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[15 comments]

Starbucks Buys a Bakery

June 5, 2012

Starbucks has the coffee thing down pretty good, but food — not so much. Now, it appears as though that is going to change — and watch out Panera Bread.

The coffee giant announced yesterday that it has entered into a definitive agreement to acquire Bay Bread, LLC, operator of the 19-store La Boulange bakery chain.

Starbucks also hired Pascal Rigo, French baker and founder of La Boulange, to run the bakery business which also sells its products in upscale restaurants, hotels and specialty grocery stores in addition to its own locations.

The goal over time is for Starbucks to sell La Boulange products in its stores while also growing the bakery chain beyond its San Francisco Bay area home.

"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 a press release. "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."

Food currently represents about 19 percent of Starbucks' total business and has been growing at double digit rates in recent years, according to the company.

"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. "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."

"La Boulange believes in whole foods made from the freshest ingredients, including specialty grain, European-style butter and locally sourced produce," said Mr. Rigo. "We weigh, mix, divide, roll, cut, bake and care about every croissant, cookie, pastry, loaf and bread that goes in our pastry case and we are looking forward to sharing our passion with Starbucks loyal and discerning customers."

Jeff DeGraff, a management professor at University of Michigan's Ross School of Business, told USA Today, the deal "makes perfect sense. Starbucks has to have a premium pastry product to go with its coffee if it wants to occupy the premium cafe space."

FINANCIALS:     [NASDAQ:SBUX] [ ]

Discussion Questions:

Discussion Questions: What do you think of Starbucks' planned acquisition of La Boulange Bakery? Do you agree that Starbucks needs a premium pastry product to go with its coffee? What do you see as the key challenges and opportunities of running the La Boulange chain?

While we value unfettered opinion, we urge you to show respect and courtesy for people or companies about whom you comment. Keep in mind that this is a public, professional business discussion. RetailWire reserves the right to edit or refuse the publication of remarks that we deem unsuitable. We may also correct for unintended spelling and grammatical errors.

Instant Poll:

How successful/unsuccessful do you expect Starbucks acquisition of La Boulange Bakery to be over the long haul?

Comments:

This is a good move for Starbucks that will enable Starbucks once again to put more distance between them and their nearest competitors. Premium baked goods will do wonders with lattes and Starbucks customers will have yet another reason to visit their favorite green stores at least once every day.

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David Biernbaum, Senior Marketing and Business Development Consultant, David Biernbaum Associates LLC

Starbucks will find that the new bakery portion of their business will be more difficult to operate and manage than the coffee segment. The complexities of bakery, I believe, are more challenging beginning with the actual baking process to contending with very short shelf life of the products.

Having total control over fresh, high quality bakery products will add greatly to the Starbucks experience if they can master it. My guess is that they will only be able to add these products in their larger metro areas where they can afford to have bakeries. I wish them well.

Art Williams, Retail Marketing Consultant/Analyst, Independent

Brilliant! But, it is not a matter of needing a premium pastry to go with its coffee. It is matter of business strategy. Most acquisitions don't work. They lack strategy, they lack thought and they are often focused on market share or efficiencies of scale that never evolve.

This one is all about scope. It enhances every aspect of the Starbucks business. It adds strength to the Starbucks franchise. Starbucks can provide capital to extend the bakery business independent from the coffee business. And it even provides a platform to further build Starbucks already billion dollar supermarket business.

In my M&A course, I tell the students that the most important part of a successful acquisition is the strategy work that goes into the decision of what companies to go after. We do SWOT, Porter's 5 Forces and PESTL, not as snapshots, but as dynamic exercises of before and after the proposed acquisition. This one would show enhancement for Starbucks on every measure.

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Gene Detroyer, Professor, Independent

Other QSRs have scaled by scaling back on quality. I am glad to see Starbucks is committed to quality, freshness and a premium offering with this acquisition. The quality and costs of your baked goods shouldn't simply be a line item on a spreadsheet at head office. Quality is a brand ambassador and a guarantor of business continuity and future growth. Good for you Starbucks, your customers will be pleased (and ain't that the point?).

Fabien Tiburce, CEO, Compliantia, Retail Audit & Task Management Software

Premium coffee has made Starbucks rich and wise,
And see a pastry future through La Boulange eyes,
It will make its pastry offerings more handsome
But expect a Starbucks stop to cost a king's ransom.

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Gene Hoffman, President/CEO, Corporate Strategies International

This is very positive for La Boulange Bakery as they go from a small number of outlets to a worldwide distribution channel of around 20,000 locations. The success of the acquisition will be in how they leverage the strengths of the bakery within the Starbucks network and brand. I look forward to getting tasty baked goods of high quality to match the coffee.

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Larry Negrich, Vice President, Marketing, nGage Labs

Finally. Starbucks is solving its pastry problem. Their experience with food retailing will help them preserve and expand the asset they bought. It makes sense.

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Liz Crawford, VP, Strategy & Insights, Match Drive

The strategy is sound -- bringing two premium product groups together. And, premium baked goods alongside a premium cup of coffee will further tie Starbucks customers to the chain.

The challenges and opportunities are going to lie in the operations and culture phases for the company. Operationally, Starbucks will have to find the magic of making a regional chain scalable across broad areas of the country. If they can't make that work, they have likely overpaid for this quality bakery.

The cultural side is often the step that throws off acquisitions, mergers, and consolidations. It has to start at the top, with the 800 pound gorillas (Starbucks President, Cliff Burrows and CEO, Howard Schultz), and the feisty and creative chimp (Pascal Rigo) demonstrating to the entire company their regard for each others' work. The press release paints a pretty story -- executing upon the culture integration is an everyday process for the next two years, until it is ingrained in the cultural mix of Starbucks.

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Roger Saunders, Managing Director, Prosper Business Development

So many cities (mine included) just don't have good bakeries. It's exciting to think that great quality baked goods could be heading to every corner. This seems to be an acquisition that makes good business sense.

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Cathy Hotka, Principal, Cathy Hotka & Associates

The acquisition makes sense from a category expansion perspective and will likely help average purchase. The challenge is, can you keep the same quality and locally sourced focus in 10,000 locations?

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Robert DiPietro, GVP Product Strategy & Business Development, Affinion Group

The purchase of La Boulange bakery is a smart move for Starbucks. It fits well with Starbucks as an upscale brand. The real issue will be how scalable La Boulange is.

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Steve Montgomery, President, b2b Solutions, LLC

As a Bay Area resident, I can tell you first-hand that La Boulange's pastries are awesome. It isn't just breakfast pastries either, they have wonderful breads, sandwiches, and salads that could be great across dayparts.

How will La Boulange's product scale? How will the range fit in with the scope of the Starbucks network? Who knows... but there are ample opportunities to create a defined testing program, first leveraging the clearest fits (i.e., test replacing the breakfast pastries in expanding waves of stores and carefully measuring results) and then moving on to testing other opportunities (e.g., lunch sandwiches, salads, etc.). Done right, Starbucks can be measuring not only the impact of the new products net of cannibalization, by daypart, by customer segment, but also impacts on food satisfaction and service scores.

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Jonathan Marek, Senior Vice President, Applied Predictive Technologies

As a consumer, I've always felt that the pastry case was a relative weak spot in the Starbucks offering. So, I'm looking forward to improved baked goods that will complement the coffee. Given Starbucks proven expertise at taking concepts and rolling them out on a global scale; Panera Bread should definitely be worried that their days of enjoying a market with few direct competitors are coming to an end.

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Martin Mehalchin, Partner, Lenati, LLC

I find this particularly interesting because I recently noted on a trip to Asia the higher quality food options at Starbucks in China and Korea, compared to the US (at least to my own uneducated palate). Nothing wrong with a muffin every now and again, but if you're going all in on morning decadence it should at least be above average.

'erkel'

Essentially, what Starbucks is doing is backwards integrating, so that they can source their baking products from a single provider and have consistent high quality. The challenges that they will face in bakery is managing a perishable good all the way from raw ingredients through production into distribution across a wide geographic area.

Also, I do not know if Starbucks is going to consolidate bakery across the US -- if so, then that would fly in the face of the local approach that Howard Schultz has evangelized over the past few years.

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Mark Price, Managing Partner, LiftPoint Consulting, Inc.

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