In Hindsight, These Acquisitions May Be Genius


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One of the biggest questions investors have had for Starbucks over the past few years is "Where's the growth going to come from?" It led many to believe that Starbucks' best days were behind it. Heck, I even had trouble convincing people here at Fool HQ that it was a good buy a couple of years ago. Thankfully, I had the opportunity to put the Fool's money behind my own research back in February 2011. The stock is a clean double since then.

Strategic acquisitions deserve a good bit of the credit here. While the deals have been debated ad nauseam in the press, management's presentation at the Sanford Bernstein Strategic Decisions Conference last week offered up some clarity on its thinking and how these acquisitions are playing out:

The juice is loose
Premium juice maker Evolution Fresh was added to the Starbucks family in November 2011 for a modest $30 million cash. At the time, it was a curious purchase, but this could turn out to be a nice little value-add. Management sees Evolution Fresh as a straight shot at the health and wellness lifestyle that many Starbucks customers are adopting.

High-pressure pasteurization is the process behind the juice and every Starbucks store in the U.S. will adopt four to eight SKUs for Evolution Fresh juice as the rollout is completed. This rollout is happening now on West Coast and will make it to the East Coast by end of this calendar year. In regard to channel development, Evolution Fresh will also be rolled out to high-end grocery stores nationwide. In fact, it's already in 3,000 stores on the West Coast including Whole Foods Market.

It's all baked in
La Boulange (Bay Bread) was next up in June 2012 for $100 million cash. Management has referred to food as the company's Achilles' heel as it was not interested in functioning as a typical restaurant. Food is viewed primarily as an incremental opportunity to add to the two in every three U.S. transactions that don't have a food item attached. The La Boulange acquisition has given Starbucks an artisan bakery with proven products that it will be able to integrate seamlessly into operations both in its coffee shops as well as stores nationwide. Within 18 months, it will be in every Starbucks store in the country.

Tea it up
Teavana is the most recent of the "big three" deals and probably raised the most eyebrows considering the size of the transaction at more than $600 million in cash. Given that tea itself is seen as a $40 billion opportunity, it's understandable that management would at least consider it. Particularly because Starbucks has already done so well with Tazo Tea. In short, the Teavana acquisition will bring hundreds of new stand-alone Teavana stores across the country in addition to the 300 mall-based locations that are already out there today.

Management is currently developing a "prototype" tea bar in New York and once it feels it has cracked the code in doing for tea what it's done for coffee, it will then begin revamping all the mall-based stores and adding tea bars to every one of those as well as potentially introducing Teavana products in Starbucks stores.

Making sense of it all
At the time, there were many questions about Starbucks and the acquisitions it was making. But looking at it in hindsight, the picture is much clearer as to where management's working to take this business: health and wellness, food and tea. It's as simple as that. Of course, there are still plenty of skeptics out there, but I'm not one of them. Even with its terrific run of late, I think this company is going to do some serious growing over the coming decade.

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Jason Moser owns shares of Starbucks. The Motley Fool recommends and owns shares of 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.

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