Starbucks boosts expansion outlook 25% amid demographic gains

by Sarah E. Lockyer

Reprinted with the permission of Nation's Restaurant News

Seattle- Starbucks Corp. increased its growth target substantially earlier this month, setting a new long-term projection of 40,000 locations worldwide, which is more than triple its current unit count and 10,000 outlets more than the company's previous goal.

Officials, while monitoring the chain's food menu additions nationwide, said the decision to raise the growth outlook was based on new research indicating that Starbucks' customer base is expanding to include patrons with lower incomes and lower education levels. The chain also is extending its reach into the Hispanic market, the study said.

Starbucks currently operates or licenses 12,440 outlets worldwide.

"We did ourselves underestimate the size of the opportunity," Starbucks chairman Howard Schultz told analysts and investors during the company's biennial conference Oct. 5.

Meanwhile, Starbucks' also is focusing on mealtime and convenience opportunities, especially at breakfast, with expansions of warm and cold food offerings and the continued development of restaurants with drive-thrus.

Schultz predicted that in less than five years Starbucks - which currently owns or licenses 8,836 locations in the United States - would double the size of the company and double the number of U.S. units. Plans call for a total of 20,000 domestic outlets and 20,000 abroad.

Analysts gave the thumbs-up to Starbucks' aggressive growth plans, noting that its average-unit volumes are at an all-time high despite the chain's ongoing expansion. Indeed, during Starbucks' fiscal 2006, which ended Oct. 1, the company opened more than 2,000 units, and average-unit volumes across the system rose to $1.045 million, from $1.004 million in fiscal 2005.

"In the United States, average new-unit sales performance continues to rise, suggesting that the company remains far from saturation," said Mark Kalinowski, an analyst at Buckingham Research Group in New York.

The coffeehouse giant, which posted a 22-percent jump in annual revenues to $7.8 billion for fiscal 2006, also is set to increase competition with restaurant operations outside the premium-coffee segment. Starbucks put chains like Dunkin' Donuts and McDonald's on notice when Anne Saunders, its senior vice president of global brand strategy, said the Seattle company is targeting every consumer who drinks coffee in the United States - and not just the high-end consumers Starbucks is known to attract.

Schultz added that Starbucks captures less than 8 percent of the entire coffee consumption in America, giving it much room to grow.

Starbucks also revealed plans to accelerate the chain's introduction of its hot-food, or "warming" program, with such new menu items as breakfast sandwiches.

According to data for the 52 weeks ended May 2006 from the NPD Group, a Port Washington, N.Y.-based market research firm, quick-service restaurant morning meal traffic grew 5 percent from the previous year. In addition, approximately 29 percent of quick-service morning meal orders included a breakfast sandwich for the same period.

Starbucks first began testing hot breakfast items in 2004. That year 97 stores offered the hot menu items. Currently, about 640 units in five major markets nationwide offer warm food items, and the company projected that by the end of fiscal 2008 nearly 6,500 outlets will offer the warmed items. According to analyst Kalinowski, warm food generates sales of about $35,000 per coffeehouse, and total food sales make up about 14.5 percent of a typical store's sales.

The new warm options include four breakfast sandwiches, which are sold all day, where available. They are peppered bacon, egg and aged Cheddar on a toasted English muffin; sausage, egg and aged Cheddar on a toasted English muffin; a reduced-fat sandwich with turkey bacon, cholesterol-free egg and reduced-fat white Cheddar on a toasted whole-wheat English muffin; and ham, egg and fontina cheese on a toasted potato bagel.

In addition, Starbucks has debuted two lunch sandwiches that can be served hot or cold, including the Tomato Mozzarella Basil and Chicken Cheddar Club sandwiches. Starbucks also introduced a warm toffee almond bar and heated chocolate chip cookies.

"Food is becoming a central part of the Starbucks experience and a key driver for our growth," said Michelle Gass, senior vice president for category management at Starbucks. "During the last four years we've seen growth of our food sales outpace our total store sales growth."

The expanded rollout comes on the heels of Dunkin' Donuts' new breakfast sandwiches, first introduced last February. Dunkin' Donuts offers an Original Supreme Omelet with egg and melted cheese on baked bagel, which when launched helped to boost sales by about 17 percent in the first month, and a Sausage Supreme Omelet with the same egg and cheese as the original with added sausage.

This month the 6,700-unit, Canton, Mass.-based chain also introduced French Toast Twist, a portable take on standard French toast.

Starbucks' expanded food program could add between 1 percent and 2 percent to annual same-store sales growth in both fiscal 2007 and 2008, according to analyst John S. Glass at CIBC World Markets in Boston.

Starbucks' price increase, which took effect Oct. 3, also is expected to help boost same-store sales. Priced were raised 5 cents on beverages and about 50 cents on a pound of coffee to offset higher fuel, health care, labor and food costs, the company said. Analysts said they were confident the increase would help profitability and would not affect consumer spending.

For Starbucks' five-week period ended Oct. 1, total revenues rose 20 percent over the same period last year to $790 million, aided by a same-store sales gain of 6 percent at corporate units. The result came after a weak August result, up 5 percent, the chain's lowest monthly comparable-store sales increase in more than four years.

slockyer@nrn.com

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Starbucks boosts expansion outlook 25% amid demographic gains