Here’s Why Starbucks Is Partnering With Snap Kitchen

Starbucks (NYSE:SBUX) is going through a rough patch. The company reported disappointing Q2 2017 results with comparable sales growth slowing due to congestion caused by its mobile order pay and system.  While the company is positive that the issues have been resolved and comps will start improving in the next quarter, analysts are not very optimistic about the company meeting expectations. However, Starbucks is continuing its growth focus which includes its goal to double the food business by 2021. “Mercato,” the company’s menu of lunch items which include grab and go salads and sandwiches, is the pillar of this initiative. However, recently, Starbucks partnered with Snap Kitchen to sell their products at its five cafes in Houston. The company hopes to expand this partnership in other regions soon. In addition to the “Mercato” initiative, we believe the partnership with Snap Kitchen will help Starbucks to cater to customers who prefer meals with healthier ingredients and can act as a catalyst for its goal of increasing revenues from food sales.

Healthy Food Focus

Snap Kitchen was founded seven years ago and the chain focuses on grab and go meals with healthy ingredients. While Starbucks is looking to drive revenues through food sales via its own products, partnering with an existing chain which is known for healthy food can give the company a strong holding in the food segment, where it is currently struggling. Starbucks faces strong competition from players such as McDonald’s and Taco Bell in the breakfast segment. After Panera’s acquisition by JAB it has become another strong competitor for Starbucks in the food segment. While fresh food might be essential for Starbucks to establish itself as a serious player in the food segment, the partnership with Snap Kitchen can give it a differentiated edge. With millennials preferring healthier food options, a grab and go sandwich with healthy ingredients might attract this section of customers.

According to our estimates, the average customer spend on Food, Coffee Bean, and Merchandise per visit at a Starbucks company owned restaurant would be around $2.26 in 2017 and we expect this number to increase gradually over our forecast period.

This is not a very high number compared to the $6 each customer spends on beverages (average) every time one visits a Starbucks restaurant. This indicates that the company has a huge opportunity in the food segment and if it offers interesting food options customers could spend higher at a Starbucks store. The partnership with Snap Kitchen, though yet another experiment by Starbucks to improve its food sales, could prove to be beneficial since it is focused on healthier food. If this partnership is successful the company could meet its goal of increasing food sales in the next few years.