Starbucks Food Woes Look Worse With JAB's Panera Acquisition

(Bloomberg) -- Starbucks Corp. has been struggling for years to pull off its ambitious plan of selling more food.

That task just got tougher. JAB Holding Co.'s $7.2 billion acquisition of bakery-cafe chain Panera Bread Co. on Wednesday vaults the investment firm squarely into the exact same lunch business that Starbucks is trying to penetrate.

While Starbucks has been attempting to improve its fare for years, it has yet to establish itself as a legitimate dining spot. Panera, meanwhile, has been fueling growth with a menu of chicken-tortilla bowls, flatbread sandwiches and Fuji apple salads. Now, with JAB's backing, it could compete globally with Starbucks and enlist the holding company's roster of coffee offerings, like Peet's Coffee, and brands such as Krispy Kreme.

“Starbucks is still in the consumer mind a very coffee-led concept,” said Stephen Dutton, consumer food-service analyst at Euromonitor International in Chicago. “It's not like customers are coming to Starbucks for lunch or for dinner.”

Starbucks Chief Executive Officer Kevin Johnson, who took the helm just four days ago, is betting big on food. He wants victuals to eventually account for 25 percent of U.S. sales, up with 20 percent now. The company is introducing a lunch lineup in Chicago this month dubbed “Mercato,” which will feature salads and sandwiches.

“This is a tremendous opportunity for Starbucks,” Sara Trilling, senior vice president of the food category and innovation, said at an event in Chicago on Thursday. The new lunch fare will feature vegan, vegetarian and high-protein options, and will give customers more choices, she said. The meals are made fresh daily in a local commissary.

Food Foibles

But Starbucks' forays into food have been met with mixed reviews in the past. In 2008, then-CEO Howard Schultz had to overhaul the chain's warm breakfast sandwiches after customers were turned off by the smell of burnt cheese, which overpowered the coffee scent.

About two years ago, the Seattle-based company brought back certain loaf cakes after diners complained about the new La Boulange line of pastries. It also curtailed its so-called Evenings program, which offered wine and appetizers, choosing instead to focus on its premium Reserve coffee brand.

More recently, Starbucks has added fancier menu items, including sous vide egg bites, gluten-free sandwiches and vegan bagels. But Starbucks fare is mostly made offsite, rather than in the restaurants, which aren't big enough for cooking. That could make it less appetizing for customers, said Peter Saleh, an analyst at BTIG LLC.

“Panera's food will always be better than what Starbucks can offer,” he said. “Starbucks is not designed to offer that high-end food. They don't have the kitchens.”

Size Difference

Starbucks have typically been about 1,700 square feet (160 square meters), while Panera bakery-cafes average 4,500 square feet -- almost three times the size.

Panera also has attracted diners with a move toward “cleaner” ingredients, including bacon made without artificial nitrates and preservatives. It announced last week that it would start listing the amount of added sugars in drinks, a further attempt to promote healthy eating. The company boosted comparable net sales by 5.3 percent in the most recent quarter, and the stock was already up 34 percent this year before the JAB takeover.

With JAB's backing, Panera could expand internationally and compete globally with Starbucks, which has more than 25,000 cafes worldwide. While there are only about 2,000 Panera locations, JAB can enlist its other brands, including Krispy Kreme, Caribou Coffee, Peet's Coffee, Senseo and Douwe Egberts.

At the very least, Panera could start selling Caribou or Peet's coffee, making each location into more of a direct Starbucks competitor.

“JAB could use its greater portfolio of concepts to compete on much greater scale,” Dutton said. “That will be a threat to Starbucks for sure.”

To contact the reporter on this story: Leslie Patton in Chicago at lpatton5@bloomberg.net.

To contact the editors responsible for this story: Nick Turner at nturner7@bloomberg.net, Lisa Wolfson