* Deal aims to improve food quality, variety
* Should close in fiscal Q4, reduce EPS by $0.02
* Shares down more than 2 percent
By Lisa Baertlein
June 4 Starbucks Corp said on Monday it is buying La Boulange Bakery owner Bay Bread LLC in a deal that takes aim at what long has been seen as its biggest weakness: food.
The $100 million cash deal is also Starbucks' biggest move yet outside of coffee.
The world's largest coffee chain said its first priority is to roll out La Boulange-branded croissants, pastries, muffins and other food in its own stores, starting in the San Francisco Bay Area where the bakery is based.
Chief Executive Howard Schultz called the deal a "significant opportunity and catalyst," saying La Boulange's artisan bakery goods will attract more customers and bolster both food and beverage sales. In a conference call with analysts, he said customers would see food presented in a different way at Starbucks cafes.
Starbucks also plans to expand La Boulange from 19 cafes into a national chain. The bakery will continue to supply its existing restaurant, hotel and specialty grocery store customers. Over time, Starbucks plans to expand such sales.
La Boulange will be the second 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 from majority investor Next World Group, is scheduled to close in the fiscal fourth quarter ended Sept 30. The deal is expected to reduce Starbucks' earnings per share in the second half of fiscal 2012 by a total of 2 cents.
Investments will continue into fiscal 2013, when earnings-per-share dilution will moderate, Starbucks Chief Financial Officer Troy Alstead said on a conference call with analysts.
The company is also working on potential food investments in Europe, Schultz said.
Shares in Starbucks slipped 2.3 percent to $52.65 in extended trading following the announcement, even as some analysts gave the deal a thumbs-up.
Just one-third of transactions at Starbucks' U.S. cafes include food, executives said. 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, they said.
Indeed, 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.
"Their food has always been the thing that people have complained about," Bernstein Research analyst Sara Senatore said. "The question investors will ask is: 'Is this the best way to do it?'"
While many U.S. Starbucks cafes 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. Its pastries, sandwiches and other foods are shipped in from local suppliers and sold from cases in the stores.
"They needed to do something to get control of the products that they sell in their stores ... Buying a bakery where they can start to experiment and start to make a difference - that's going to be huge," Ken Harris, an independent consultant to the food and beverage industry, said.
Analysts said the deal should help Starbucks' differentiate its food from what is offered by fast-food competitors. That would put Starbucks in more direct competition with Panera Bread Co - a fast-growing chain that makes its own breads and pastries fresh each day.
Shares in Panera slipped 1.6 percent to $138 after the deal was announced.