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Starbucks back on expansion path in Americas, China

A sign is seen outside a Starbucks Coffee shop in central London December 3, 2012. REUTERS/Andrew Winning
A sign is seen outside a Starbucks Coffee shop in central London December 3, 2012. REUTERS/Andrew Winning

By Lisa Baertlein

NEW YORK (Reuters) - Starbucks Corp plans to increase the number of its cafes in the Americas by more than 20 percent by opening more than 3,000 new shops there in the next five years as it looks to rely on tea and juice as much as coffee, it said on Wednesday.

The world's largest coffee chain is also finished with acquisitions for now, after buying juice seller Evolution Fresh for $30 million and Bay Bread LLC's La Boulange Bakery for $100 million over the last 13 months. Starbucks also plans to close its $620 million purchase of tea store chain Teavana Holdings Inc by year-end.

The company also announced expansion plans for the China/Asia Pacific region for the next three years.

"We're pretty full up at this time in terms of our resources and capabilities," Chief Executive Officer Howard Schultz said at Starbucks' investor conference in New York on Wednesday. "At this moment in time, we have enough to handle."

Food has long been a weak link at Starbucks, which plans to roll out sweet and savory La Boulange pastries and other goodies at 2,500 of its company-operated U.S. shops by the end of next year. Starbucks also expects to have Evolution Fresh juices in more than 5,000 U.S. stores by then.

Evolution Fresh should be slightly accretive in fiscal 2013 and La Boulange will follow in fiscal 2014, Starbucks' Chief Financial Officer Troy Alstead said.

The company also is experimenting with new retail concepts.

It has opened four Evolution Fresh juice stores and one Tazo tea shop in the United States, and it plans to add "tea bars" to existing Teavana stores.

The goal at Teavana is to replicate the success the company had adding coffee drinks at its early Starbucks stores, which sold whole bean coffee.

"There is always a risk when you take on all these brands," Bernstein Research analyst Sara Senatore said, but she added that Starbucks had mitigated that risk by making deals that fit with its long-term growth plans.

Schultz admitted that Starbucks' growth in 2007 and 2008 - the years before its business plunged with the financial crisis - was "undisciplined." The company is not returning to that prior strategy of "growth for growth's sake," he said.

PACKAGED GROWTH

Starbucks' consumer packaged goods business, which sells such items as whole bean coffee and bottled drinks through grocery stores and other retailers, could one day be as large as the cafe chain, Schultz said.

Investment Technology Group analyst Steve West said he was encouraged that the company is building a "tiered strategy" for those packaged goods, which will broaden their consumer appeal.

Investors are closely tracking Starbucks' new at-home Verismo coffee and espresso brewer, which the company is using to grab a piece of the fast-growing single-serve market dominated by Green Mountain Coffee Roasters Inc and Nestle SA .

Verismo sells for $199 or $399 depending on size and function. It will create a $30 million loss this year but should add to profits in 2015. Starbucks expects to get significant revenue from sales of the coffee and milk pods used with Verismo, which should bolster the packaged goods business.

Jeff Hansberry, Starbucks' president of channel development and emerging brands, said Verismo sales are "in line with our expectations."

CONSTRUCTION BOOM

When Starbucks' fiscal year ended on September 30, the company had 18,066 shops around the world, with just over 12,900 in the Americas. The United States dominates that region and will get more than half of the 3,000 planned new stores that the company announced on Wednesday.

Starbucks expects China to overtake Canada as its second-largest market in 2014. The fast-growing China/Asia Pacific region will have nearly 4,000 cafes by the end of 2013, including 1,000 in mainland China, where Starbucks said it was on track to have 1,500 cafes in 70 cities in 2015.

John Culver, president of Starbucks' China/Asia Pacific business, said sales at established stores in the region remain robust in October and November, following a 10 percent increase in the fiscal fourth quarter that ended September 30.

"We have seen the momentum we had in the fourth quarter carry over," Culver said.

CEO Schultz told Reuters that Starbucks is in talks about paying income taxes in the UK, even though the company has not made a profit in that market for many years. The move following criticism from lawmakers and the media over strategies that let it minimize payments. The company is expected to make a statement about a deal on Thursday.

Starbucks shares closed down 0.6 percent at $50.79 on Nasdaq.

(Reporting by Lisa Baertlein in Los Angeles; Editing by John Wallace, Lisa Von Ahn, Tim Dobbyn and Phil Berlowitz)

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