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Howard Schultz Wants Starbucks to Be the IBM of Coffee

NEW YORK ( TheStreet) -- Starbucks' (SBUX - Get Report) CEO Howard Schultz wants you, his company's shareholders, and coffee drinkers everywhere to know how and why he's spending money.

In talking boldly about relatively small deals -- Monday's $100 million acquisition of bakery La Boulange and the $30 million purchase of juices specialist Evolution Fresh in 2011 -- Schultz is trying to say that after struggling to grow the nation's largest coffee company in the past, he's "cracked the code" on a new model to grow shares and store offerings. It just turns out that the new model is an old one: Schultz's plan is similar in style to the growth path that IBM (IBM - Get Report) has outlined to distance itself from its roots in hardware and grow in data analytics, consulting and IT services.
Howard Schultz in 2005, enjoying one of his five daily cups of brewed 'Bucks.

If investors spend the time to listen to Schultz speaking about the two small acquisitions for a company with nearly $12 billion in annual sales, what they would hear is conviction similar in nature to how IBM plans to grow its annual sales far beyond $100 billion.

Both IBM and Starbucks appear to be making two points to investors and, in a sense to consumers. First, they feel they sell a core differentiated product -- the best coffee & the best in tech business services -- that can organically grow in profitability over the years. Second, both companies hope to find a formula to expand from that core to grow sales without diluting existing offerings.

Growth through consolidation or major store additions has been an obvious go-to, and dubious, growth strategy in the tech and consumer sectors-- for instance, Hewlett Packard's (HPQ - Get Report) acquisition of Compaq in 2001, and in the case of Starbucks, its epic coffee outlet expansion in the 2000s.

Yet Starbucks recent deals make it appear to be as skeptical of this model as IBM. In effect, Starbucks wants to add new business streams without making its coffee brand a commodity product. Nimble acquisitions that don't break the bank backed by multi-year growth initiatives may be the key, and make the selloff in Starbucks shares on the news of its bakery deal seem premature, as well as commentary that the move suggests a hint of "peak coffee" desperation amid Schultz's excitement.

Schultz's Monday afternoon choreography for a $100 million acquisition is worth thinking over carefully.

For those who missed it: On Monday afternoon, Starbucks alerted investors that it would be announcing a move to "further strengthen" its retail business, causing trading in the Seattle-based brewer to spike. At roughly 3:30 pm, Schultz opened a conference call with analysts to unveil his acquisition of La Boulange, a San Francisco-based bakery chain as a "significant next step" in growing Starbucks $1.5 billion selling foods business.

Known to drink four to five cups of Starbucks Aged Sumatra roast a day, some might look at the hoopla over a small deal as cause for Schultz to cut back on the caffeine, when what investors should key on is how Schultz's talk contrasts with what the company was doing 10 years ago.

The most prescient analysis on Starbucks past failings may come from, of all places, comedian Louis Black in a Daily Show monologue. Black proclaimed in 2001 that he'd located the end of the universe when spotting one Starbucks across the street from another.

"What was the gentleman thinking, who stood in the empty lot across from a Starbucks, when he turned to his wife and kids and said 'I have a vision. I am going to build a Starbucks across from a Starbucks?" a perplexed Black joked. The answer: only a person who wants a mochachino from the store across the street but needs a cup of coffee to get there.
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