Starbucks' addition of booze is a snooze

It's too little, too early to get worked up about the new offerings from the world's biggest coffee chain.

By InvestorPlace Jan 24, 2012 12:32PM
Image: Beer (© Corbis)By James Brumley

With 18,000 stores tapping out as much coffee as reasonably possible, Starbucks (SBUX) has decided to grow its top line -- at least for some of its stores -- by widening its menu in a major way. Soon, at a couple dozen locations in Atlanta and Southern California, Starbucks will offer coffee, scones -- and brewskis?


Yes, the world's biggest chain of coffeehouses has tiptoed further into the world of beer and wine (the company has already been testing alcohol sales in the Pacific Northwest), looking to get more round-the-clock revenue flowing from its admittedly enviable real estate.


The initial reactions from customers, not to mention investors, have been strong though hardly uniform. In fact, we've really seen only two basic responses, and they're at extreme opposite ends of the spectrum -- people either love it or hate it.


Except, it seems, me. I get the basic premise behind the decision. Starbucks has been collecting some of the world's best retail real estate for three decades. Hot, overpriced coffee isn't in demand 18 hours a day, though, so the company is not getting the most out of its square footage. And now that the coffeehouse sells every known variety, size, shape and flavor of coffee conceivable, the natural progression is expanding the menu.


Alcohol is a good choice, all things considered.


Coffee tends to be a morning ritual, and Starbucks has managed to extend acceptable coffee-drinking hours well past lunch. It's a tough sell in many locales late at night, though. Not everybody wants to be highly caffeinated before bed, and a beer is more apt to be relaxing when the sun goes down.


And the profit margins for spirits are as ridiculously high as they are for coffee -- in the 70% range. Moreover, at a proposed price point of $5 and higher a pop, beer and wine at Starbucks don't present profitability questions.


The key here, however, is that the company is gunning for a crowd it hasn't been attracting. Starbucks has acknowledged it expects the maneuver to attract higher-end customers, a segment that's becoming increasingly valuable while the weak economy continues to crimp the middle class and its purchases of $4 lattes.


Starbucks didn't grow from one store in 1971 to more than 18,000 now by accident. These guys have made savvy decisions most of the time over the course of a phenomenal expansion. It doesn't mean every idea is infallible, though, and the transition from "just coffee" to "beer and wine, too" won't likely be as easy as the company assumes.


High-end beer fans tend to be as rabid about how and where they get their beer as high-end coffee fans are about how and where they get their java. Starbucks has spent millions of dollars and several years refining its image and clientele. In successfully doing so, however, it also has become a locale that, by design, might have alienated a beer-drinking crowd. There's just something about the ambiance that doesn't work -- maybe it's too many soccer moms and too many laptops.


As such, adding beer and wine to the menu might cause another alienation, pitting both of the company's target markets against each other.

 

To be fair, not every Starbucks is going to offer beer and wine. In fact, most won't -- a critical detail missing from many discussions of the matter. Only a few stores in the U.S. are slated for alcohol sales in 2012 -- about 0.12% of the company's locales, to be precise. And those stores have been hand-selected specifically because they were ideal fits for that difficult transition to beer and wine.


I'm surprised the media have cared as much as they have. Yes, this small experiment could be the model for all of Starbucks' locales in the future. That's a very distant future, though, and hardly an undertaking the company seems interested in right now. Investors worrying about the impact now -- good or bad -- might find this expanded menu isn't going to matter either way anytime soon.


Pick and choose your battles. This isn't a game-changer.


Starbucks may have a better chance with its customers preferring "blondes" than partaking in a cold one.


As of this writing, James Brumley did not hold a position in any of the aforementioned stocks.


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