Starbucks Corp (SBUX.O) plans to start a chain of juice bars starting next year, venturing into territory staked out by Jamba Inc (JMBA.O), in its biggest-ever expansion beyond coffee.
The world's largest coffee chain, which has made no secret of its ambitions to expand beyond its staple business, said on Thursday it bought juice company Evolution Fresh for $30 million in cash.
Chief Executive Officer Howard Schultz hopes buying Evolution Fresh, whose products are sold by a handful of retailers, including Whole Foods Market Inc (WFM.O), will give the company a meaningful foothold in the estimated $50 billion health food market.
The first juice bars will open on the U.S. West Coast around the middle of next year, but the company would not say how many were planned. The chain's name has not been revealed and it was not clear whether Starbucks' familiar Mermaid logo -- which recently dropped the word coffee from its design -- would be displayed in the stores, which also will sell food.
The CEO said the moves announced Thursday were the first of many things the company planned for the so-called health and wellness market.
Starbucks is getting into a fragmented market with intensifying competition and potentially lower margins than those enjoyed by its coffee shops.
Jamba, a publicly held juice and smoothie chain, has struggled in recent years. Revenues have slid as companies such as Starbucks and McDonald's Corp (MCD.N) introduced competing products.
Schultz said Jamba suffered after it moved toward a more commodity business and away from what popular independents do well. He argued that some successful independent juice bar operators have annual sales of well over $1 million per outlet.
Analysts said that is far higher than a typical Jamba store and a bit less than an average U.S. Starbucks cafe.
We think we can build a major business, Schultz told reporters on a conference call.
Setting up a regional or even nationwide chain could prove costly and take the company further away from its core competency, analysts said.
It has interesting potential, but I don't know if has the broad appeal that coffee has, said Bob Goldin, executive vice president at food service consultancy Technomic.
But Starbucks is smart enough that, if it's something that doesn't work, they can pull the plug pretty quickly, Morningstar analyst R.J. Hottovy said.
I CHOOSE ... FRUIT
Schultz said demand is coming from people who choose fresh fruit and vegetable drinks as meal replacements, as well as from individuals watching their weight or attempting to bolster their health with dietary cleanses.
New York City's Liquiteria juice bar, for example, says its pressed juices detoxify and rejuvenate.
Seattle-based Starbucks wants to sell a broader range of branded products through its own cafes, grocery stores and other retail outlets -- including juices from Evolution Fresh.
Starbucks took control of its business selling packaged coffee, tea and ready-to-drink beverages earlier this year and has had success getting its products in more desirable spots on grocery store shelves, Hottovy said.
San Bernardino, California-based Evolution Fresh sells fruit and vegetable juices and was started by the founder of Naked Juice, which is now owned by PepsiCo Inc (PEP.N). It uses a heat-free, high-pressure pasteurization process it says retains more of the nutrients in its products compared with using conventional heat pasteurization.
Its products are currently sold in Whole Foods and PCC Natural Markets stores on the U.S. West Coast. Starbucks plans to expand distribution into additional retail channels and sell the products in its own retail stores.
Over time, Starbucks said it plans to invest in Evolution Fresh's facility upgrades, as well as its distribution business.
Starbucks expects Evolution Fresh to operate at a modest loss in fiscal 2012 before breaking even in fiscal 2013. The company, which returned to profit growth in 2010 after a painful two-year restructuring, said its forecasts for fiscal 2012 are unchanged as a result of the acquisition.
Jamba shares were unchanged at $1.66 at the close of Nasdaq trading on Thursday. Starbucks, which is up about 40 percent over the last 12 months, added 1.3 percent to finish at $43.52.