Starbucks Believes M&A Bolsters Company’s Core

September 14, 2012

A pedestrian passes by a La Boulange outlet in San Francisco. Starbucks is paying $100 million for the chain.

Most people flock to Starbucks to buy coffee, Frappuccinos and lattes. But Starbucks is sending out a siren call for customers to add sandwiches and pastries to their java orders. In fact, it spent $100 million to acquire La Boulange, a San Francisco-based bakery with 19 outlets, in June. Integration is slated to begin by early 2013.

How does the hefty acquisition fit into Starbucks’ long-term strategy? The skinny is that to grow revenue, companies must go beyond their core products. Known for coffee, Starbucks has to expand its repertoire in order to boost income. As a result of the merger, La Boulange’s products will be sold at Starbucks outlets and supermarkets nationally.

Starbucks’ springing for La Boulange achieves two primary goals, says Darren Tristano, a Chicago-based executive vice president at Technomic, a food industry research and consulting firm. The first is boosting sales of its baked goods, which only account for about 20% of total sales. The second focuses on the fact that selling La Boulange’s products in supermarkets adds to its line of consumer packaged goods like coffee.

‘We Are Bakers Too’

At the time of the acquisition, Starbucks CEO Howard Schultz said, “This is an investment in our core business. After more than 40 years, we will be able to say that we are bakers too.”

David Tarantino, a Milwaukee-based senior research analyst with Robert W. Baird, says Starbucks views this purchase as a “strategic asset to grow their food sales dramatically.” Currently, about one-third of its customers buy food, and if La Boulange can boost that number to 40% or more, Starbucks will see a return on its investment.

Tarantino says the fact that Pascal Rigo, the founder and CEO of La Boulange, is staying on and joining Starbucks as a senior executive is critical to the acquisition.

“His involvement will help make sure that Starbucks maintains the quality, recipes and execution of its food items as it rolls out nationally,” he said.

Moreover, it allows Starbucks to become more of a fast-casual cafe rather than a quick-service coffee shop. That will let it compete vs. Panera Bread, one of the most rapidly expanding chains in the restaurant industry.

Since Starbucks lures hordes of coffee drinkers, its target clientele will have an opportunity to increase spending. Consumers will be able to buy freshly made croissants, muffins and sandwiches to accompany their beverages at breakfast and lunch, Tristano says. Starbucks will have to develop kitchens in several regional locales to transport the pastries to its outlets and ensure freshness.

In the past, Starbucks has offered panini sandwiches that needed microwave heating. This led to mixed results in sales.“It slowed down service and took baristas away from their specialty,” Tristano said.

But why spend $100 million to acquire 19 bakeries, a premium price, instead of developing their own? “Buying the bakeries accelerates growth,” Tristano said. Panera is expanding quickly and Dunkin’ Donuts offers specialty coffees, so the La Boulange purchase primes Starbucks to vie in a more upscale way against two rivals.

Rather than spend millions in R&D, La Boulange offers immediate help. “They now have a supply chain that can provide its 10,875 U.S.-based stores and create retail products for supermarkets,” Tristano said.

Tarantino says that customers currently spend $1.5 billion on food at Starbucks annually. He says this justified the $100 million price of the acquisition because Starbucks “sees the potential return they might get from having La Boulange products in its cafe.”

Expanding La Boulange beyond the U.S. is a strong possibility. Tarantino said that “Starbucks is a global brand. It’s clearly possible you could see La Boulange outlets outside the U.S. in Asia and Latin America.”

Of course, any major M&A has risks. Tarantino says this purchase could “start to stretch the management bandwidth too far and could lead to management losing focus on its core.”

Global Expansion

Starbucks has said that it wants to retain La Boulange’s identity and not rebrand it as Starbucks. That strategy enables it to franchise the bakery and expand it nationwide, Tristano says. Growth won’t happen overnight and could take several years to achieve, but Starbucks could ramp up revenue by opening many new La Boulange bakeries.

Starbucks faces challenges maintaining its brand. Tristano says it acquired Evolution Juice for $30 million in November 2011 to expand its juice offerings and tackle industry leader Jamba Juice, and despite adding the bakeries, it’s still “a coffeehouse at heart.” It must continue to focus and specialize on the coffee while adding to its repertoire of products.

But Tarantino sees La Boulange spiking Starbucks’ revenue when combined with Starbucks’ ubiquity.

“Starbucks has significant growth potential of its retail brand,” he said. “Coffee is a convenience, and if you have to walk six blocks to find it, it can be too far.”