Starbucks Happy Hour May Risk Alienating Some Customers: Retail

Bringing happy hour to Starbucks Corp. (SBUX) may be easier said than done.

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 U.S. 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 said.

“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 $11.7 billion worldwide in the year ended Oct. 2, from $9.77 billion in 2009. Profit more than tripled during the same time. Starbucks has captured 33 percent of the $26.5 billion U.S. coffee and snack shop market, according a July report from researcher IBISWorld Inc. Dunkin’ Brands Group Inc.’s (DNKN) Dunkin’ Donuts chain has 16 percent of the market.

Shares Advance

The company’s shares climbed 43 percent last year, compared with a 16 percent gain for the Bloomberg U.S. Quick Service Restaurant Index, which includes McDonald’s (MCD) Corp., Krispy Kreme Doughnuts Inc. 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.”

Give a Reason

“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 U.S. 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 Inc. for $30 million 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 U.S., according to its website.

Revamped Packaging

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.”

To contact the reporter on this story: Leslie Patton in Chicago at lpatton5@bloomberg.net

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net

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