Starbucks Declares War on Jamba Juice

Imagine General Custer’s dismay if, as the Indians closed in, an Indian Air Force began dropping nukes on his position as well. That image will give you an understanding of what Jamba Inc. (NASDAQ:JMBA) must be feeling these days. Starbucks (NASDAQ:SBUX) is opening its own juice stores. I hope Jamba likes toast, because that’s what it’s going to be.

The fresh-juice market mirrors the trajectory of the bagel craze of the 1990s. It was a great idea, people loved the concept, and there was no barrier to entry. Every time you turn around today, there’s a juice store, a juice bar, or a beverage shop offering juice staring you in the face.

Whole Foods Market (NYSE:WFM) has a juice counter. Starbucks already offered juices. Then it purchased Evolution Fresh juices for a song — $30 million — last November. Starbucks clearly had a plan to take that concept and roll it out into a new type of store, and that’s just what it plans to do.

Evolution Fresh will offer juice, wraps, soups, sandwiches, salads and other light fare. This signals a huge move for Starbucks — it has decided not to sit around while McDonald’s (NYSE:MCD) and Dunkin’ Donuts (NASDAQ:DNKN) expand their food offerings.

I see two results developing from this initiative. The first is increased competition for Jamba, which is already suffering from a crowded market. The company has lost money every year, though those losses are finally expected to vanish this fiscal year. The company remains cash-flow negative, with only $20 million of cash on the books. So this could be the death blow for Jamba, which trades at $2 per share. I’d consider shorting.

However, I’m not crazy about this move by Starbucks. The company’s success has been based on two simple concepts: (1) providing a place for people to hang out and socialize besides work and home, and (2) selling an addictive product.

Evolution Fresh is nothing more than another health-food cafe that sells juice. There’s nothing special or unique about it, it does not solve a problem, and it is not what Starbucks specializes in.

Like bagels and juice stores before it, the concept may burn brightly at first, but then I suspect the effort will become an albatross. Starbucks’ net margins are in the 10% range. Restaurants are lucky if they make 3% margins. I think this is a classic case of Peter Lynch’s concept of “diworse-ification.”

In the end, I suspect this move will significantly harm Jamba but also inflict harm on Starbucks. The difference is the latter will still be an 800-pound gorilla, but the former will be a splattered watermelon.

Lawrence Meyers does not hold a position in any company mentioned here.

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