Nobody expects Starbucks (NASDAQ:SBUX) to suddenly start selling more soda than coffee, but every single base hit it makes will help it win the game in the long term. Starbucks prides itself on 17 quarters in a row of domestic same-store sales above 5% and the increasing bottom line that this helps it achieve. In order for that to keep going, it needs new traffic and higher monetization.
A refreshing innovation
On June 23, Starbucks announced the availability of its handcrafted and made-to-order sodas at 3,000 locations in North America. The initial flavor choices are Spiced Root Beer, Golden Ginger Ale, and Lemon Ale. The root beer is flavored with cinnamon, nutmeg, clove and star anise. The ginger ale has ginger, citrus and brown sugar. And the lemon ale has a "citrus-forward blend of real lemon juice with hints of apricot and ginger." They all sound delicious!
According to the release, Starbucks hopes that customers will pair the soda with breakfast and lunch foods. Starbucks has been making a food push in recent years and 20% of its sales now come from various eats. Starbucks is even offering hot foods such as a classic three-cheese grilled cheese sandwich to bring out the kids in all of us -- or perhaps to bring the kids into Starbucks.
Helping to bubble up sales
It makes sense. If kids can be tempted to drag their parents into Starbucks for a soda or a grilled cheese, the parents may buy coffee or other things too. And who wants hot coffee with a hot sandwich when it's hot out? Cold and refreshing may just work when you've been all Frappuccino'd out already.
You can see two other benefits here. First, while Starbucks has no trouble with creating a big line in the mornings, the afternoons and evenings tend to be rather quiet. Any sales, even if just a little, that can come in during these slots would be helpful. Morning profits already cover overhead for the average Starbucks so even small upticks in afternoon sales should produce large upticks in profit.
Then there is the whole "third place" theme that Starbucks goes after. Starbucks wants to be known as your third place between home and work. For those who hang out in Starbucks reading a book, surfing the Internet, or listening to music, after the coffee cup is empty most have enough of a jolt. A soda may appeal to those who are still thirsty, and let's face it, coffee can leave you parched.
The average Starbucks does around $800,000 a year in sales. A 5% same-store increase therefore only equals $40,000. At $3 a handcrafted soda (with fizz) the soda alone could potentially boost sales by 5% with just 36 sodas a day or a single serving for every 20 minutes of a 12-hour day on average. In other words, it doesn't take many soda sales to make a big difference, at least for the first 3,000 locations.
On the profit line, which is of course the most important, you have to figure that a $3 cup of soda should have a healthy profit margin. Soda tends to be the most profitable item by percentage on a restaurant's menu, even surpassing coffee. For Starbucks, the "all in" cost of the coffee equals less than 10% of the sale.
Foolish final thoughts
More interesting than addition of soda is the symbol it represents. It represents management's creative, innovative, and effective ideas for business growth in a careful, methodical, and appealing way that more often than not -- simply works. It's exciting to watch Starbucks continue to execute its plans so well and always makes you wonder -- what other surprises does the coffee company have up its sleeve?