Can “Brunch” Be The Next Revenue Driver For Starbucks?

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SBUX: Starbucks logo
SBUX
Starbucks

Reports suggest that Starbucks is testing a “weekend-only” brunch menu in selected locations in the U.S. This appears to be an innovative idea by the company to spread its wings wider and increase its food revenues. While beverages and primarily coffee are Starbucks’ main source of revenue, the company also serves a selection of wine and craft beer along with savoury small plates in selected locations as part of its “Starbucks Evenings” program. This indicates the company’s intentions to look at other related segments apart from coffee beverages to grow revenues. Starbucks’ food revenue is less than half that of its beverage revenue.  We believe this segment presents a huge growth opportunity for the company. In 2014, the company outlined a plan to grow its food revenues and these initiatives are showing results in terms of growth in sales of breakfast food items. We believe that, with a brunch menu, the company can tap into late morning visitors on weekends and this can provide a boost to its food revenue growth.

10% Upside To Our Price Estimate If Food Spend Increases At A Rapid Pace

According to our estimates, Food, Coffee Bean and Merchandise Spend Per Customer Visit  at Starbucks will increase gradually from $ 2.03 in 2016 to nearly $ 2.20 by the end of our forecast period.

However, if through the company’s various initiatives to promote sales of food items, this spend increases at a rapid pace and reaches $3.00 by the end of our forecast period, there can be a nearly 10% upside to our price estimate.  Data from Google Trends reveals that the interest in brunch has been increasing steadily since 2004. While this interest is concentrated in certain specific states of the U.S., an increase in disposable income and decrease in the number of people eating breakfast has contributed to the increase in demand for brunch. Google’s data also reveals that brunch is more popular on weekends compared to weekdays. Starbucks is well poised to tap into this trend with its weekend brunch offering.

We believe constant innovation in its offerings is critical for Starbucks to continue revenue growth. While it is testing premium coffee outlets and introducing several seasonal beverages, focus on food menu innovations can drive growth. As an increasing number of consumers look to quick service restaurants to grab a meal.  As the popularity of brunch is on the rise, this initiative can drive revenue growth for Starbucks and help meet its food revenue target, in our view.

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