The Good and Bad of the Cool Caffeine Store's Expansion

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Starbucks' (NASDAQ: SBUX) press release announcing its proposed acquisition of Teavana (NYSE: TEA) reads, “Starbucks Announces Agreement to Acquire Teavana to Globally Transform Tea Industry.” Globally transform the tea industry? Well, maybe that's hyperbole, but this merger would be a big step toward a noted coffee house finding a bigger audience, if it can avoid some common pitfalls.

More Than Just Coffee
Although known for its high-end coffees, Starbucks has sold tea under the Tazo brand since 1999. However, the company has never really been able to make a big brand out of Tazo. That hasn't dulled management's ambitions outside of its core coffee market. Indeed, Starbucks has been rather acquisitive of late, adding Evolution Fresh, a store bought juice brand, and La Boulange, a French style bakery, to its family of brands.

Commenting on the Teavana purchase, Jeff Hansberry, the coffee giant's president of Channel Development and Emerging Brands noted that “The acquisition of Teavana supports our growth strategy to innovate with new products, enter new categories, and expand into new channels of distribution.”

Thus, the Teavana move makes sense, on one level, since the prospects for the company's core Starbucks brand isn't as exciting as it once was. With the ability to sell more products to other retailers, such as tea and juice in the grocery space, the company has a chance to reach customers in venues that haven't been as material to the top line in the past. Moreover, adding French bakery food items allows the company to take its coffee shops to a new level and exploit the La Boulange brand as a totally new concept. Assuming the tea deal pans out, it will also have a tea concept to grow.

The Big Deal?
Adding another brand to the fold, however, isn't likely to be the most exciting thing about the Teavana purchase. More meaningful is the company's material store count. Indeed, with over 300 stores, Teavana has enough of a store base and enough brand recognition that Starbucks won't have to start from scratch or go through the effort of taking a regional brand to the next level. Thus, the company would have three concepts, all of a similar nature: Starbucks, La Boulange, and Teavana.

Note that La Boulange is small and will need a lot more of management's time and effort to expand. So having Teavana over that initial bump is important. The ability to cross sell across the three concepts will also be interesting, if Starbucks can pull it off.

A Good Price
Teavana only recently went public. However, its shares have been stuck in a downward trend, falling over 50% from the high reached early in the year. So Starbucks appears to have stepped in opportunistically. That said, only time will tell if the acquisition works.

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TEA data by YCharts

An Industry Littered With Failure
There are material risks to Starbucks' recent expansion efforts. While going global is a great idea, moving outside of one's niche can, and often has, proven disastrous. Time and again new concepts in the quick service space flame out after coming to market with very high hopes. Boston Market is a good example. Although the company is still around, it over expanded and nearly died before Dow30 member McDonald's (NYSE: MCD) stepped in to buy it. Having turned it around, the burger giant sold it. Interestingly, this isn't he first concept that spent time with or was founded by McDonald's. The company also owned Chipotle Mexican Grill (NYSE: CMG) and a pizza place at one time.

Note that McDonald's divested all of these concepts to focus on its core burger brand. Even Chipotle, a hugely successful Mexican food brand, was jettisoned. Why? Because it is hard for even one of the best operators to keep its focus when it spreads itself too thin (note that Chipotle has also been experimenting with new food concepts, too). Starbucks' efforts could, indeed, result in a lack of focus. It's a risk that investors have to watch for.

Another risk to keep an eye on is overexposure. The best example of this is probably Krispy Kreme Donuts (NYSE: KKD). Once a regional brand loved for its sinful confections, it became a household name in an ill fated expansion effort that brought Krispy Kreme to too many markets and put its products into too many distribution channels. Part of the allure of Krispy Kreme's donuts, it seems, was that they weren't on every street corner and in every grocery store.

Already moving into additional distribution channels, Starbucks' could risk over saturation with its core brand and all of the others it has just added. For example, the La Boulange may play well on the West Coast, but will it take off on the East Coast? Can Starbucks sell La Boulange branded products in all of its coffee houses and still open dedicated bakeries? What if it brings  La Boulange products into the grocery channel, will that tarnish the brand?

A Good Deal, But Execution Counts
At first blush, the Teavana deal looks like a good one for Starbucks. However, execution is going to be important. With the company taking aggressive actions to expand, making all the right moves becomes increasingly more difficult. Remember that Starbucks spent its own time in limbo not too long ago until CEO Howard Schultz returned to straighten things out.

ReubenGBrewer has no positions in the stocks mentioned above. The Motley Fool owns shares of Chipotle Mexican Grill, McDonald's, Starbucks, and Teavana Holdings and has the following options: short JAN 2013 $47.00 puts on Starbucks. Motley Fool newsletter services recommend Chipotle Mexican Grill, Krispy Kreme Doughnuts, McDonald's, and Starbucks. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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