Starbucks turns to happy hour to draw the crowds

Struggling coffee chain to trial alcohol sales in some US stores in bid to boost profits
Starbucks turns to happy hour to draw the crowds
Starbucks logo
By Bloomberg
Tue 24 Jan 2012 04:47 PM

Bringing happy hour to Starbucks may be easier said than

After experimenting with alcohol sales at six West Coast
stores, the world’s largest coffee-shop chain said yesterday that it will sell
beer and wine in as many as 25 locations by the end of the year. Starbucks,
which has 10,700 US cafes, will also sell fruit-and-cheese plates and focaccia
with olive oil.

The strategy is part of a broader experiment to find ways to
lure Starbucks customers and even non-coffee drinkers into stores during slow
periods of the day, especially afternoons and evenings. The trick will be doing
it without alienating core customers, said Bill Chidley, a Centerville,
Ohio-based senior vice president at Interbrand, a brand consulting firm.

“It makes sense if you think of the way that McDonald’s grew
its business by going into breakfast” and specialty coffees, Chidley said in an
interview. Still, selling alcohol may turn off some families with children, he

“It certainly is going to be controversial,” he said.

The wine and beer initiative is part of an effort by chief
executive officer Howard Schultz to cement a turnaround he engineered starting
in 2008. Starbucks shuttered hundreds of cafes after overbuilding and a
consumer-led recession sent sales and profits sliding.

Sales have rebounded since Schultz reclaimed the CEO post in
2008. Revenue rose 20 percent to $11.7bn worldwide in the year ended Oct. 2,
from $9.77bn in 2009.

Profit more than tripled during the same time. Starbucks has
captured 33 percent of the $26.5bn US coffee and snack shop market, according a
July report from researcher IBISWorld Inc. Dunkin’ Donuts chain has 16 percent
of the market.

The company’s shares climbed 43 percent last year, compared
with a 16 percent gain for the Bloomberg US Quick Service Restaurant Index,
which includes McDonald’s, Krispy Kreme Doughnuts and Wendy’s Co.

In recent years several restaurant chains have sought to
boost growth by transcending their origins.

McDonald’s has successfully moved beyond fast food into
coffee beverages, opening McCafe bistros with earth-tone decor and free Wi-Fi.
McDonald’s also expanded its menu offerings - including fruit smoothies, salads
and wraps - with the aim of attracting people around the clock.

Dunkin’ Donuts has introduced new food to lure folks after
the morning hours.

Starbucks has “plenty of business in the morning,” said Sara
Senatore, a New York-based analyst at Sanford C. Bernstein & Co. The chain
isn’t making full use of its workers and real estate in the later part of the
day, said Senatore, who rates the shares “outperform.”

 “At a certain point,
you need to grow revenue, you need to give people other reasons to come in,”
Chidley said.

The new stores, which will be located in Chicago, Atlanta
and Southern California, will be larger and seat more patrons than regular
Starbucks cafes, Clarice Turner, senior vice president of US operations, said
yesterday in an interview.

At the six stores that now sell alcohol in Seattle and
Portland, Oregon, beer is $5 and glasses of wine are $7 to $9. Starbucks is
creating the bar menu “so it’s relevant to local taste preferences,” Turner
said, declining to be more specific.

In November, Starbucks acquired juicemaker Evolution Fresh
for $30m and said it would open stores selling such drinks as pomegranate
lemonade and protein shakes to broaden its market beyond coffee. San Bernardino,
California-based Evolution sells organic and fresh-squeezed juices at grocery
stores in the US, according to its website.

This month, Starbucks introduced blonde-roast coffee, its
lightest blend yet, in an attempt to attract consumers who don’t want to drink
Starbucks’ signature dark roasts. The company also revamped its coffee
packaging to reflect the new categories - blonde, medium and dark.

Starbucks has had mixed success with new offerings in the
past. The company pulled the plug on a yogurt-based fruit drink introduced in
2008 because it was too complicated to make. In 2006, Starbucks yanked Chantico
drinking chocolate, a Spanish- inspired beverage served in 6-ounce cups,
because the small size and thick drink turned off customers.

Starbucks isn’t considering bringing wine and beer to the
whole chain, Turner said.

“It won’t be at every Starbucks store ever,” she said.

Still, Starbucks has the potential to put beer and wine in
at least 10 percent of its stores, Peter Saleh, a restaurant analyst at Telsey
Advisory Group in New York, said in an interview.

“I doubt that this is just an opportunity for 100 or 200
restaurants,” he said. “I don’t think they would distract themselves with
something that would be so insignificant to their bottom line.”

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