Synergy: Think Starbucks, Not Facebook

Past acquisitions could help Starbucks reach its $100 billion target sooner than investors think.

Apr 13, 2014 at 5:00AM

Acquisitions have recently been a hot topic with Facebook's (NASDAQ:FB) purchase of mobile messaging service Whatsapp for $19 billion in February and its purchase of Oculus VR last month for $2 billion.

Both these purchases drew headlines as investors and analysts alike suffered from sticker shock over the prices that Facebook paid.

While these companies were huge purchases, prudent investors should be paying attention to acquisitions that a different company, Starbucks (NASDAQ:SBUX), made several years ago.

Paying $100 million for 19 bakeries
In mid-2012 Starbucks purchased La Boulange, a San Francisco-based bakery with 19 locations, for $100 million.

This purchase would allow Starbucks to begin offering more and better food choices to its customers.

Prior to the La Boulange acquisition Starbucks' food sales only amounted to around 19% of its revenue, and just one in three customers purchased food. Starbucks' CFO acknowledged that the company's food has not always "met expectations," and noted that food sales could represent a higher percentage of the company's revenue in the future.

The La Boulange roll-out is in its final stage with nearly all stores in the U.S. selling the company's baked goods. While it is unclear exactly how much the new pastries will contribute to the company's bottom line, the results look good. At locations where the roll-out has taken place, sales of croissants, "morning buns," and cheese Danishes have doubled.

Juicing returns through fruit
In addition to improving its food offerings, Starbucks saw opportunity in selling fresh juices at its locations. In 2011 the company purchased Evolution Fresh for $30 million.

Evolution Fresh is a high-end juice company that was started by Jimmy Rosenberg, the founder of Naked Juice. The company uses a pasteurization method that applies high levels of pressure to juice in order to kill off pathogenic bacteria. By using this technique the company is able to give its juice a shelf life of 40 days. This longer shelf life has allowed Starbucks to begin selling juices at its stores.

Currently Evolution Juice appears at just over 8,000 of Starbucks' 13,000 locations in the U.S., which shows that the company still has room to grow the brand. Additionally, Starbucks has helped expand the brand by selling the product at Whole Foods and building a larger juicing factory in California. This will put Starbucks in a good position to take advantage of changes in consumer trends.

The next caffeine frontier 
"We're going to bring tea and bring our capability and our understanding of what we've done for coffee to tea." -- Howard Schultz, October 2013.

In 2012 Starbucks purchased Teavana for $620 million. Since then not much has happened between the two companies. Teavana has continued to operate as an independent store brand. Last month, however, Starbucks announced that it will partner with Oprah Winfrey to create "Oprah Chai Tea" which it will sell at both Teavana and Starbucks locations. Additionally the company has started to replace its old teas with Teavana tea. This makes Teavana an increasingly important part of the Starbucks brand.

As this trend continues, investors will likely see growth in tea sales and a subsequent improvement in earnings growth.

Vertical integration and a new revenue stream
Perhaps the most exciting aspect of Starbucks' growth is its move into mobile payments.

In mid-2012 Starbucks invested $25 million into Square, a company that allows consumers and small businesses to make transactions through their smartphones. It also began to accept Square as a payment method at its company-owned U.S. locations.

Prior to that the company had also developed its own app which allows customers to pay for their orders before they even enter its stores.

Currently mobile purchases account for 14% of all Starbucks transactions in the U.S. This is up significantly from the 10% figure that the company had reported less than a year ago.

While Starbucks' acceptance of mobile payments has shown significant growth, the platform has even greater potential.

In an interview on CNBC Howard Schultz stated that the company's mobile payment software was both "flexible and applicable enough outside of Starbucks" and that they were receiving calls from major retailers which had asked about using Starbucks' software.

This gives Starbucks a tremendous opportunity in licensing its technology to other companies.

However, Starbucks does have competition. Last year eBay's (NASDAQ:EBAY) Paypal released Beacon, an app that competes directly with Square and Starbucks' app by allowing customers to make hands-free payments after they walk into stores.

If Beacon gains traction, eBay may win out over Starbucks in the mobile payment wars. However, even with this risk the potential for Starbucks is huge.

If Starbucks can successfully integrate this platform with those of other retailers, mobile payments could represent a significant percentage of the company's business in the future. This opportunity is not represented in the company's current share price.

A bar within a cafe
In 2010 Starbucks began to test alcohol sales in a Seattle store, and it then expanded this test to 25 stores in 2012. Last month the company announced that it will begin to sell alcohol at more stores and that it will eventually sell alcohol at over 1000 locations throughout the nation.

While there are some problems with this strategy, Starbucks has shown that alcohol sales have been, for the most part, very successful in the test stores. Considering the high margins that alcohol brings in and the fact that Starbucks locations tend to be less busy in the evenings, when people are more likely to consume alcohol, the company stands to benefit significantly from this change.

A $100 Billion Company
Starbucks issued a press release in which it said that it aimed to become a $100 billion company. This would take the share price up to $132.30, almost double where it trades now.

Given the company's many opportunities for growth and its successful execution in the past, it is very likely that the company will meet or exceed this number in the next several years. At its current share price investors are not pricing in the multiple opportunities for growth that Starbucks has ahead of it.

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John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Kyle Farrah has no position in any stocks mentioned. The Motley Fool recommends eBay, Facebook, Starbucks, and Whole Foods Market. The Motley Fool owns shares of eBay, Facebook, Starbucks, and Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

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Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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