With 18,000 stores tapping out as much coffee real estate as reasonably possible, Starbucks (NASDAQ: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 be offering coffee, scones … and brewskis?
Yes, the world’s biggest chain of coffee houses has tiptoed further into the world of beer and wine (the company already is testing booze sales in the Pacific Northwest), looking to get more round-the-clock revenue flowing from its admittedly-enviable real estate.
The initial reactions from consumers (not to mention investors) have been strong, though hardly uniform. In fact, we’ve really only seen two basic responses, and they’re at extreme opposite ends of the spectrum — people either love it or hate it.
Fair enough. But would it be OK if my response was a mere “Whatever”?
OK, 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 hot demand 18 hours per day, though, so the company’s not getting the maximum bang out of its square footage. And now that the coffeehouse sells every known variety, size, shape and flavor of coffee conceivable to man, the natural progression is expanding the menu in a big way.
Booze 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 bedtime, 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 hadn’t been attracting before. 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 on 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.
See, 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 base. 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 around.
As such, adding beer and wine to the menu might cause another alienation, pitting both of the company’s target markets against one another.
Color Me Disinterested
To be fair, not every Starbucks is going to be offering beer and wine. In fact, the vast majority of them won’t … a critical detail missing from most of the opines. Only a few stores in the United States 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.
Bluntly, I’m surprised the media has cared as much as it has.
Yes, this small experiment could be the model for all its locales in the future. That’s a very distant future, though, and hardly an undertaking the company seems interested in making part of its typical fare anytime soon. 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.
As of this writing, James Brumley did not hold a position in any of the aforementioned stocks.