Analysts React to Starbucks-La Boulange Deal

Restaurant industry experts have mixed thoughts on whether the pending acquisition is the right move for Starbucks

June 6, 2012 | By Lisa Jennings

Industry experts have mixed opinions on Starbucks’ decision to purchase La Boulange.

Wall Street analysts and industry observers on Tuesday had a mixed reaction to Starbucks’ $100 million acquisition of the La Boulange bakery brand, with some praising the potential for revenue growth and others concerned that the coffeehouse giant is losing its focus on coffee.

Starbucks on Monday announced an agreement to acquire Bay Bread LLC and its 19-unit La Boulange bakery café chain based in San Francisco. The move will allow Starbucks to boost food offerings in its coffeehouse stores, as well as grow the La Boulange chain and, eventually, offer branded products in grocery and other retail channels.

One immediate goal of the move is to build food attachment in Starbucks stores with the addition of what company officials described as higher-quality croissants, French pastries, breads and muffins offered by La Boulange. Only one-third of Starbucks transactions currently include food.

Darren Tristano, executive vice president of market research firm Technomic Inc., said the La Boulange brand “fits very nicely with Starbucks’ positioning as a gourmet coffee provider” and the French bakery products are likely to appeal to the coffeehouse chain’s audience.

Tristano said La Boulange’s menu is similar to that of upscale sandwich chain Le Pain Quotidien.

“It’s organic, it’s select meats, and it’s local,” he explained. “It’s very on trend for what consumers are looking for.”

Starbucks could also use the move to incorporate more dishes beyond morning pastries since La Boulange offers items such as sandwiches and quiches. “So there will be more for breakfast, but it will also flow through the day,” Tristano said.

Jeffrey Bernstein, an analyst with Barclays in New York, however, issued a report Tuesday expressing “overarching concerns of distraction from the core coffee platform and/or damage to the existing customer experience.”

Still, over the long term, Bernstein conceded that Starbucks’ pursuit of a bakery platform was a “logical next step” that could increase food sales and drive incremental traffic and daypart growth for the coffeehouse chain.

Starbucks officials declined to offer details on La Boulange’s performance, but founder Pascal Rigo stated previously that revenue has grown at least 10 percent per year since it opened, with 2011 revenue between $60 million and $90 million, according to analyst Andy Barish at Jefferies & Co. Inc.

Barish estimated La Boulange locations average unit volumes around $3 million to $4 million, with remaining sales coming from wholesale distribution to hotels, restaurants and grocery stores.

Prior to the announcement, Rigo had also been planning growth, according to Barish. Another 25 locations were planned by the end of 2012, which would grow La Boulange throughout Southern California.

Starbucks said a 2-cent dilution to earnings is expected this year, with moderate dilution in 2013 as La Boulange food offerings are rolled out beyond the Bay area Starbucks locations.

Barish noted that Starbucks did not give specifics on anticipated pricing for La Boulange menu items in coffeehouse locations. However, he noted that La Boulange prices in the Bay area are relatively high and said he “would expect some premium to the current food program given Starbucks avowed commitment to preserving La Boulange’s freshness and quality.”

Perhaps most beneficial over the long term is the potential for consumer packaged goods, or CPG, growth for the La Boulange brand, said Barish.

“Given the company’s success with VIA and K-Cups, we think this aspect of the acquisition is especially interesting and could be highly incremental in the long term given the potential margin profile,” he wrote.

Bernstein of Barclays, however, was more cautious in response to the CPG potential for La Boulange.

“As for expansion of the existing retail platform and pursuit of the CPG opportunity, we hope Starbucks will learn to crawl before walk, with true visibility limited,” he wrote.

Others were decidedly middle-of-the-road.

David Tarantino of Baird Equity Research, for example, said, “We see strategic value related to potential to upgrade food offerings in Starbucks stores, but we think the possible benefits of this acquisition are roughly balanced with the short-term risks related to acquisition costs and increased operating complexity.”

Most said it remains to be seen whether Starbucks will take food market share from archrival McDonald’s, or bakery-café specialists like Panera Bread or Au Bon Pain.

“It’s not an immediate threat,” said Dave Jenkins, a partner in consulting firm CustomersDNA. “It will be a long road to show whether [Starbucks food offerings] will develop a following.”

Jenkins, however, said Starbucks’ move was necessary to continue growth.

“For them to grow, they either had to get people to spend more at breakfast or to move into other dayparts,” he said.

While Starbucks has long been established as a consumer favorite for coffee, food has not been the coffeehouse chain’s forte, Jenkins noted. As with all quick-service breakfast players, pricing and portability will play a key role.

“How will this be really different from the bakery products they’re selling now?” Jenkins said. “It’s almost like they’re buying a test lab.”

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