In its second major acquisition in less than a year, Starbucks recently purchased the La Boulange bakery products fast food chain along with its parent company, Bay Bread.
In the vein of fast-casual leader Panera Bread Company, the 19-unit California chain is an upscale concept that focuses on sandwiches, salads and other breakfast and lunch items served with house-baked artisan breads. The acquisition marks the company’s first foray into fast food and bakery goods retail, offering wide-ranging opportunities for diversification. However, in a time when many major foodservice operators are consolidating their operations rather than branching out, the acquisition carries risks as real as its potential benefits.
Another acquisition, another new category
On the heels of the Evolution Fresh acquisition in November, Starbucks’ national roll-out plan for the La Boulange brand feels familiar: First, the company will incorporate La Boulange-branded bakery goods items into existing Starbucks stores, expanding national brand-recognition among its existing customer base. Next, Starbucks will begin expanding the chain to major cities, eventually pursuing a national footprint. Finally, Starbucks will continue serving La Boulange’s current wholesale customers, which include grocery stores and other retailers, and the company will look into pursuing an expanded retail distribution network in the future. In sum, Starbucks is hoping to bring the French bakery concept to a national US audience in the same way that it introduced specialist coffee shops, applying the Starbucks formula to other promising brands.
After decades of being a single-category brand, the company is suddenly multi-pronged, competing in bakery products fast food, specialist coffee shops, juice/smoothie bars and various retail categories. In many ways, this could be exactly what Starbucks needs, as its US business has been facing threats of saturation for many years. Amidst mounting competition, Starbucks has been losing share in chained specialist coffee shops since 2007, surrendering 13 percentage points over the four-year period, and independent coffee shops are rising in popularity as US consumers seek out differentiated dining experiences. Amidst this tapering growth, Starbucks began paring back outlet numbers in 2008, closing nearly 800 units by 2011. While the company has recently stated that they have no fears of imminent saturation, these recent acquisitions will certainly give them room to expand more quickly without risk of cannibalising sales.
Too much too soon?
That said, diversification—especially at this rapid pace—comes with risks of its own. Starbucks’ strategy hinges on the idea that it can replicate the success of its eponymous brand in any category, but it’s important to note that the context has changed. Whereas Starbucks essentially created a new category for itself, bakery products fast food is already a robust segment populated by innovative players. The niche led fast food in the US in 2011 with 7% value growth, and the space is highly fragmented as nearly two dozen major players battle for share. The segment was outpaced only by fast-casual dining in terms of fast food growth last year, and unsurprisingly, La Boulange straddles both categories, giving Starbucks access to two of the fastest-growing segments of US consumer foodservice. But with that growth comes fierce competition, and it remains to be seen whether being backed by the Starbucks name will be enough to set the new chain apart.
Furthermore, simple participation in new categories isn’t enough to guarantee a boost in company-wide success. The last few years have seen many of the largest foodservice operators streamlining operations in the hopes of boosting profitability, selling off smaller chains in order to spend their time—and capital—improving those with the greatest chance of success. McDonald’s, for example, went through a period of diversification in the late nineties, purchasing stakes in Latin American fast food chain Chipotle Mexican Grill, chicken fast food chain Boston Market and pizza consumer foodservice chain Donato’s Pizza, only to divest each of them by 2006. Yum! Brands acquired fish fast food chain Long John Silver’s and burger fast food chain A&W in 2002, only to sell both off in 2011, and Wendy’s both acquired and divested burger fast food chain Arby’s from 2008-2011. While Starbucks is not a company likely to be discouraged by the idea of swimming against the current, it’s notable that three of its fellow foodservice leaders are actively evolving in the opposite direction.
Bringing the quaint French bakery to the masses
With the inherent risks of diversification in mind, it makes sense to take a closer look at the La Boulange concept and how it fits into the competitive landscape. Despite its similarities to Panera Bread Company, the chain’s San Francisco following insists it is not just another mixed bakery goods clone. The brand incorporates a very high-end positioning and makes ingredient quality a major focus, both in line with current fast-casual trends. Outlets advertise the chain’s use of locally-sourced ingredients, and signs on the walls unapologetically boast that baked goods are made with real butter as opposed to cheaper, less indulgent substitutes. The chain also has a homespun, European feel, with a French-inspired menu and décor, offering consumers a new dining experience. Finally, the chain incorporates a few premium extras that add to its fast-casual positioning, like a complimentary condiments bar featuring home-made jams, honey, Nutella spread, cornichons and olives.
As such, the chain is well-positioned to appeal to fast-casual followers, and its above-and-beyond premium positioning could help it succeed even amidst the encroaching threat of traditional fast food players. However, this success is highly dependent on Starbucks being able to replicate the chain’s current positioning on a national scale. The company enjoys a high level of brand recognition and consumer loyalty in its home market of San Francisco, but local consumers have watched it grow from its origins as a family-owned independent bakery. With this home-grown image playing such a large part in its current positioning, it’s difficult to say how the appeal of La Boulange-branded items will translate to being sold at Starbucks, a brand that’s nearly synonymous with large-scale ubiquity.
And ultimately, the fate of these items at existing outlets is what’s important here. While the La Boulange chain could one affect company-wide sales, it’s currently just a tiny blip on the US foodservice radar. The La Boulange products that will be sold in all Starbucks stores by the end of 2013, however, have the opportunity to immediately affect sales for the massive chain.
According to company officials, one out of every three Starbucks purchases in the US currently contains a food item, and so-called attachment rates have become a major focus. Starbucks has yet to elaborate on the type of new bakery items it plans to incorporate into stores, but an expanded—and improved—selection of sandwiches and baked goods could add significant incremental traffic and increase consumers’ potential daily visits. If national Starbucks consumers come to see La Boulange products as a unique draw to the coffee shop chain, it could yield significant value gains over the long-term.
The bigger picture
This new focus on food by an operator whose flagship chain hinges its positioning on beverages is indicative of a larger trend in US foodservice: Just as fast food operators are adding beverage menus in the hopes of boosting comparable-store sales, and full-service restaurants are incorporating fast-casual elements (such as single-digit pricing on lunch items) in the hopes of driving traffic, the lines that divide specialist coffee shops and bakery products fast food are blurring as a focus on beverages becomes a limiting factor to sales growth.
Both specialist coffee shops and bakery products fast food share many of the same qualities, including a focus on quick takeaway service, a dependence on breakfast, menus featuring coffee and bakery goods and, in many cases, the use of the third-place concept to encourage visits. As a result, these two categories have found themselves battling for overlapping slices of the US population, and are thus evolving toward one another in the hopes of gaining additional share. Starbucks’ acquisition of La Boulange is certainly an extreme example of this, but moving forward we’re likely to see many more iterations of this trend as bakery fast food players seek to increase attachment rates by promoting beverages, and specialist coffee shops do the same with food. In terms of value, however, bakery products fast food is a much larger target, with nearly three times the US value sales of specialist coffee shops in 2011. With this in mind, Starbucks stands to gain significant revenue even by claiming just a small percentage of the competing market.
Ultimately, the outlook for Starbucks is optimistic. While the La Boulange chain itself is unlikely to add any significant value for many years, the addition of premium, branded bakery products in existing stores should not only help the chain harness some of the growth being enjoyed by bakery fast food products, but also add incremental sales and drive traffic through a wider variety of dayparts, both goals that have become integral to the success of US foodservice operators as the recovery continues.