Starbucks Buying San Francisco Bakery

Starbucks Corp said on Monday it is buying La Boulange Bakery owner Bay Bread LLC for $100 million in cash in a deal that is its biggest move yet outside coffee and takes direct aim at what long has been seen as the company's biggest weakness: food.

The world's biggest coffee chain said its first priority is to roll out La Boulange croissants, pastries, cookies and other food in its own stores. It also intends to build the 19-cafe San Francisco Bay Area operator into a national chain.

La Boulange will be the second retail business Starbucks has acquired in less than a year. It bought juice seller Evolution Fresh for $30 million in cash in November and opened the first in a planned collection of Evolution Fresh juice bars in a swanky Seattle suburb in March.

Starbucks' acquisition of Bay Bread is scheduled to close in the fiscal fourth quarter ended Sept 30. It is expected to reduce earnings per share in the second half of fiscal year 2012 by a total of 2 cents, Starbucks Chief Financial Officer Troy Alstead told Reuters.

Shares in Starbucks slipped 2.6 percent to $52.50 in extended trading following the announcement about the deal.

Food now accounts for about 19 percent of Starbucks U.S. store business, or about $1.5 billion in annual revenue at domestic, company-operated stores.

Despite the fact that two-thirds of transactions at U.S. Starbucks cafes do not include a food purchase, the category has grown by double-digit percentage rates in each of the last two fiscal years within the company, Alstead said.

"There's still a huge opportunity for us to do more," Alstead said.

The CFO expects that offering higher quality and more variety in the food department will perk up sales overall.

"As more traffic comes in to our stores, we know that if they're buying food, there's an opportunity for them to buy a beverage," Alstead said.

While many U.S. Starbucks cafe have food warming ovens, none have kitchens. That has allowed the company to focus on cranking out high-profit drinks, but has restricted efforts to make its food more appealing.

The chain has tweaked some of its food to make it healthier and tastier, but its pastries, sandwiches and other foods are shipped in from local suppliers and sold from cases in the stores.

During the morning rush in many U.S. cities, it is not uncommon to see office workers carrying a drink from Starbucks and a bag of food from rivals like McDonald's Corp or Dunkin' Donuts.

The La Boulange deal should help Starbucks' differentiate its food from what is offered by fast-food competitors. At the same time, it could put Starbucks in more direct competition with Panera Bread Co - a fast-growing chain that makes its own breads and pastries fresh each day.