Starbucks plans to grow through acquisitions, grocery sales

Now that Starbucks has saturated the U.S. with 11,000 coffee shops, the Seattle-based chain has adopted a new strategy that is more about consumer products than cafes.

Starbucks still wants to expand its international store base — including more than tripling its stores in mainland China to 1,500 by 2015 — but its big push will be in grocery-store sales, Starbucks executives told analysts at a conference Wednesday in New York.

Consumer products like coffee beans and bottled Frappuccino are a small part of Starbucks' business now, generating just 7 percent of its $10.7 billion in revenue last year.

"The big theme was that this company is in transition, becoming a global consumer-products company that was a specialty retailer," said Jack Russo, an analyst for Edward Jones in St. Louis who attended the conference.

CEO Howard Schultz told the analysts Starbucks plans to consider acquisitions "small and large" for its new direction, although he and other officials declined to say what firms the company is eyeing.

There are too many possible acquisitions to guess where Starbucks might start, said William Smead, manager of the Smead Value Fund in Seattle. About 5.5 percent of all the equity money his firm manages is in Starbucks stock. But, he said he likes the idea of acquisitions.

He said he considers them a good use of Starbucks' excess cash, which doubled to $1.2 billion during its last fiscal year, despite its first-ever dividend payments to shareholders.

"Schultz is doing what shareholders want him to do, which is take his vision and ability to manage things way better than other people and attack an area that could be a major product area for them over the next 20 years," Smead said.

One potential target he mentioned was Dean Foods. Based in Dallas, Dean is the largest U.S. distributor of milk, creamer and cultured dairy products, including such brands as Horizon Organic and Land O Lakes. Its stock is trading near a 52-week low, and TheStreet.com lists it among the 10 worst-performing stocks this year in the Standard & Poor's 500 index.

Milk also happens to be a primary ingredient in Starbucks' drinks.

Edward Jones' Russo also said Starbucks' new focus makes sense, "because there's no room for new stores in the U.S."

However, he wonders about the company's growth projections.

Starbucks stock currently trades around $30 a share, about 25 times earnings. The consumer-products companies he follows trade much lower, at 14 to 15 times earnings.

"But then I didn't think they'd get their business turned around as quickly as they have," Russo said.

Melissa Allison: 206-464-3312 or mallison@seattletimes.com