Starbucks: "Cheers" Brand Extension
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Starbucks (NASDAQ: SBUX) was a pioneer in the "Experience Economy." It turned a commodity like a cup of coffee into a treasured ritual. Later, Target (NYSE: TGT) leveraged shopping as an experience to take on the drab big boxes like Wal-Mart (NYSE: WMT). And that's exactly how Sephora came to dominate cosmetics in retail.
Therefore, it's a safe bet that Starbucks can go the distance in making the brand extension from the Starbucks experience of coffee in the morning to the experience of wine and beer in the evening. On Monday, it announced this move. That will start out in a handful of locations such as Chicago and Atlanta. It had been tested out in 2010 in Starbucks hometown Seattle and Portland, Oregon. By the end of 2012, the concept will be in 25 locations, but not made standard. At least not yet.
Call this "Cheers" for the more sophisticated crowd. Those consumers have already developed the habit of hanging out at the local Starbucks, sipping upscale coffee, talking, and using the WiFi for their laptops. Since its nearest competition McDonald's Corp (NYSE: MCD) and Dunkin' Donuts (NASDAQ: DNKN) aren't experience-economy players, it wouldn't be easy for them to follow Starbucks into serving alcohol. So, the joking around that Mickey D and Dunkin' are next to have customers bellying up to the bar doesn't make business sense. The problem for all three in the coffee space has been the fall-off in traffic after around 2 P.M. This is the solution Starbucks is trying.
The stock closed down 1.7 percent at 47.34, with a 52-week range of 30.75 to 48.39. When a strong brand risks change, the market becomes uneasy. But Starbucks, like all players in the experience sandbox, is protective of what customers have come to expect. More to the point, and this should cheer up investors, the margin on most alcoholic beverages is excellent. According to Sanford C. Bernstein & Co. analyst Sara Senatore, it's about 75 percent, reports BLOOMBERG BUSINESS WEEK.
A glass of wine at Starbucks sells for about $7 to $9 and beer about $5. There will also be revenue from upscale finger food like cheese and bread, served on real china. Starbucks will make plenty of friends in this venture since the wine it uses will be bought local as will the cheese. That purchasing policy anoints the experience as green. The glass plates aren't only a classy but also a green touch. Here's a scenario. One evening, three buddies swing by Starbucks in Atlanta. They settle in. That totals nine wines @$63 and the kind of dinner drinkers put together @$42. No, they probably won't do that a lot but if groups do it often enough @$105, that sure makes the experiment seem worth any risk. The margin is about $78.75.
Another move Starbucks plans is to ramp up its presence in China. According to Leo Sun at INVESTORSGUIDE.COM, it will boost the number of stores in China from the current 470 to 1500 by 2015.
Motley Fool newsletter services recommend McDonald's, Starbucks and Wal-Mart Stores. The Motley Fool owns shares of Starbucks and Wal-Mart Stores. janegenova has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
