Starbucks Gets Its Juices Flowing

NEW YORK ( TheStreet) -- Starbucks ( SBUX) the world's biggest coffee chain, said Thurdsay that it would make a push into juice sales by buying Evolution Fresh for $30 million. For Starbucks, it's a move into juices, which it sells via chilled drinks like orange mango juice and strawberry smoothies.

In a press release announcing the purchase Starbucks said, "Starbucks will reinvent the $1.6 billion super-premium juice segment, its significant next step in entering the larger $50 billion Health and Wellness sector."

Evolution Fresh, while small, has an impressive juice pedigree. It was started by the Naked Juice founder Jimmy Rosenberg and former Odwalla president Shawn Sugarman in San Bernadino, Calif., in 1993. Currently, the company, which was previously owned by private equity fund Fireman Capital Partners, sells an array of fresh squeezed grapefruit, orange, pomegranate, tangerine and watermelon juice products in food retailers like Whole Foods Markets ( WFM).

Starbucks said that while it expects to first sell Evolution Fresh products in its coffee-selling chains outlets, it will then use the purchase to introduce a new health and wellness line of stores, starting oin the West Coast and planned for early-to-mid 2012. To make the investment pay off relative to expectations, Starbucks said it will invest in distribution and growth of juices products. In a call announcing the deal, Starbucks CEO Howard S. Schultz said, "even though this is a small acquisition in size, it is a significant strategic decision and direction for the company."

Nevertheless, it's a small acquisition for the roaster founded in Seattle's Pike Place market in 1971 and that carries the Starbucks name in homage to a character in Herman Melville's Moby Dick. Overall, Starbucks ended 2011 with $11.7 billion in annual sales and profits of $1.25 billion, both more than 10% increases from a year earlier. Starbucks shares rose slightly on the news to $43.53 in afternoon trading -- its shares have risen over 35 % year to date.

The move is another step in its blueprint to diversify its offerings of coffee and specialty coffee-related drinks to less commoditized businesses as its faced increasing competition from other high-end coffee sellers like Dunkin' Brands ( DNKN) announced in December 2010. Over a year ago, Starbucks rolled out Via, its ready made coffee packs, which Schultz said in a recent earnings call "continues to accelerate and is on its way to becoming a $1 billion business."

In 2011, Via revenue contributed $250 million to sales globally, and the coffee packs are offered in 12 countries, including China. Of Via, "people said it was a crazy idea and then 18 months later tens of thousands of points of distribution on its way to be a billion-dollar business as a result of the success that we enjoyed in our retail stores," Schultz said on Thursday's call.

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Schultz and Starbucks see the premium juices business it will tap into by carrying Evolution as a similar growth opportunity to Via. Overall, Starbucks said that specialty juice sales could reach nearly $2 billion in 2012 and that it's part of a larger $50 billion health and wellness foods category that it expects to tap into.

"The acquisition that we're announcing today is the, in a very strong way, what we're saying to the marketplace is that our intention is to re-invent this category in the same tonality that we reinvented over the last 40 years the basic commodity of coffee. ... We think that we've cracked the code on our ability to create a very unique economic model," said Schultz.

While Schultz is clearly exuberant about the deal, he made an emphasis to stress that it was a targeted and highly thought-out purchase. As the Starbucks M&A team looked at many past deals, Schultz said they have been, "very thoughtful in turning down 99% of the things that we've looked at. Evolution was their first choice."

When pressed by analysts about why he didn't buy a larger company to make its juices push, Schultz demurred about the prospects for juice powerhouses like Jamba Juice. "I don't want to say anything negative about them but I think they drifted to an area of really commoditizing their business and no longer standing for what the independents have done so well," said Schultz.

Starbucks said it would be an all-cash deal and made clear that its quarterly and 2012 earnings targets are unchanged as a result of the deal.

-- Written by Antoine Gara in New York