Starbucks’ New Strategy: Will This Acquisition Brew Greater Revenue?
Starbucks (NASDAQ:SBUX) plans to spend $100 million to acquire San Francisco artisan bakery Bay Bread and its La Boulange brand. Bay Bread currently runs 19 La Boulange stores in the Bay Area that sell croissants, pastries, cookies, breads, and more, all using fresh and locally sourced ingredients favored by French founder Pascal Rigo.
The point of the acquisition, Starbucks said Monday, is to meet customer demand for “more wholesome and delicious food options.” It will start by rolling out Rigo’s products at Starbucks stores in the Bay Area in early 2013, followed later by a wider launch.
Starbucks also plans to turn La Boulange into a nationwide chain.
Though Starbucks is all about coffee, food actually makes up one-third of its transactions and accounts for $1.5 billion of its annual revenue in the U.S. Food sales have been growing rapidly in recent years, and have already jumped 14 percent just in the first half of this year.
“Food is a key component of our core business that represents a significant opportunity for continued growth through multiple channels,” Starbucks Chief Executive Howard Schultz said in a conference call announcing the deal. “We believe there is a tremendous opportunity to increase food attachment and, in doing so, drive incremental traffic into our store.”
Starbucks has been working to phase artificial ingredients out of its food products, often in response to patron requests on social media sites and other online venues. In April, consumer outcry caused Starbucks to discontinue use of a dye made from cochineal insects that had been used to color some of its pastries and drinks.
Despite the higher quality food, Starbucks says margins will stay the same. It will be working to expand its own production and distribution facilities, while also partnering with third-party suppliers to develop baked goods for the brand. As it does with its coffee products and ice cream, Starbucks may eventually offer La Boulange products in supermarkets and other non-Starbucks stores.
Though still pending regulatory approval, the bakery deal, being made with Next World Group, an investment firm that owns Bay Bread, is expected to close this fall, during Starbucks’ fiscal fourth quarter. Rigo would be named senior vice president and general manager of La Boulange at Starbucks.
Starbucks shares closed up 3.4 percent to $53.90 on Monday before the bakery announcement. Shares were up more than 55 percent from a year earlier.