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Starbucks seeks acquisitions to boost grocery plan

Starbucks seeks acquisitions to boost grocery plan
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First Published: Thu, Dec 02 2010. 09 28 AM IST
Updated: Thu, Dec 02 2010. 09 28 AM IST
New York: Starbucks Corp laid out an ambitious strategy for growing sales beyond its cafes, saying it would look to expand its packaged goods business through acquisitions.
Starbucks’ brass believe its packaged coffee, bottled Frappuccino, Via instant coffee and other products sold in grocery stores can grow faster than sales at its 17,000 retail cafes around the globe.
The coffee chain plans to accelerate that growth by taking a bigger role in that business, which includes cutting ties with Kraft Foods Inc, its distributor of Starbucks coffee to supermarkets for the past 12 years.
Chief executive Howard Schultz said at an investor meeting in New York that Starbucks would become “a new kind of company” that takes advantage of its network of ubiquitous cafes, grocery partners and customer loyalty.
Schultz said Starbucks was open to buying large and small companies that would build its consumer products portfolio.
“Inorganic growth will be a bigger part of our future than it has been over our previous 10 years,” said chief financial officer Troy Alstead, referring to acquisitions.
Shares in the company rose 3.6%.
The plan is to debut new food and drinks in cafes for customers to sample, then roll them out to grocers and restaurants, then to hotels. Starbucks uses this model for its year-old Via instant coffee products.
The consumer goods business accounted for only 7% of Starbucks’ total revenue of $10.7 billion last year, but the company said it has healthy margins and room to run.
Frappuccino cold drinks and Tazo teas are billion-dollar businesses for Starbucks, and it is working to take Via and Seattle’s Best to that level.
Starbucks currently only sells packaged goods in 10 of the 54 countries in which it operates.
For its cafe business, China will get most of the 400 new international stores planned this year and will dominate growth for many years to come, CFO Alstead said.
Schultz also said it was “tragic” that speculation in the coffee market, rather than bean shortages, was to blame for the recent rally in coffee prices.
Kraft Breakup Looms
Executives tiptoed carefully around Starbucks’ messy break-up with Kraft. The companies are in arbitration, Alstead said.
The biggest unknown is how much Starbucks might have to pay for its freedom from Kraft.
Bernstein analyst Sara Senatore said the value of Kraft’s business could be around $1.2 billion, excluding any premium Starbucks may be required to pay Kraft, if arbitrators agree with Kraft’s position that the contract is perpetual.
If they agree with Starbucks that the pact would have expired in 2014, the value could be less than $300 million, she said.
“We would expect an arbitration award to be below the perpetuity value,” Senatore said, pointing to complaints Starbucks has levied against Kraft, including that Kraft mismanaged displays and inventory of its coffee.
The Kraft deal brought Starbucks revenue of roughly $400 million in its fiscal year ended 3 Oct., according to Starbucks’ annual report.
Starbucks hopes to end its relationship with Kraft in March 2011. Alstead said he expects the grocery coffee and tea business to add strongly to earnings in 2012 and beyond.
On Monday, Starbucks told Reuters its new partner for the packaged coffee and tea business would be privately held Acosta Inc, which in one year helped Starbucks drive Via sales of about $135 million.
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First Published: Thu, Dec 02 2010. 09 28 AM IST