If you've ever had a hangover in the morning, one of the first things you may desire is a piping hot coffee from Starbucks (NASDAQ:SBUX). How ironic is it that now Starbucks is going into the hangover-creating business by offering beer and wine?
While Starbucks continues to stave off competition from rivals Dunkin' Brands (NASDAQ:DNKN) and Krispy Kreme Doughnuts (NYSE: KKD), this latest move may be just what it needs to jolt ahead for several key reasons.
Starbucks has been test marketing a concept referred to as "Starbucks Evenings" that begins after 4 p.m. At a handful of locations, it began selling beer and wine (but not hard liquor) along with fancy snacks: bacon-wrapped dates, truffle macaroni and cheese, Parmesan-crusted chicken skewers, chocolate fondue, and many other items.
So far only 26 locations are part of the program with an eye on a total of 40 by year-end. The plan is to now increase that number to more than 1,000 since the tests have been a success. In an interview with Bloomberg, CFO Troy Alstead stated, "We've tested it long enough in enough markets -- this is a program that works."
It's not surprising. Coffee doesn't sell much at Starbucks or just about anywhere else at 4 p.m. for obvious reasons. Even a small success would add to the top and bottom lines. Why not transform the place into something more appealing for the evening crowd?
The third place
Starbucks has focused much of its marketing on making the locations a "third place" between home and work. It's obviously worked in the mornings as we can see with the constantly expanding revenue and same-store sales. But what the numbers don't tell you as clearly is the success in the afternoon.
Pop into many locations, and you may notice something interesting in the late afternoons. That is, a crowded Starbucks but with no line to get coffee. You may even see tables of three, four, or five friends with only one of them drinking coffee.
The third-place concept has worked. In fact, it's worked so well that often people will gather at a Starbucks in the afternoon or evening and not even order a coffee at all! Well, now those same people can get a hot bite to eat or a glass of wine. It's a great way to monetize the lounge atmosphere the company has already created.
Won't work with doughnuts
Starbucks won't have to worry too much about competitors Dunkin' Brands or Krispy Kreme Doughnuts jumping on the booze bandwagon. Dunkin' Brands boasts that its small store size makes for an easy and cheap expansion. This is true. It's becoming more and more of a place to get coffee and food to go. That doesn't quite work with a glass of wine.
Krispy Kreme Doughnuts is starting to undergo a rapid expansion with a similar concept to Dunkin' Donuts by using small factory stores. Again, it's not quite going to work as well with that format to serve beer or wine when there are little or no places to sit. In short, Dunkin' Donuts and Krispy Kreme Doughnuts locations are not "the third place" that Starbucks locations are.
Additionally, Starbucks domestically has already built out most of the locations it plans to build for a while; it ran into cannibalization from over-saturation a few years ago, forcing it to actually close a chunk of stores. The best way to fight against the Dunkin' Brands and Krispy Kreme Doughnuts expansion is by focusing on additional offerings at existing stores to dig the brand's heels in.
Foolish final thoughts
CEO Howard Schultz is targeting turning Starbucks into a $100 billion company. With a $58 billion current market cap, there is still ample room upward if you believe him -- plus a 1% to 2% dividend yield while you wait. Fools should continue to monitor Starbucks and its booze rollout. Next up -- look for liquor to also eventually be part of the menu. Irish coffee, anyone?