Starbucks gets Serious About Breakfast

SEATTLE, Washington (AP) — As no-frills breakfast kings like McDonald"s Corp. and Dunkin" Donuts have gotten more serious about their coffee, Starbucks Corp. has gotten more serious about its breakfast.

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It started selling toasted egg sandwiches alongside its scones, muffins and other breakfast breads in hometown stores three years ago, and the effort is expanding.

Offering such trimmings as peppered bacon and Black Forest ham, Starbucks added the English muffin sandwiches to stores in Washington, D.C., last year, and in Portland, Oregon, last month. San Francisco stores will get them in early April, and Chicago outlets will start selling them later this year.

By the time its current fiscal year ends in October, Starbucks says it will offer breakfast sandwiches at roughly 600 stores — up from about 250 today.

Industry analysts say it"s a sensible move that doesn"t involve much risk.

"If Starbucks can get food right, it gives them a whole new leg of growth," said Linda Bannister, an Edward Jones analyst in St. Louis.

The biggest gamble, analysts say, is whether hot food can be served without slowing down service.

Vendors prepare the breakfast sandwiches daily and deliver them first thing in the morning. The sandwiches are heated up in countertop ovens about twice the size of the average microwave, a process that takes about three minutes, Starbucks spokesman Alan Hilowitz said.

So far, the system seems to be working.

"The last time I got a sandwich and a latte at Starbucks, I waited longer for the latte," said Sharon Zackfia, an analyst with William Blair & Co. in Chicago.

Starbucks has not disclosed exactly how its growing sandwich business is affecting its bottom line — only that on average, it boosts same-store revenues by about $30,000 a year, or roughly 3 percent.

Drinks remain its primary and fastest-growing revenue source, accounting for 77 percent of $5.4 billion in sales at company-run retail stores for fiscal 2005. That"s up from 61 percent since fiscal 1996, when company-run retail store revenue was about $599 million.

Starbucks counts sales at company-run stores separately from those at its licensed shops in hotels, malls and the like.

As a percentage of revenue, fresh food has remained relatively constant over the past decade, ranging from 12 percent to 16 percent of annual company-run retail sales. In fiscal 2005, pastries, desserts, sandwiches and salads accounted for 15 percent of those sales.

Meanwhile, Starbucks has beefed up its corporate-level food division from about a half dozen employees a decade ago to roughly 70 today.

Tom Barr, who heads up the food division, realizes he faces increasingly stiff competition but said that"s not the reason Starbucks is focusing more on food. It"s just part of the business of keeping its customers happy, he said.

When it first rolled out warm breakfast sandwiches in April 2003, Starbucks got mixed reviews.

Since then, it bagged one egg sandwich with roasted peppers, red onion and Colby Jack cheese and replaced it with others that have proved more popular: eggs Florentine with baby spinach and havarti, and herbed sausage and egg with aged sharp cheddar.

Officially, Starbucks isn"t saying how many more markets might get breakfast sandwiches in the coming years. But Barr said, "We"re confident in the program," and that he"d be surprised if Starbucks didn"t expand the service to at least a couple new markets next year.

The sandwiches sell for $2.95, about the price of a 12 oz. "tall" mocha, which costs $2.70-$3.40 depending on the region.

The suggested retail price for a small latte at Dunkin" Donuts is $1.99; it"s $2.74 for breakfast sandwiches with egg, cheese and ham, bacon or sausage. At McDonald"s, the suggested retail price for a small cup of premium roast is 99 cents; for an Egg McMuffin it"s $1.99.

Bill Whitman, spokesman for McDonald"s USA, said Starbucks" heightened focus on breakfast food comes as a compliment to a company that considers itself the inventor of the fast-food breakfast.

"I think there"s much work left to be done to catch up to the industry leader," he said.

Wary of crediting any competitor with forcing the company to revamp its coffee strategy, Whitman said McDonald"s committed to the upgrade once it realized consumers were getting their caffeine fixes throughout the day, not just at breakfast.

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