Will This Risky Move Win Over Starbucks Customers?

Starbucks (NASDAQ:SBUX) is taking its non-coffee expansion seriously and is reportedly spending $100 million in cash to buy San-Francisco-based Bay Bread and its La Boulange brand. The company said it was acting on feedback from customers, who asked for “more wholesome and delicious food options.”

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Food sales have been growing at Starbucks, bringing in about $1.5 billion in revenue. However, customers have largely criticized the quality of the fare and the limit in options. The La Boulange menu includes such items like organic breads, goat cheese salads, flank steak sandwiches and mac ‘n’ cheese in truffle oil, which may help appease the demand.

“After more than 40 years, we will be able to say that we are bakers, too,” Starbucks chief executive Howard Schultz said in a statement about his company’s largest acquisition yet. It had earlier bought Seattle Coffee Co. for $81 million in stock.

“Food is a key component of our core business, which represents significant opportunities for growth,” Schultz added. “Our food sales have grown by double digits in each of the last two fiscal years, and La Boulange will be a significant catalyst to grow it even further.”

He added that one-third of Starbucks’ transactions now have a food item attached.

La Boulange items will reportedly start appearing in the San Francisco Bay Area sometime early next year and eventually roll out nationwide. The acquisition is expected to dilute earnings by two cents a share in the second half of this year.

Analysts expressed cautious optimism about the deal. “[I]n the long-term, we believe the pursuit of a bakery platform a logical next step, helping drive increased food sales, incremental traffic, and daypart growth in SBUX stores,” Bernstein wrote. “As for expansion of the existing retail platform and pursuit of the CPG [consumer packaged goods] opportunity, we hope SBUX will learn to crawl before walk, with true visibility limited.”

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