Starbucks Corporation (NASDAQ:SBUX) has agreed to buy La Boulange, a French bakery chain, in an all-cash deal worth $100 million. La Boulange has 19 locations currently across the San Francisco Bay area and sells its products to several upscale restaurants and hotels.  We reckon this is a smart move by Starbucks as the idea of selling French bakery goods along with its traditional coffee-dominated menu will complement its image of a restaurant chain offering a high-quality dining experience. Even McDonald’s (NYSE:MCD) rolled out bakery items such as muffins, banana breads and cheese danishes earlier this year in select number of outlets to gauge initial response.
We have a Trefis price estimate of $55 for Starbucks, which is about 5% above the market price.
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Offering More Choices
It looks like Starbucks will most likely offer the servings in its own retail stores rather than expand the bakery chain as an independent brand. Restaurant chains are continually expanding their offerings to appeal to a wider consumer base to generate higher revenue per store. Since certain costs such as rent and labor are fixed, additional revenues help increase the profitability significantly.
There is also a rise in demand for restaurant chains such as Panera Breads and Chipotle Mexican Grill (NYSE:CMG) which emphasize on freshness and quality of their offerings and have menus that are overall considered healthier compared to traditional fast food chains such as McDonald’s or Wendy’s. With this acquisition, Starbucks has aligned itself to cash in on this growing opportunity. Besides bakery items, La Boulange also serves salads and sandwiches.
The move could also pay off in the consumer packaged goods segment since Starbucks now has distribution networks set up in the country. The company’s revenues touched $1 billion in 2011 helped by the transition of its business model from in-house retail to direct distribution (i.e. through groceries, drugstores and other retail channels). Starbucks’ Global Consumer Product (CPG) division, which consists of packaged tea and coffee, is one of the fast-growing segments of the company.
Apart from bakery items, Starbucks is also looking to expand into juices. Last year, it bought Evolution Juice in a $30 million cash deal and even opened its first juice bar in the first quarter of 2012.Notes:
- UPDATE: Starbucks to Expand Food Offering With La Boulange Bakery Acquisition, wsj.com, June 4,2012 [↩]