chain expects a change in the next half of the year. The driver of growth in this case is expected to be food sales.
Since 2012 when Starbucks acquired La Boulange, the coffee chain has been increasing the amount of food sales at its outlets. Food sales at the chain have grown by 50% since 2013 and plans are in place to double the figure in the next four years. But while non-beverage options have increased at Starbucks, the amount of food sales has remained at 19%. This is because customers do not consider Starbucks a destination for lunch.
To make Starbucks a popular lunch destination, the coffee chain has been experimenting in a couple of markets. This includes in Chicago where it has been trying out Mercato, a menu consisting of sandwiches and salads. Company executives have said that the results are promising and the menu will be rolled out to more outlets in 2018. Starbucks has also been experimenting in Houston with healthy menus.
If Starbucks chooses to increases its food sales, one of the likely consequences is a lower gross margin. This is because beverages such as coffee have higher gross margins. According to Maw, the company’s beverages have an average gross margin of over 80%. Food, however, enjoys gross margins of a little over 50% meaning investors will have to make do with a fall in gross margins should the coffee chain increase the amount of food it sells.