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Starbucks Should Bake Higher Profits With This Acquisition

Eric Volkman
June 5, 2012

Alors! Starbucks (Nasdaq: SBUX  ) is plunging deeper into the food business with its just-announced acquisition of French-flavored gourmet bakery chain La Boulange. This is a good move by the coffee king, and if done right it should add at least a few cents to the company's bottom line. It's about time, too, as the coffee maker has never really gotten its act together as far as comestibles are concerned.

Want a bagel with that latte... please?
The great competitive advantage Starbucks has over rivals like Dunkin' Brands' (NYSE: DNKN  ) Dunkin' Donuts and McDonald's (NYSE: MCD  ) is its position as the retailer most strongly identified with premium java drinks. What's an advantage can also be a crutch, though, as most customers visit Starbucks only for a hot drink, neglecting the various food offerings on prominent display in front of them. This contrasts to McDonald's, where coffee is typically just one of the purchases being made.

The coffee purveyor has made a mighty effort to shore up those offerings in recent years, putting healthier options and smaller-sized pastries on the menu. This has boosted food sales, but there's still a long way to go; according to the company, vittles currently account for $1.5 billion of company revenue in its American stores. That's not a huge amount, considering the firm rang up total domestic sales of $8 billion in its most recent fiscal year.

Bon apetit!
This is what makes La Boulange a potentially tasty buy. The company was established in San Francisco by a professional baker, Pascal Rigo, and has grown into a 19-location-strong chain in that city's finicky and competitive market. So Rigo and his bakers are obviously good at making stuff people want to eat.

Which is what the coffee giant needs in terms of food. After all, when was the last time any of us heard a friend or colleague rave about the sandwich wrap or banana bread they ate at Starbucks?

The deal looks very favorable for both parties. Starbucks gets not only La Boulange but Rigo as an executive and presumably something like a Chief Baking Officer (technically he'll be the vice president and general manager of the bakery, which is to become a unit of its acquirer).

On a relative basis Starbucks didn't have to break the bank for the purchase. It came out to $100 million in cash, or approximately $0.13 per share. With $2.2 billion in cash and short term investments Starbucks should easily be able to foot the bill. In