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Starbucks Goes Into the Bakery Business

The Exchange

Starbucks (SBUX) is spending a bit of bread to get into the bakery business: The coffee giant plans to lay out $100 million in cash to purchase San-Francisco-based Bay Bread and its La Boulange brand. This is the largest acquisition Starbucks has made yet (its purchase of Seattle Coffee Co. for $81 million in stock previously held this title), and it speaks to CEO Howard Schultz's desire to better-satisfy hungry customers.

The company referenced customer demand for "more wholesome and delicious food options" when it announced the deal on June 4, and it seems the La Boulange menu -- which, along with organic breads, includes everything from warm goat cheese salads to flank steak sandwiches to mac 'n' cheese with truffle oil -- might help achieve such a goal.

Food sales at Starbucks have already jumped in the past couple of years, and its culinary offerings bring in about $1.5 billion of its annual U.S. revenue; its current menu varies by region (food is shipped in by local suppliers), but the choices in general have been criticized by some customers.

Tastier Food on the Horizon?

An article in the L.A. Times quotes one customer as saying, "They charge a lot for it and put it in a fancy wrapper, but it's basically airplane food." And one commenter on a Starbucks-themed string on Chow Hound noted, "While the sandwiches sold at Starbucks often have an interesting list of ingredients, they don't deliver on that promise. I found those I tried relatively tasteless, extremely skimpy, and outrageously expensive for what they were."

Ouch! Perhaps this acquisition, which is expected to close later in the year pending regulatory approval, will drive customers in specifically for the chow. "After more than 40 years, we will be able to say that we are bakers, too," CEO Howard Schultz said in a statement. La Boulange items will start to appear in Bay area stores first (probably early next year), then roll out nationwide.

The deal may eventually lead to La Boulange products being sold in grocery stores as well, although priority number one should be increasing food sales at Starbucks locations; currently about one-third of purchases at U.S. stores include food.

Shareholders Not Eating Up the News

But while customers may applaud the tastier foodstuffs to come, shareholders were not eating up the news on Tuesday. Shares were down more than 3 percent in late afternoon trade; the company said the deal will dilute earnings by a couple of pennies during the second half of fiscal 2012, prompting some analysts to lower their earnings estimates. Meanwhile, Panera Bread (PNRA), which could see some healthy competition as a result of this deal, wavered throughout the day but was up around 40 cents in later trade.

As of market close on June 4, Starbucks shares were up about 19 percent year-to-date.

This is one of a few big announcements from the company in recent months; late last month it unveiled a first-time product deal with Disney (DIS), and in March it said it would enter the single-serve market with a brewing machine, Verismo, challenging the market leader, Green Mountain (GMCR), and its Keurig machine. March also saw the opening of its first Evolution Fresh juice bar; Starbucks bought the chain for $30 million in November. Add to this the addition of alcohol to the menu at some Starbucks locations, and it's safe to say the coffee king is looking to add a few more crowns to its head.

What do you think? Is this a smart purchase for Starbucks? What's your opinion on the current menu? Does it need a major improvement?