What Starbucks Has to Gain by Expanding its Alcohol Sales

Move over baristas, the bartenders are coming -- at least after 4 p.m.

Starbucks (NASDAQ: SBUX  ) , with about 11,500 stores in the U.S., is about to try and transform more of its local coffee shops into evening nightspots. The effort, called "Starbuck Evenings," offers beer, wine, and appetizers to customers after 4 p.m. In 2010, the program began at a few select Seattle stores. The results were significant enough to warrant expansion to 26 more stores in big cities like Chicago and Atlanta. 

Now Starbucks has announced its intention to launch the program in another 40 stores in 2014 -- and eventually coffee lovers can order an elegant Cabernet, Chardonnay, or cold craft beer at thousands of neighborhood Starbucks. 

Currently, Starbucks is valued at $53.03 billion as of April 17. Its plan is to eventually reach the $100 billion mark. 

Mixed reactions on drinks
When Starbucks first initiated "Evenings," restaurant insiders reacted with mixed predictions. Some thought that the program was a brilliant idea. Others expressed concerns that Starbucks would dilute its brand and core identity as the coffee heavyweight. All seemed to agree that the evening drinking spot had to maintain the same ambiance as the morning drinking place for it to work. In other words, it needed to be a "cafe that serves beer and wine, not a bar that serves good coffee."

Obviously it's working
While other fast food restaurants, including Sonic  (NASDAQ: SONC  ) and Burger King  (NYSE: BKW  ) , have struggled to implement alcohol sales into their concepts, Starbucks is encouraged by its experiment. Starbucks doesn't release specific numbers on alcohol sales, but Starbucks COO Troy Alstead did say this to Bloomberg News: "We've tested it long enough in enough markets — this is a program that works. As we bring the evening program to stores, there's a meaningful increase in sales during that time of the day."

Historically, Starbucks does 70% of its sales before 2 p.m. Having more offerings after that can't help but bring in additional sales. The question is, how much extra? Doubling your market cap is a hefty endeavor, but wine and beer, like coffee, have weighty margins and raise the price of the average ticket. 

Matt Milletto, vice president of the American Barista and Coffee School and co-owner of Water Avenue Coffee in Portland, estimates that average coffeehouse transactions run about $4.25. Adding beer and wine in the evening lifts it to $6.25 to $6.50. Also offering light food, as Starbucks will do, brings in more customers as an alternative to dining at a restaurant.

More drink innovations
Starbucks is not placing all its hopes for future growth on alcohol and appetizer sales. It's also launching its Teavana stores in about 20 locations, including New York City. The goal is to capture a significant chunk of the $90 billion global tea market with the brand, as it has with the coffee market. 

Starbucks also plans to increase its super-premium juice sales. Currently, the category is a $1.6 billion market. Starbucks will produce its high-grade juice in its own juicery in California. It also plans to test "handcrafted carbonated beverages" in certain markets. 

A Fool's conclusion
Starbucks is performing well at the moment. It increased same store sales 7% in 2013 -- 6% of that was increased traffic and 1% was attributed to a rise in average ticket. Revenues also jumped nearly 12% from the 2012 fiscal year to fiscal 2013, while first quarter 2014 revenues were up 11.5% from the first quarter of 2013. Operating margins gained 150 basis points, rising to 16.5%. Starbucks' sales mix consists of beverages (74%), food (20%), whole bean coffees (3%), and coffee-related hardware (3%.) 

While giving consumers choices by moving outside the coffee market is an idea with lots of upside, the execution of the strategy is paramount. Starbucks must maintain its identity as the king of premium coffee as it exploits opportunities in other markets. So far, the company has shown a willingness to test concepts before making huge investments, as its gradual progression into beer and wine sales shows. Beer and wine can add revenue, but they can also increase labor and liability expenses. The alcohol initiative can also change the "sense of community" and "conversational environment" that entices customers to pay more for a cup of coffee -- or any other drink.

My sense is that this will be a successful revenue stream for the coffee leader, especially since many local independent coffee bars have already successfully added beer and wine without disrupting their look and feel by becoming a raucous party spot. However, doubling your market capitalization is a huge undertaking; it will take more than a few new drinks to make that happen. If Starbucks continues to grow as it has since restructuring in 2009 and stays innovative, it's on the right track. 

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