Starbucks' big bet on lunch could steal diners from Panera

  • As more people eat at their desks or opt to brown bag their meal to save money, restaurants have to get creative to get folks to visit their stores.
  • The company said it has grown its food business by 1.5 times since 2013 and planned to double it by 2021.
  • Princi elevates Starbucks culinary offerings and gives diners a destination for lunch.

The restaurant industry is in trouble and lunch could be to blame.

For brands like Starbucks, luring in customers in the wee morning hours is an easy feat, with enticing breakfast menus and drinks packed with caffeine. Keeping diners coming through the door after 11 a.m. is another story entirely, however.

But, the coffee giant has a plan.

Lunch represents 33 percent of total food-service industry traffic, according to the NPD Group. However, lunch traffic has been in decline over the last few years, with fewer people showing up at restaurants for lunch.

A display of Princi bakery goods at Starbucks' Seattle Roastery.
Sarah Whitten | CNBC
A display of Princi bakery goods at Starbucks' Seattle Roastery.

As more people eat at their desks or opt to brown bag their meal to save money, restaurants have to get creative to get folks to visit their stores. For some, the answer has been catering and delivery. Others have begun to offer cheap and convenient options that can be scooped up and brought back to the office.

For Starbucks, the approach is a little broader. At its traditional Starbucks stores, the coffee company has dabbled in grab-and-go sandwiches and salads, bolstered its mobile-ordering so that customers can order food and beverages ahead and pick them up, and created unique Frappuccinos that are available at a discount in the early afternoon.

While new beverage concoctions in its Frappucino line have fallen flat with consumers in the last six months, sales of the company's Bistro Boxes, prepackaged sandwiches and salads, have grown 20 percent each year for the last two years.

And then there is Princi. Starbucks invested in the Italian bakery in 2016 and a year later opened its first location in the company's flagship Roastery and Tasting Room in Seattle. Starbucks also has one open in its first Reserve store at its headquarters, also in Seattle.

Princi's 'Eggs in Purgatory' served at Starbucks Seattle Roastery
Sarah Whitten | CNBC
Princi's 'Eggs in Purgatory' served at Starbucks Seattle Roastery

Starbucks said during its shareholders meeting that 40 percent of the customers that come to this Reserve store have gone out of their way to drive there. The Reserve is located in the SoDo neighborhood in Seattle, an area in the city that Starbucks Chairman Howard Schultz said is "not a destination."

Still, the location is packed with customers. Some are saddled up to one of the coffee bars watching baristas brew coffee using a siphon or shake together a coffee-inspired cocktail. Others have ordered fresh baked foccacia pizzas and found a place to sit and soak up the marketplace.

The space is impressive at more than 8,000 square feet, four times larger than a typical Starbucks location, and buzzing. Six massive black ovens are the center piece of the space. Here, Starbucks employees bake all of the breads, pastries and cakes sold to customers in the store.

A Starbucks barista demonstrates how to brew coffee using a siphon at the Reserve Store in Seattle.
Starbucks
A Starbucks barista demonstrates how to brew coffee using a siphon at the Reserve Store in Seattle.

Starbucks has been keen to expand its food selections and grow the category for years. From 2016 to 2017 revenue from food increased 15 percent and now accounts for 21 percent of sales in the U.S.

At the annual shareholders' meeting last month, the company said it had grown its food business by 1.5 times since 2013 and planned to double it by 2021.

Lunchtime is the biggest financial opportunity for the company, Rosalind Brewer, chief operating officer, said during the shareholders' meeting.

"Although Starbucks has been a premium brand in the breakfast and coffee segment for decades, they have struggled to put quality food items in play to match their premium beverages," Darren Tristano, CEO of CHD Expert, told CNBC via email. "Starbucks has raised the bar with their new Reserve Roasteries, increasing the footprint and upgrading the quality to a new level to continue to stay relevant to coffee aficionados."

Customers order food from Princi bakery at the center of Starbucks' Reserve Store in Seattle.
Starbucks
Customers order food from Princi bakery at the center of Starbucks' Reserve Store in Seattle.

While the company has said that it will roll out its Mercato menu, which features sandwiches, salads, protein boxes and a variety of fruit and yogurt bowls, to more than 1,000 stores by the end of the year, Princi is what elevates Starbucks culinary offerings and gives diners a destination for lunch.

Right now, there are only a handful of Princi locations, including one in Starbucks' Shanghai Roastery. Starbucks plans to place a Princi bakery in each of its future Roastery locations in Milan, New York, Chicago and Tokyo as well as standalone locations in Seattle, Chicago and New York.

"Although there are fewer locations and markets that would be able to support the new Starbucks 'marketplace,' this new concept evolution will make it more challenging for competitors like Panera Bread and Corner Bakery to fight for share of the bakery cafe segment while differentiating further from quick-service giant Dunkin Donuts," Tristano said.

A slice of focaccia pizza from Princi at Starbucks Reserve Store in Seattle.
Sarah Whitten | CNBC
A slice of focaccia pizza from Princi at Starbucks Reserve Store in Seattle.