SBUX: THE $100MM+ ACQUISITION?

Given recent acquisitions by Starbucks, it seems that management sees baked goods and pre-prepared cold drinks as being significant drivers of Starbucks stores’ comparable sales growth going forward.

We have had reservations about the La Boulange acquisition from the day the news was released.  Our view then was that expanding the La Boulange brand throughout the Starbucks stores' national footprint would be a capital intensive venture with less-than-certain results.  Our stance has not changed in the interim.  A post published on Monday by reputed baker Maury Rubin on his blog, City Bakery Daily, described the Starbucks-La Boulange deal as being “one for the ages” for those “on the ground in bakery land”. 

Starbucks’ rationalization of the acquisition centered on the following points:

  • We see an incredible opportunity to bring the artistry of the best French bakery product to the U.S. marketplace in a similar way that Starbucks bought the romance of the Italian espresso bar to many American coffee consumers for the first time.
  • With this acquisition, we will make an investment in our core part of our business, while also building and romancing the La Boulange brand into the nation's best premium retail bakery cafe experience.
  • Our key strategic goal will be to introduce artisan bakery products under the La Boulange brand into our stores in the U.S., giving customers more reasons to frequent and enjoy their experience during multiple day parts and as a result, drive incrementality within existing and new stores.

Mr. Rubin’s post on City Bakery Daily makes several assertions that seem to bring many of the underpinnings of Starbucks’ above statements into doubt.  His writing suggests that there could be some logistical impediments to Starbucks’ realizing its vision of La Boulange being the nation’s best premium retail bakery café brand.  Here is one paragraph that highlights one important issue facing Starbucks’ vision for the bakery brand.

“Many years ago, when Starbucks first moved into New York City, they asked if City Bakery would consider being a supplier of baked goods. I was completely interested, until I learned the required delivery schedule: orders needed to ship to a central location by 6pm to be sold the next day. In our bakery, then as now, we bake every thirty minutes all morning long. The goal is to have pastry on our counter that was in the oven within the hour when bought. For Starbucks, we would need to have baked 15-18 hours before the fact.”

Clearly, the implication is that for the La Boulange brand to become synonymous with quality, distinguished from other brands of baked goods offered in cafe settings, significant investment will be required.  Mr. Rubin calls it a “Marshall Plan-like approach” in terms of investment in operations.  Our view is that Starbucks is not going to retrofit its stores to bake on site; Mr. Rubin notes that he recently read that the average operating profit margin for bakeries nationally is 3.5%.  The final sentence of Mr. Rubin’s post asks the question all investors in Starbucks need to be focused on; “with $100 million already spent [on La Boulange], will it cost Starbucks tens of millions more to actually get the quality they seek into customer's hands?”

Howard Penney

Managing Director

Rory Green

Analyst