Starbucks Expands Bakery Offerings With $100M Acquisition

SEATTLE -- Starbucks Coffee Co. is listening to its consumers and growing its food reach with the acquisition of Bay Bread LLC and its La Boulange Bakery brand. The $100-million, all cash transaction with Next World Group, the majority investor in the bakery business, is expected to close in the second quarter of fiscal year 2012.

In addition to the acquisition, Starbucks has hired French baker Pascal Rigo, who founded La Boulange Bakery. The business consists of 19 locations in the San Francisco Bay area.

With this acquisition, Starbucks plans to introduce many of Pascal's recipes into its U.S. company-operated stores under the La Boulange brand, while also accelerating the expansion of the company's retail footprint over time in key U.S. cities to further build a differentiated brand and customer experience unique to the premium retail bakery café category, according to a release.

"This is an investment in our core business. After more than 40 years, we will be able to say that we are bakers too," said Howard Schultz, Starbucks chairman, president and CEO. "In La Boulange bakery and Pascal, we've found a company and a culinary artist who share our passion for creating premium products, reinventing and elevating an entire product category, and delivering the best customer experience.

"We looked at opportunities comprehensively when making this acquisition and we believe La Boulange is truly unique in terms of visionary leadership, product taste and quality, brand authenticity, bakery capabilities, and potential for growth."

In the past few years Starbucks has turned to its food portfolio for growth opportunities in multiple channels. It has made major enhancements to its food offerings based on customer feedback, including removing artificial ingredients wherever possible and diversifying its portfolio to include smaller portion sizes. Food now accounts for $1.5 billion in revenues in U.S. company-operated stores and has grown by double digits in each of the last two fiscal years, the company said.

"The acquisition of La Boulange bakery will help us to expand day-parts, drive customer loyalty and ultimately grow the overall business through differentiated brand experiences and multiple channels," said Cliff Burrows, president, Starbucks Americas, who will oversee the integration and expansion of La Boulange. "We will leverage our scale and premium product expertise to transform a core part of our business while building La Boulange bakery into a national artisanal bakery brand. And we will do it with an unwavering commitment to maintaining the uniqueness, quality and level of care that Pascal is known for baking into each of his croissants, pastries, loafs, cookies and breads."

In order to bring La Boulange products to its company-operated retail stores in the United States, Starbucks will look to make investments to broaden distribution capacity in select markets, while working closely with outside suppliers to create various La Boulange products for Starbucks stores nationwide. The company will continue to serve Bay Bread LLC's wholesale bakery customers and will evaluate expanding distribution over time.

The deal does the raise question that Starbucks may be straying too far from its core business, according to Bonnie Herzog, managing director, beverage, tobacco and consumer research at Wells Fargo Securities.

"We are intrigued by [Starbucks'] vision in building and expanding the La Boulange brand, bringing its signature 'romance' to this new category. However, we question if [Starbucks] is potentially over-extending its capabilities by acquiring La Boulange, rather than forging a partnership with Bay Breads or another upscale bakery brand and/or developing a proprietary brand," she said. "We also question the potential dilution of the coffee experience given the increased focus on food."