How Starbucks Could Benefit From Serving Alcohol

Starbucks aims to turn its baristas into bartenders in an attempt to improve same-store sales. Will the company succeed?

Mar 29, 2014 at 10:00AM

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?

Sbc

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.

Boost your 2014 returns with The Motley Fool's top stock
There’s a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it’s one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Victoria Zhang has no position in any stocks mentioned. The Motley Fool recommends Burger King Worldwide and Starbucks. The Motley Fool owns shares of Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers