Starbucks Will Win With Wine

Jan.24.12 | About: Starbucks Corporation (SBUX)

Today, Starbucks (NASDAQ:SBUX) announced that it is rolling out alcoholic beverages in a greater number of stores, after having success with the concept at trial locations in the Pacific Northwest. It is now expanding the experiment to locations in Chicago, Atlanta, and California.

The press release states:

Since first introducing the evening day-part concept at its Olive Waylocation in Seattle in October 2010, Starbucks has seen success creating a new occasion for customers later in the day through an expanded food and beverage menu. Five stores in the Seattle area and one in Portland, Oregon currently serve wine, beer and premium food. Late last year, Starbucks announced plans to bring the concept to five to seven locations in the Chicago area by the end of 2012. Atlanta and Southern California will each see four to six stores, also by the end of the year.

This is a great way for Starbucks to solidify its status as the "third place" in the lives of its core customers. These new restaurants will be a warm, inviting place to gather for a friendly, casual drink; in many communities, such an establishment doesn't exist. It will be a great setting for a not-too-formal meeting with a co-worker or business prospect. In many areas, especially in suburbia, it may become the best bar available for young or young-at-heart people.

Though this is a depressing thought, in my current neighborhood, Starbucks would probably become my go-to bar if the setting needed to be somewhat professional, or if my companion doesn't appreciate dive bars. A $5 beer or $7 glass of wine is affordable, when compared with many wine bars or establishments that serve craft beers, and falls in line with the upscale prices that Starbucks customers already choose to pay. These new stores should also do well in areas with large student populations, too; it will finally be possible to be productive while enjoying a beer (that isn't a Keystone Light from your refrigerator).

Not only will this concept strengthen Starbucks' brand and positively impact communities, but it will also increase Starbucks' profits. In normal stores, Starbucks takes in over 70% of daily revenue by 2pm; in new stores, the addition of wine, beer, and food has increased afternoon sales by double digits. While those figures are a bit vague, it seems likely that these additions boost same-store sales by about 10%, and $5-$10 drinks mean that profit probably increases by an even greater amount. (While other costs exist, a bottled craft beer probably costs about $1 and a decent glass of wine may cost $2 or $3, so Starbucks isn't likely to suffer margin compression when introducing these new offerings.) The sales figures, if they remain similar over an eventual large group of participating locations, will be very good for Starbucks shareholders.

Along with Starbucks' apparent initial success, other better-quality eateries have shown that this concept (selling alcohol) is good business. One company that deploys this strategy is Chipotle Mexican Grill (NYSE:CMG); it sells beer and margaritas at many locations. This helps solidify its image as a fun restaurant while differentiating it from Qdoba, the mom-and-pop Mexican restaurant selling only canned soda, or Taco Bell (NYSE:YUM). Additionally, the prevalence of bars, establishments that exist primarily to sell alcohol, is another bit of evidence that suggests that selling alcohol can be profitable.

The financial success of the early trials and the soundness of the concept seem to indicate that Starbucks shareholders may continue to enjoy excellent returns as this concept is expanded. The only questions I that still have are: Why didn't the company think of this sooner, and when is this coming to a Starbucks near me?

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.