Starbucks chooses the takeover option to diversify into baking

Starbucks has just made its largest-ever acquisition, paying $100m for San Francisco-based Bay Bread.  The acquisition is part of Starbuck’s strategy of diversifying its product offering and boosting the importance of food at its 17,400 outlets worldwide.

Bay Bread owns the La Boulange brand, which means that pastries and other bread products will now be sold alongside “Via” instant coffee, a number of juice offerings and an increased number of food choices.

According to a report in Bloomberg:

“La Boulange bakery operates 19 retail stores in the San Francisco area and sells its products in restaurants, hotels and grocery stores, according to the statement. Besides selling the bakery’s food in Starbucks cafes, Starbucks will expand La Boulange locations nationwide.”

Bay Bread is Starbucks’ largest acquisition to date, surpassing its 1998 takeover of Seattle Coffee Co., a UK based coffee chain, for $81 million (a transaction I advised Seattle Coffee Co management on - great fun at the time!).

It follows another recent takeover - in 2011 Starbucks bought juice company Evolution Fresh and announced plans to open a whole new chain of stand-alone juice and sandwich shops.

Will shareholders welcome the takeover of Bay Breads? Has Starbucks paid too high a price for the deal? Time will tell, but Starbucks shareholders have enjoyed a significant improvement in shareholder value since Howard Schultz returned as CEO in early 2008. Schultz started implementing his turnaround plan in 2009 and since then Starbucks’ share price has risen by over 500%. I suspect they will give him the Board the benefit of the doubt on the takeover.

I’ll let Schultz end this blog entry with his own take on the strategic motives behind the takeover of Bay Bread: he is quoted at the announcement:

“After more than 40 years, we will be able to say that we are bakers too,”

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