La Boulange Closures Might Turn Out To Be A Positive Move For Starbucks

With strong Q2 earnings for the fiscal 2015, Starbucks Corporation (NASDAQ: SBUX) is focused on its long-term growth.  The company’s  stock rose more than 40% over the last 12 months, and is currently trading at $54.

Three years back, Starbucks announced its decision to acquire La Boulange Bakery in order to cater to the customers’ demand for more food options. ^[1] On June 16 2015, Starbucks decided to close all 23 of its La Boulange retail locations, as well as two manufacturing facilities serving those stores, due to the belief that the La Boulange segment is not sustainable for the company’s long-term growth. However, the company plans to continue serving the La Boulange food at its Starbucks retail locations. ^[2] This strong move by the company might be taken as a step down in terms of food offering, but it is actually a better decision in accordance with the company’s new business strategy. Here’s why:

• La Boulange retail stores are included in the Americas segment of the company’s financial reporting structure. However, over the last 3 years, the revenues from foodservice has remained stagnant. In 2012, when the company acquired La Boulange, the foodservice revenues were 4% of the net revenues. Since then, it has declined to 3% of the net revenues by the end of 2014.
• In 2014, the ‘CPG (Consumer Packaged Goods), foodservice, and other’ segment in the Americas declined by 17% year-over-year (y-o-y) to $39.1 million. The La Boulange, as well the Evolution Fresh stores performed below expectations, despite many strenuous efforts by the company. However, the overall segment rose 10% in 2014, due to strong performance of the consumer goods segment in Europe and the Middle East.
• Apparently, this is part of the company’s long-term plan to double the revenues by 2019 to $30 billion a year. According to the reports by company’s officials, the La Boulange stores do not fit in their long-term business plan.

• Starbucks plans on gradually expanding its in-store food services, and hence, will continue to offer La Boulange products in its stores. However, closures of underperforming La Boulange stores will improve the operational efficiency.
• Furthermore, this move fits perfectly with the company’s strategy to focus on its branded product line, and on digital channels.

With the introduction of Starbucks Reserve stores, Reserve Roastery, and mobile payments, the closing of La Boulange stores will have no effect, if not a positive one, on its financial and operational performance in the coming few years.

See the links below for more information:

• Starbucks to close all 23 La Boulange locations (www.usatoday.com)
• Starbucks upsets San Franciscans with La Boulange closures (www.seattletimes.com)
• Strong revenue growth in China & Asia-Pacific drives Starbucks’ top-line growth in Q2 (www.trefis.com)
• Three scenarios that can impact Starbucks’ stock (www.trefis.com)

View Interactive Institutional Research (Powered by Trefis):
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research

1. Starbucks announces agreement to acquire La Boulange Bakery to elevate core food offerings and build premium, artisanal bakery brand [↩]
2. Starbucks food strategy and La Boulange update [↩]