UPDATE 1-Starbucks ready for deals to boost grocery plan

* CEO eyes acquisitions for consumer goods growth

* Break-up with Kraft looms large

* Shares up 3.3 percent
(Rewrites with CEO comments, share move, graphic link)

By Lisa Baertlein

NEW YORK, Dec 1 (BestGrowthStock) – Starbucks is prepared to make
acquisitions to help accelerate sales of bagged coffee and
other consumer products beyond its cafes, Chief Executive
Howard Schultz told investors on Wednesday.

The brass at Starbucks Corp (SBUX.O: ) says the consumer
packaged goods business should grow faster than the company’s
retail cafes, which total 17,000 globally.

But Wall Street wants specifics on how it will accomplish
that goal, particularly as it works through a messy break-up
with Kraft Foods Inc (KFT.N: ), which has handled sales of
Starbucks packaged coffee and tea in supermarkets and club
stores since 1998. [ID:nN29193436]

Speaking at the company’s investor meeting in New York,
Schultz said the Seattle-based coffee giant was prepared to buy
small and large companies that would help expand its selection
of consumer products. Starbucks shares rose 3.3 percent in
morning trading.

The company wants to sell more Starbucks-branded products,
including packaged coffee and tea, Via instant coffee, bottled
drinks and ice cream through channels ranging from supermarkets
and warehouse stores to restaurants and hotels.

As one example, Schultz said the company’s Tazo tea
business has “significant upside if we pay attention to it and
invest in it.” Starbucks aims to build Via and its Seattle’s
Best mid-tier coffee brand into billion-dollar businesses.

He said Starbucks would also focus on improving margins in
its international cafe business and aim to attract more
customers in the afternoon and evening hours.

For its fiscal year ended Oct. 3, packaged goods accounted
for just 7 percent of Starbucks’ revenue of $10.7 billion. The
company says it has healthy margins and lots of room to run.

Starbucks is also expected to provide more information
about the locations of 400 new international and 100 new U.S.
cafes planned for its new fiscal year.

Earlier this week, Starbucks accused Kraft of multiple
contractual breaches, including mismanaging grocery sales. It
wants to end the union on March 1, ahead of what it says was a
2014 expiration date. [ID:nN28130393]

(For a graphic on the Starbucks-Kraft partnership, click on
http://r.reuters.com/dyf97q.)

In the 12 years Kraft has handled Starbucks grocery coffee
and tea sales, revenue grew to $500 million from $50 million.

Kraft asserts that the deal is perpetual and denied
breaching the contract. It said that if Starbucks wants out, it
must pay Kraft the fair market value of the business plus a
premium of as much as 35 percent.

If the companies do not settle their differences on their
own, it will go before dispute resolution firm JAMS in Chicago.
[ID:nN29193436]

BUYING ITS FREEDOM

The biggest unknown is how much Starbucks might have to pay
for its freedom from Kraft.

Bernstein analyst Sara Senatore said the value of Kraft’s
business could be around $1.2 billion, excluding any premium,
if arbitrators agree that the contract is perpetual. If they
agree with Starbucks that the pact would have expired in 2014,
the value could be less than $300 million, she said.

“We would expect an arbitration award to be below the
perpetuity value,” Senatore said, pointing to the complaints
Starbucks has levied against Kraft.

Baird analyst David Tarantino said the divorce from Kraft
could be a wash for Starbucks, which does not have expertise in
placing products in grocery stores.

“We view the near-term benefits and risks of (Starbucks)
taking over the packaged goods business as roughly balanced,”
he said.

The Kraft deal brought Starbucks revenue of roughly $400
million in its fiscal year ended Oct. 3, according to
regulatory documents. Starbucks makes some profit selling the
roasted, bagged coffee to Kraft, which also pays Starbucks a
separate fee based on grocery sales and other factors.

While revenue from the partnership rose more than 9 percent
in 2010 and more than 8 percent in 2009, analysts say Starbucks
has suffered three years of sequential market share losses.

That was partly due to the success of rivals like Dunkin
Donuts, which is distributed by J.M. Smucker Co (SJM.N: ), and
Peet’s Coffee & Tea (PEET.O: ), which has won fans among a
growing number of people who are brewing coffee at home to save
money.

Analysts declined to estimate how much extra revenue
Starbucks could pick up by taking the business back from
Kraft.

“We believe the Starbucks (grocery packaged coffee) brand
is ripe for reinvigoration,” said Senatore.

Starbucks on Monday told Reuters its new partner for the
packaged coffee and tea business would be privately held Acosta
Inc [ACSTA.UL], which in one year helped Starbucks drive Via
sales of about $135 million.

Ending the deal with Kraft would also break Starbucks’ tie
to Kraft’s Tassimo single-cup brewing system, which is a
distant rival to the Keurig brewer from Green Mountain Coffee
Roasters Inc (GMCR.O: ). Starbucks is not expected to make an
announcement about single-cup brewing on Wednesday.
(Reporting by Lisa Baertlein in Los Angeles and Martinne
Geller in New York; editing by Michele Gershberg, John
Wallace)

UPDATE 1-Starbucks ready for deals to boost grocery plan