Starbucks: Is Serving Alcohol a Wise Decision?

Starbucks is known for making highly strategic decisions that tend to drive the top line from different directions. Is this likely to be another example, or is this a misstep?

Apr 6, 2014 at 10:00AM
Sbux Evenings

starbucks.com

Starbucks (NASDAQ:SBUX) has been testing the sale of beer and wine in several locations across the United States, including Chicago, Los Angeles, Seattle, Atlanta, Washington, D.C., and Portland, Ore.

This could be a way for Starbucks to increase its sales per square foot and comps performance. However, Starbucks delivered very solid domestic comps growth of 6% in fiscal-year 2013 year over year. 

When some investors read the word 'alcohol,' they see the potential for an added revenue stream. Other investors read the word 'alcohol' and imagine Starbucks turning from a high-end scene with a relaxing atmosphere to a location that might resemble Road House with Patrick Swayze. One of these assessments is much more likely to be correct than the other, and the answer has major implications for Starbucks shareholders.

Potential rewards outweigh risks
What all investors need to realize is that Starbucks has been testing the sale of beer and wine in select locations for several years. Therefore, the company wouldn't look to expand in this area unless results were already good.

Also consider that CEO Howard Schultz was recently rated as one of the best bosses in the country by employees, with 93% of workers approving of his leadership on anonymous-employee-review site Glassdoor.com. In other words, this isn't the kind of guy who is going to take uncalculated risks.

Schultz has seen that demand for alcohol is higher in some locations than others. That being the case, the company will simply look to offer this feature only in locations where demand is high. While this is only supposed to be a source of incremental revenue for now, there's no telling what the future holds. If demand is found to be high at newly tested locations, then Starbucks could be a favorite local haunt for people seeking a drink while relaxing in a clean, safe, and comfortable atmosphere. Keep in mind, alcohol is served during Starbucks Evenings, not Starbucks Party Nights.

An added benefit here is that alcohol has the potential to attract consumers who have never stepped foot in a Starbucks. If these consumers enjoy themselves in the evening, then they're more likely to return to Starbucks during the day. Furthermore, Starbucks is seeking to offer alcohol mostly in locations near public transportation, which equates to high amounts of foot traffic.

Another potential positive is that Starbucks is serving its alcohol at a premium. This should come as no surprise. The justification is that customers are also paying for the atmosphere, which makes sense. A glass of wine will range between $8 and $10 per glass, and a pint of beer will range between $5 and $6 -- in most locations. It might surprise some people that Starbucks is serving alcohol, but two other companies might surprise you more.

Maintaining and fueling growth
Chipotle Mexican Grill (NYSE:CMG) hand Red Robin Gourmet Burgers (NASDAQ: RRGB) also serve alcohol. Chipotle has delivered top-line growth of 132.8% over the past five years, considerably higher than Starbucks at 52.7% (still very impressive) and Red Robin at 14.9%.

Alcohol is only 1% to 2% of sales for Chipotle. However, the company has looked to improve this percentage by experimenting with different products, including high-end Patron Silver tequila, pricing a glass between $6.50 and $8. Chipotle also serves beer, wine, and a standard margarita.

Chipotle plans on opening 180 to 195 new restaurants in 2014. It's likely that Chipotle will test out different alcohol products at each location, see what works, and adjust accordingly based on local demands.

As far as Red Robin goes, it seems like an odd place to serve alcohol since it's widely seen as a family restaurant. But with top-line growth coming in at just 1.7% over the past year, innovative concepts must be implemented and tested.

Red Robin is taking a unique approach by mixing dessert and alcohol. For instance, it now sells a Mango Moscato Wine Shake: blends Alice White Moscato, Skyy Infusions Moscato vodka, mango puree, and vanilla soft serve. Red Robin has also rolled out a Citrus Moscato Fizz: Moscato vodka, muddled citrus, and soda.

The Foolish bottom line
All three of the aforementioned companies are looking to increase foot traffic and sales by serving alcohol. However, Starbucks is likely to have the most long-term potential regarding the serving of alcohol for the following reasons: an already-established reputation for offering a calm and comfortable atmosphere, strategically chosen locations based on close proximity to public transportation, and the potential to drive new customers to its stores via this new offering. Please do your own research prior to making any investment decisions. And if you're looking to invest in companies with enormous growth potential like Chipotle, then the answers are provided below.

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Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill and Starbucks. The Motley Fool owns shares of Chipotle Mexican Grill and 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.

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