"Bartender, give me a Starbucks!"
Yes, it's true. The unstoppable java maker is adding a coffee-flavored liqueur to its repertoire -- moving strongly into the market dominated by Allied Domecq's (NYSE:AED) Kahlua and Diageo's (NYSE:DEO) Bailey's Irish Cream.
Starbucks (NASDAQ:SBUX) will market the self-named drink with Jim Beam, a unit of Fortune Brands (NYSE:FO), seeking to grab more than a sip of Kahlua's 80% market share. The Starbucks liqueur, which remembles Kahlua in texture, taste and alcohol content (20% by volume, 40 proof), will come with a premium price tag that should be familiar to devotees of its coffee. A 750-ml bottle will cost $23, compared with $17 for Kahlua. It will also be available in 1 liter and 50-ml bottles. A 1.5-oz serving of the liqueur has one-fifth the caffeine content of a "tall" serving of Starbucks coffee.
The drink will not be available at Starbucks' coffeehouses, where employees are called "baristas." It will only be sold only in bars, restaurants, and liquor stores.
The liqueur is another example of Starbucks' innovative drive -- branching out beyond the confines of the coffee cup and smartly extending its brand. The company also markets its Frappucino coffee drink with Pepsi (NYSE:PEP), while Dreyer's Grand Ice Cream Holdings (NASDAQ:DRYR) sells Starbucks ice cream.
Fool contributor Nathan Parmalee recently looked at whether you should buy, sell, or hold Starbucks stock, noting the steady drumbeat of improving margins and returns on equity, even at this late stage of the company's amazing growth story. The takeaway was that Nathan would not sell, and if share prices dipped below $45 (it currently trades for $49), he would even recommend buying more shares, primarily because the story remains intact: strong growth, negligible debt, and virtually unleveraged ROE growth. The 7% quarterly same-store sales growth that disappointed analysts did not concern him nearly as much.
Diageo and Allied Domecq, the world's No.1 and No. 2 alcohol distributors, respectively, are not worried that Starbucks will topple their leadership position. They say it will likely bring new interest to the segment. It also happens to be a time when sector growth can support another big name, while allowing all of the major players to grow. In particular, super-premium brands of distilled spirits are being unveiled to supplement the $14.7 billion spirits market.
Allied Domecq recently introduced Elit, its super-premium vodka, which sells for twice as much as the premium Ketel One and five times more than Diageo's Smirnoff, the best-selling vodka. The latter has also released a super-premium blended scotch whisky, Johnny Walker Green, which sells for $20 more than its Black label whisky but only a quarter of the $200-a-bottle Johnny Walker Blue. Similarly, Brown-Forman (NYSE:BFB), the maker of Jack Daniels, has experienced growth in profits of 17% and Pernod-Ricard (Pink Sheets: PDRDY.PK), the world's No. 3 spirit seller, introduced a super-premium whiskey for its Jameson Irish whiskey line and a $30 bottle of vodka designed by the architect behind the Guggenheim Museum in Spain.
Spirit sales accounted for 30% of all alcohol sales in 2004, well ahead of the 28% in 2002, and it was primarily on the back of the super-premium brands that they were able to grow. Their volume increased almost 10% last year, compared with a less than 2% increase by value brands. Still, the super-premiums only represent about $150 million in revenue, or 1% of the market. But the growth in liquor consumption comes at the expense of beer, which recorded a 0.3% decline in 2003 and another fractional decline in 2004.
Therefore, it seems that the time is ripe for Starbucks not only to enter the liqueur market but also to offer its new drink at a premium price. Alyce Lomax loves Starbucks for its strong balance sheet and muscular free cash flow generation (strange girl, that Alyce), but a coffee-flavored liqueur might just give her another reason to turn her head.
Read about Starbucks while sipping a Venti Caffe Verona:
- Should You Still Hold Starbucks?
- Stocks Fools Love: Starbucks
- Did Starbucks Really Disappoint?
- David Gardner's 5-Part Interview with CEO Jim Donald
Fool contributor Rich Duprey is waiting for Starbucks to team up with Coors Light. He does not own any of the stocks mentioned in the article.
