Analysts react to Starbucks-La Boulange deal
Wall Street analysts and industry observers on Tuesday had a mixed reaction to Starbucks’ $100 million acquisition of the La Boulange bakery brand, with some praising the potential for revenue growth and others concerned that the coffeehouse giant is losing its focus on coffee.
Starbucks on Monday announced an agreement to acquire Bay Bread LLC and its 19-unit La Boulange bakery café chain based in San Francisco. The move will allow Starbucks to boost food offerings in its coffeehouse stores, as well as grow the La Boulange chain and, eventually, offer branded products in grocery and other retail channels.
One immediate goal of the move is to build food attachment in Starbucks stores with the addition of what company officials described as higher-quality croissants, French pastries, breads and muffins offered by La Boulange. Only one-third of Starbucks transactions currently include food.
Darren Tristano, executive vice president of market research firm Technomic Inc., said the La Boulange brand “fits very nicely with Starbucks’ positioning as a gourmet coffee provider” and the French bakery products are likely to appeal to the coffeehouse chain’s audience.
Tristano said La Boulange’s menu is similar to that of upscale sandwich chain Le Pain Quotidien.
“It’s organic, it’s select meats, and it’s local,” he explained. “It’s very on trend for what consumers are looking for.”
Starbucks could also use the move to incorporate more dishes beyond morning pastries since La Boulange offers items such as sandwiches and quiches. “So there will be more for breakfast, but it will also flow through the day,” Tristano said.
Jeffrey Bernstein, an analyst with Barclays in New York, however, issued a report Tuesday expressing “overarching concerns of distraction from the core coffee platform and/or damage to the existing customer experience.”
Still, over the long term, Bernstein conceded that Starbucks’ pursuit of a bakery platform was a “logical next step” that could increase food sales and drive incremental traffic and daypart growth for the coffeehouse chain.
Starbucks officials declined to offer details on La Boulange’s performance, but founder Pascal Rigo stated previously that revenue has grown at least 10 percent per year since it opened, with 2011 revenue between $60 million and $90 million, according to analyst Andy Barish at Jefferies & Co. Inc.
Barish estimated La Boulange locations average unit volumes around $3 million to $4 million, with remaining sales coming from wholesale distribution to hotels, restaurants and grocery stores.
Prior to the announcement, Rigo had also been planning growth, according to Barish. Another 25 locations were planned by the end of 2012, which would grow La Boulange throughout Southern California.
Starbucks said a 2-cent dilution to earnings is expected this year, with moderate dilution in 2013 as La Boulange food offerings are rolled out beyond the Bay area Starbucks locations.