Starbucks buys Bay Bread to improve food items

(AP) NEW YORK - Starbucks Corp. (SBUX) is looking to expand its food business with a $100 million cash deal to buy a small bakery chain.

The Seattle-based coffee shop chain says baked goods from La Boulange will start replacing its current lineup early next year, starting with iconic French pastries such as the croissant.

Starbucks also says it plans to make the San Francisco-area bakery into a national presence in the years ahead.

"We'll take it one store at a time, starting in metropolitan areas around the U.S. where there's demand," said Cliff Burrows, president of Starbucks Americas.

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For now, Burrows said the primary objective of the deal is to meet growing customer expectations in terms of food quality.

Food has become an important part of Starbucks' revenue stream in recent years, with the segment now generating $1.5 billion a year. About a third of the purchases in its U.S. locations include a food item.

La Boulange, which also serves salads and sandwiches in a casual sit-down setting, has 19 locations in the Bay Area.

The deal positions Starbucks to enter a fast-growing segment of the restaurant industry currently dominated by Panera Bread Co. (PNRA), which offers freshly baked bread, sandwiches and salads in a sit-down setting for slightly higher prices than most fast-food chains. St. Louis-based Panera has about 1,500 locations, up from about 1,000 five years ago. Sales have grown by 73 percent over that same time, according to food industry researcher Technomic Inc.

With the acquisition of La Boulange, Starbucks says it hopes to popularize the French bakery experience in the U.S. the same way it brought the experience of the Italian espresso bar to the masses.

"After more than 40 years, we will be able to say that we are bakers too," CEO Howard Schultz said in a statement.

The acquisition of Bay Bread LLC, the parent company of La Boulange, is expected to close in the fourth quarter and dilute Starbucks' earnings by 2 cents per share in the second half of the fiscal year. For the full year, Starbucks has said it expects earnings per share to be between $1.81 and $1.84.

As Starbucks faces increasing competition from fast-food chains serving specialty coffees, the company has increasingly tried to increase its profits through an expanding mix of consumer products, such as its ice cream and Tazo-branded K-Cup portion packs.

This holiday season Starbucks plans to sell a single-cup coffee machine called Verismo that lets people brew lattes and other drinks at home. And moving beyond its iconic cafes, the company earlier this year announced plans to open its first Evolution Fresh Inc. juice store.

Starbucks shares rose $1.75, or 3.4 percent, to close at $53.90. They fell $1.40 or 2.6 percent in after-hours trading following the announcement of the La Boulange deal.