Starbucks Acquires Bay Bread for $100 Million in Cash

Starbucks Corp. (SBUX), the world’s largest coffee-shop operator, agreed to buy Bay Bread LLC for $100 million in cash, making its largest acquisition to further expand its offering of food with pastries and sandwiches.

The purchase of San Francisco-based Bay Bread and its La Boulange brand will decrease full-year profit by 2 cents a share, the Seattle-based company said in a statement yesterday. The French-themed bakery sells homemade granola, flank steak sandwiches and organic bread, according to its website.

“We are deeply committed to building a national brand” with bakery items, Chief Executive Officer Howard Schultz said during a conference call. Starbucks may also sell La Boulange products in grocery stores where it already sells coffee and tea, he said.

Since returning as CEO in 2008, Schultz has introduced Via instant coffee, wrested control of packaged goods distribution from Kraft Foods Inc. (KFT) and bought a juicemaker to cash in on the health and wellness trend. The company has also recently tried to boost sales by attracting afternoon customers with wrap and noodle boxes and a smaller-portion desserts line.

“It will be higher quality food,” said Peter Saleh, an analyst at Telsey Advisory Group in New York. Starbucks customers “care about the quality of the item” and are “definitely brand-conscious people.”

The purchase is the largest by Starbucks following its acquisition of U.K. coffee shop operator Seattle Coffee Co. for about $81 million in stock in 1998, according to data compiled by Bloomberg.

‘Critical Component’

Starbucks fell 3.5 percent to $52.01 at 9:44 a.m. in New York. The shares had gained 17 percent this year before today.

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.

“Food is a critical component of the core Starbucks business,” Chief Financial Officer Troy Alstead said in a telephone interview. Food, including fruit salads, chicken lettuce wraps and blueberry scones, makes up about 19 percent of sales at Starbucks U.S. stores, he said.

The transaction is expected to close in Starbucks’ fiscal fourth quarter, Alstead said. Pascal Rigo, who opened the first La Boulange store in 1999, will become senior vice president and general manager of La Boulange bakery at Starbucks when the deal is finalized.

Energy Drinks

The purchase extends Starbucks reach further beyond its coffee-shop roots and it will need to explain how much more capital it will deploy as it rolls out Bay Bread products in its stores and expands La Boulange’s network, Saleh said.

Starbucks revenue rose 6.3 percent to $8.04 billion in the U.S. in the year ended Oct. 2. The company’s domestic segment made up 69 percent of revenue last year.

Last year, Starbucks paid $30 million for Evolution Fresh Inc. and has since opened one cafe to sell the flash-pasteurized juice, which it also plans to put in grocery stores. In March, Starbucks said it would sell 60-calorie, green-coffee extract energy drinks called Refreshers. It also owns the Tazo tea and Ethos water brands.

Starbucks has about 17,400 stores worldwide, including more than 10,800 in the U.S.

To contact the reporter on this story: Leslie Patton in Chicago at lpatton5@bloomberg.net

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net

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