Is Starbucks squeezing off more than it can chew?

A timely juice bar acquisition is worse -- and better -- than you probably think.

By Motley Fool Pick of the Day Nov 14, 2011 4:01PM

By Rick Aristotle Munarriz

 

Starbucks (SBUX) turned heads with last week's deal for Evolution Fresh.

 

Paying $30 million for a natural juice company may not seem to move the needle at a company with a market cap more than 100 times greater, but it is worth exploring if Starbucks lives up to its plans to introduce Evolution into its java havens, expand retail distribution, and eventually roll out juice bars.

 

This will be a great deal for Starbucks, but it's important to frame it correctly.

 

There are shortcomings and opportunities that need to be addressed. The biggest loser in this deal has also been misidentified, so let's start there.

 

Two coffee beans walk into a juice bar
Jamba Juice parent Jamba (JMBA) had the misfortune of announcing its quarterly results the day before Starbucks broke the Evolution news.

 

The smoothie chain posted its second consecutive quarter of chunkier-than-expected profitability. It was the first time since going public six years ago that Jamba clocked in with back-to-back quarters of positive earnings.

 

Is Starbucks crashing Jamba's party now that it's starting to get good?

 

Well, there's a massive divide between a fresh juice company and a smoothie shop. Starbucks' first step will be to replace PepsiCo's (PEP) Naked line of fruit juices that it offers in its stores, making PepsiCo the only clear loser here.

 

Once Evolution gets a foothold in the company's stores, convincing new retailers beyond its limited West Coast presence to begin stocking Evolution will be a breeze. Again, this is something that will be a threat to PepsiCo and Coca-Cola's (KO) Odwalla. A refrigerated presence at your local Starbucks or growing shelf space at your neighborhood grocer isn't really problematic to a chain where blenders do the whirring.

 

It's only once Starbucks begins rolling out an Evolution chain of juice bars that Jamba will have to worry, though it's not as if the competition has hurt Jamba. Starbucks and McDonald's (MCD) offer smoothies these days, but Jamba's comps have been positive in each of the past four quarters. Mainstream competition hasn't hurt Jamba. In fact, it has probably helped by educating the consumer. Loose-leaf tea retailer Teavana (TEA) has thrived in recent years. The limited Tazo teas offered by Starbucks have probably helped more than hurt Teavana, promoting a greater interest in premium teas.

 

Unfortunately for Jamba, Evolution as a juice bar concept -- if it does make the logical step from fresh juices to iced up smoothies -- will post a challenge. Starbucks and McDonald's are laughable because they only offer three simple smoothie options. They lack the dozens of blended concoctions and vitamin or wellness boosts that the dedicated chain offers. Evolution will be able to aim there, challenging Jamba's aspirations of being the top banana in healthy active lifestyle brands.

 

Things you'll just have to get juice to
There's a reason why a darling brand with impressive pedigree papers can be had for $30 million.

 

Soda and coffee giants may have gobbled up juice companies over the years, but let's not confuse the margin potential. Unlike cola syrup or coffee beans that are delicious models because local bottlers and coffee shops provide their own water in the creation process, fresh juices present costlier shipping and more time-sensitive logistics than pop and joe.

 

In other words, Evolution won't carry the same kind of markups as the rest of the Starbucks menu.

 

There's also the disparity dilemma. Starbucks baristas won't be squeezing organic grapefruits or extracting wheatgrass juice between runs at the espresso machine. The in-store Evolution offerings will likely be the same bottled beverages that folks can buy at stores. The game will change if and when stand-alone juice bars begin rolling out, but it's not as if folks will associate Starbucks stores as a distinctive place to satisfy a natural juice fix.

 

This is still a great deal for Starbucks
Negatives aside, this is a great deal because the very act of buying Evolution makes it a much more valuable company. The national Starbucks exposure will take Evolution to the next level. Once the bottled fruit and veggie drinks begin showing up at Starbucks in refrigerated displays area grocery stores will want to follow suit. Isn't this why Coke and Pepsi have moved into this space to begin with?

 

The juice bars will be a more fundamental challenge. Growing Evolution into a healthy lifestyle brand will take some weaning off of a Starbucks brand which is an admired name -- of course -- but certainly not one that consumers associate with health.

 

It's there where the blueprint gets risky, but there's no denying that Starbucks will be able to make some serious coin off this investment during the early in-store incorporation and retail distribution push.

 

Longtime Fool contributor Rick Munarriz calls them as he sees them. He does own shares in Jamba. The Motley Fool owns shares of PepsiCo, Coca-Cola, and Starbucks. Motley Fool newsletter services have recommended buying shares of Coca-Cola, PepsiCo, Starbucks, and McDonald's. Motley Fool newsletter services have recommended creating a diagonal call position in PepsiCo. 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.

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