How Starbucks Could Benefit From Serving Alcohol

Starbucks (NASDAQ: SBUX  ) , the largest coffeehouse company in the world, appears willing to go beyond its traditional coffee business and turn its baristas into bartenders. The company has been testing booze sales in Seattle, Chicago, Los Angeles, and Atlanta, and it may expand its offering to thousands of stores over the next few years.

The alcohol-selling strategy clearly looks like an attempt to improve Starbucks' top line. In its most recent quarter the company posted yet another quarter of strong earnings, but its same-store sales growth showed signs of slowing down. Selling alcohol could help Starbucks attract new customers and fix its revenue growth slowdown issue. The strategy has been tried before, as even Burger King (NYSE: BKW  ) has attempted to move toward alcohol in the past. Could selling booze help Starbucks improve its top line?

Source: Starbucks

The plan
The company announced that it has been testing out its "Evenings Menu" in select cities. This special menu consists of appetizer-esque items -- such as the Chocolate Fondue or the Blue Brie Cheese Plate -- together with a small variety of wines and beers.

So far the story isn't new. Reports indicate that the company started selling alcoholic drinks in Seattle as early as 2010. By 2012, roughly 25 locations in Los Angeles, Chicago, and Atlanta provided the extended evening menu.

According to Starbucks' COO Troy Alstead, the extended menu has been tested in enough markets. Regardless of the location, sales have shown clear improvement during the time of the day when Starbucks made its evening menu available.

Now the company plans the second step of installing the extended menu across thousands of locations. The drinks currently appear at about 26 cafes, with plans for 40 by the end of the year. Eventually, the extended menu could reach 2,000 locations. 

The implications
Surely, locations that provide the extended evening menu to customers will likely see improvement in sales. However, could selling booze really help Starbucks as a whole to improve its top line?

Because Starbucks has 20,000 locations all over the world, the company would probably need to implement its plan to sell booze across several hundred locations before it observed a meaningful effect on overall sales performance. 

The good news is that, essentially, there's a good chance that the plan will succeed in the long run. First of all, as Starbucks' spokeswoman Lisa Passe notes, the concept of selling alcoholic drinks comes as a natural progression for the company. Starbucks is all about creating occasions for customers to gather, relax, and connect with each other. This is especially true in the evenings, which are the busiest time of the day for both coffee shops and bars.

It's also important to acknowledge that the company has already tested its evening menu extensively over the past four years. The company isn't going to risk losing its traditional customers in order to gain additional revenue from sales of alcoholic drinks.

Challenges ahead
Starbucks will need to train its baristas to sell alcoholic beverages. More importantly, it must pay for some licenses. The real challenge here is installing a control system that would allow the company to avoid the possible litigation risks involved with selling alcohol. This doesn't just mean teaching the staff how to deal with drunk customers. For example, significant numbers of teenagers hang out at Starbucks, even in the evenings. In some instances, the company may have to create a space that is suitable to its traditional customers, teenagers, and customers who are just there to drink alcohol. 

Competitors
Note that a significant amount of players in the ultra-competitive restaurant and fast food business already sell alcohol. Burger King, for example, added cocktails --such as mojitos and Long Island iced teas-- to its menu in Japan last year. The drinks have limited availability: each restaurant only sells 30 of them per day and it only sells them between 6pm and 11pm.

By adding cocktails to its menu, Burger King may be trying to differentiate itself from McDonald's. In particular, Burger King may be trying to target the high-end segment. The company has also introduced other items to its menu that are not typical of fast food chains, such as broiled BBQ ribs. Note that the company may just be experimenting, as only a few stores in Japan are providing a special menu with cocktails included. However, Burger King's project of including cocktails in the evening menu has a high chance of improving revenue, especially in Japan, one of the largest market for alcoholic beverages at $87 billion. If things go north, the company may increase the number of locations that sell cocktails.

Foolish bottom line
Selling alcoholic beverages is generally a high-margin business. If Starbucks succeeds in implementing its evening menu across several hundred locations without losing its traditional customers, the company should experience top-line and earnings improvements over the middle to long run. To do so, the company will need to deal with challenges that include training its baristas and implementing a proper control system.

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