Starbucks Coffee-In Bangladesh-Marketing & Pricing Strategy

INTRODUCTION

Starbucks is known to be the world’s largest coffee company. Withover 17000 locations in over 50 countries the brand haspositioned itself in customer mindset through its qualityproduct, service and environment.

The marketing plan is going to investigate the possible launch ofthe franchise of Starbucks Coffee shop in Dhaka, Bangladesh. Thefocus of the report is the analysis of the marketing and thefinancial forecast of the project to determine the success andreturn of the proposed project.

MISSION AND VISION

The mission is to introduce Starbucks as a franchise of theoriginal Starbucks of Seattle Washington in Bangladesh in orderto deliver the signature coffee and quality experience that hadalways been the trademark of Starbucks. We will focus on makingour Amsterdam store successful by adapting to the needs of thelocal customers while keeping the core Starbucks strengthsintact. This store will set a positive example of corporatesocial responsibility by adhering to our high environmentalstandards and create a positive experience for customers tocreate repeat business.

Vision: We see a world in which we inspire and nurture the human spirit – one person, one cup and one neighborhood at atime.

Mission: To introduce Starbucks, the most recognized and respected brand in the world, in Bangladesh with the highestquality whole bean coffee.

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Starbucks thrives to provide the world with joy and inspire the people to see what we see. We continue to be the most recognized and respected brand of coffee in the world and will never stop providing our consumers with the highest quality of whole bean coffee. Our mission and vision provides our consumers, partners and prospective sponsors with our beliefs and morals with no roomfor misinterpretation.

CURRENT MARKETING SITUATION

The international market of Starbucks Coffee Company is in 49countries with more than 16500 stores. Starbucks was based on theidea that enjoying a cup of coffee is a social experience. Ourproject aims on delivering the same experience in Dhaka byfranchising The Starbucks Company and hence utilizing its brandequity. Bangladesh has recently encountered a boost in theentertainment sector of its economy where social hangouts withfriends and peer have recently captivated the youth culture. Witha few competitors like Gloria Jeans and Coffee World the consumergroup is not left with much of option to diversify theirexperience. Since Starbucks had always stuck with the motto ofdelivering the most expensive coffee in the world our targetconsumer group is the elite social group that either reside orwork in Banani, which is equivalent to the Beverly Hills inBangladesh.

MARKET DESCRIPTION

We would segment our market based on Demographic segmentation.For Demographic segmentation we would primarily focus on the agegroup discrimination. The targeted age groups that lie between

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17-25 are more concerned about the environment and the servicethat comes with the product. It is much easier to develop brandloyalty among this targeted segment. Therefore the venue shouldprovide incidental services like free Wi-Fi zone and couchseating arrangement as they usually accompany in groups. The 25-40 group is all working class and therefore are more concernedabout the product than the experience. Hence in order to satisfythis consumer group we should offer take-away coffee indisposable Starbucks Cup.

ANALYSIS OF STARBUCKS THROUGH SWOT ANALYSIS

SWOT analysis is an excellent tool in evaluating the strength,weakness, opportunity and threat of the proposed projectparticularly because the project involves the risk of penetrationof a foreign franchise into the domestic market.

Strength

Brand equity: All across the globe Starbucks is well establishedas a pioneer in the Coffee Company. This well established brandequity can be easily liquidated to customer equity throughawareness.It provides a range of different quality coffee that has been itsUnique Selling Point in Bangladesh market because the concept isstill not dispersed in the Bangladesh market and it has tosurvive through few competitors who include Gloria Jeans andCoffee World.Extended worldwide network and community helps to generateinsight into consumer behavior and quality expectation therebygiving it an edge against its competitors.

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Weakness

The premium price charged against the product (coffee and otherincidentals) reduces its number of target consumer group becausethe economy of Bangladesh has a lower GDP than the othercountries where Starbucks is dispersed.There had been events of past failure of similar projects whenstarted in Holland because of differentiation on evaluation ofdomestic consumers against a broad spectrum of internationalhomogenous consumer group.

Opportunities

As previously discussed the takeaways in Starbucks customizedparcel bearing its logo could serve as an excellent tool forpromotion among the demographics of its targeted customers. Alsoby providing an excellent and memorable location in adjacent withthe quality product will allow the Starbucks franchise inBangladesh to gain competitive advantage to its customers.Increased revenue with expanding new market base is anotheropportunity for Starbucks.

Threat

The political disruptions in Bangladesh can have an impact on theoperations of the Starbucks coffee shop in Bangladesh. Suchdisruptions can hinder the revenue generation stream and alsohence cause risk if the capital structuring is through non-recourse debt financing.

The stealing/copying of brand name and logo with slight/ minoralteration is a common practice in Bangladesh and there had been

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recent cases and several victims of the same which also includethe franchise KFC.

SWOT ANALYSIS

OBJECTIVES AND ISSUES

Objectives We have set aggressive but achievable objectives for the firstand second years of market entry.

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First-year objectives. During 2014 initial year on themarket, we are aiming for unit sales volume of BDT5,000,000.

Second-year objectives. Our second-year objectives areto sell a combined total of one million units and breakeven early in this period.

Issues

In relation to the product launch, our major issue is the abilityto establish a well-regarded brand name linked to meaningfulpositioning. We will invest heavily in marketing to create amemorable and distinctive brand image projecting innovation,quality, and value. We also must measure awareness and responseso we can adjust our marketing efforts as necessary.

MARKETING STRATEGY

Segmentation:

The segmentation part will be similar to the standard Starbucksegmentation. We will use demographic, psychographic andbehavioral segments. First of all, the demographic segmentationwill focus on age, income and occupation. We see the 15-40 groupas our main customer. This correlates with our own observationsin French and Swiss Starbucks’. This group can be divided in twoother groups. The group 15-25, and the group 25-40. The firstgroup will have a lower income, and probably be students. This isthe youngest generation, and for this segment Starbucks has to behip and modern. The other group is probably working and has ahigher income. The difference between the groups is also that thefirst group will probably use the sitting space whereas the

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second will most likely be customers who make purchases andconsume them outside of the store.

In the psychographic segment we have focused primarily onlifestyles segmentation. This is very similar to the demographicsegment above. The students will have another lifestyle than theworking group. Another lifestyle segment will be the people whodrink coffee, and those who do not drink coffee. This is acrucial segment, because Starbucks has to have an image that youdon’t have to be a coffee drinker to enjoy Starbucks.

The behavioral segment is the most interesting one, and also thesegment that can be the most influenced. It is strong because wecan create new segments. First of all, we will segment customerswith respect to benefit and usage. Benefit segmentation is forthe customers who go to Starbucks because of the Starbucksproducts or Starbucks service. So the segmentation here will be(again similar to the demographic and psychographic) the peoplewho prefer to sit down and enjoy their product and the buy & gocustomers. The usage can be divided into light, medium and heavyusers. We recommend focusing primarily on the high usage segment.The advantage of this type of segmentation, mentioned before, isthat Starbucks can create a new behavioral segment group andthrough this, new customers. This can be achieved throughsegmenting customers based on their desired benefits. A veryrecent example of this, introduced in several Starbucks’ throughthe world is wireless internet. This is an extra incentive to goto Starbucks, because of the creation of benefits drivensegments, in this example, customers who use wireless internet.

Target Market:

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Starbucks strives to provide it consumers with a product thatbest fits the consumer’s needs. To do this we have selected aspecific target market to provide for:

Male and Female Age 15-35 Inner city residence White collar ambiance career Environmentally friendly consumer Generally purchase more than just coffee Latte, specialty flavors, reusable cups

Positioning Strategy

Starbucks has already brand equity therefore the objective is toconvert the established brand equity in international market intocustomer equity in Bangladesh market. Our marketing will focus todeliver the signature coffee and quality experience that hadalways been the trademark of Starbucks.

Product Positioning Quality Ambiance Frame of Reference:

“PREMIUM QUALITY”

Pricing Strategy

Starbucks already has a reputation of having the most expensivecoffee in the marketplace. Therefore we try to retain theStarbucks ideology by following the Market skimming pricing whichfocuses on setting high initial prices to skim revenues layer bylayer from the market. The premium price is justified for theStarbucks quality and image. Also the demographic location of itslaunch in Bangladesh is consistent with the company’s primaryobjective.

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Product Strategy

The main product of Starbucks is its coffee line therefore theprimary object for our promotion would be the Starbucks signaturecoffee. All different coffee variations that are popular inStarbucks would be included in the initial product portfolio.However, depending on sales response amendments could be made.Another important group of products that are served asincidentals in the various outlets of Starbucks include lightsnacks particularly donuts and muffins. Though the popularity ofsuch snacks is still limited but during initial promotion theseline of products would be included in the product portfolio.

The Starbucks franchise in Bangladesh would also allow takeawaysas the classic disposable coffee mugs bearing the logo ofStarbucks will serve as promotion and create awareness amongstpotential target customers.

Distribution Strategy

The coffee shop is located in the posh area of Dhaka city wherethe demographics of the target customer is highest. SinceStarbucks is popular for its high quality and high premium pricethe venue chosen for its launch comply with the overall successof the project. We have selected Banani, Gulshan, Dhanmondi andUttara as our primary locations.

Action Program

June 2014We will launch a sales promotion campaign of BDT 10,00,000 toeducate our target customers through major advertisement inBillboards in the rush areas of Banani, Gulshan, Dhanmondi and

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Uttara. Also promotion can be done through distributing invite tothe Embassy’s situated in the vicinity including othermultinational company’s CEO or other influential people. Theinvite can be accompanied by complimentary coffee sample to hookthe target customer to pay at least a single visit during itslaunch.

July 2014We would increase our sales promotions by crowd sourcing were ourcustomers would be asked to submit a snap of their most nostalgicmemories with their friends in their favorite hangout place atthe company’s new website hosted. This return response will helpus realize our target consumer’s perception of an idealenvironment to enjoy coffee experiences. The promotion willcreate a buzz and would also create awareness of the launch ofthe product. The contest would run for 1 whole month, therebygiving time to disperse the news to our target group. The winnerwill be rewarded with a free one month subscription of StarbucksTall Latte.

August 2014After analyzing the responses from the mob of contestants, ananalyst group will try to evaluate the psychology of theparticipants. They would try to formulate what majority ofconsumers find appealing in a hangout place. This informationwill be processed into the interior of our venue.

September 2014The promotion will run simultaneously with the interior work ofthe project. October 2014Starbucks franchise will be inaugurated with a great responsefrom our target group.

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Budget

Total first-year sales revenue for the franchise is projected atBDT 75 million, with an average wholesale price of BDT 150 perunit and a variable cost per unit of BDT 100 for 500,000 units.Break-even calculations indicate that we will become profitableafter the sales volume exceeds 650,000, which we anticipate earlyin the product’s second year. Our break-even analysis of firstsmartphone product assumes wholesale revenue of BDT 150 per unit,variable cost of BDT 100 per unit, and estimated first-year fixedcosts of BDT 32,500,000. Based on these assumptions, the break-even calculation is as follows:

BDT 32,500,000 / (BDT 150 per unit – BDT 100 per unit) = 650,000 units

THE FOUR P’S

Product

The Starbucks ‘product’ can be divided into actual tangibleproducts (which can be further divided into direct consumptionproducts and merchandise products) and an intangible servicepart. The products will be described first; later on the serviceaspects of Starbucks will be explained.

Evidently, the main product of Starbucks is coffee. That is whatthe chain is known for. All different coffee variations are partof their product portfolio. Other drinks, like tea and softdrinks, are also direct consumption products. When launching theStarbucks location in Dhaka, this group of Starbucks productsshould remain the same as they (especially the coffees) carry theabsolute essence of Starbucks.

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Another important group of products that are directly consumedwithin Starbucks are small snacks. Starbucks chains in the UnitedStates for instance are known for the fact that they also servedonuts, muffins, cake and other snacks that are alike. Theseproducts are quite popular and frequently ordered by customers togo with a cup of Starbucks coffee. One of the reasons for thesuccess of these side snacks is the American culture of havingbreakfast and lunch outdoors. Moreover, these snacks are for someAmerican Starbucks customer’s actual breakfast products. However,the situation in Dhaka, Bangladesh is quite different than in theUnited States due to cultural and behavioral differences. Forinstance, Bangladeshi people are known to be a bit closed andbreakfast and lunch moments are seen as private moments ofquality time, also for business people. When launching Starbucksin Dhaka, without adapting anything, the side, and snack productscould become a bottleneck as sales could be disappointing. Inother words, this product category poses a challenge as theobjective is to launch Starbucks in Dhaka and serious decreasesin any of the product categories could seriously harm thisambitious goal. Needless to say, an adaptation within this snackproduct category should be made to fit our quality standards,behavior and culture. Donuts and muffins could easily stay in theproduct portfolio, but they should not be characterized asbreakfast or lunch products. They should be seen and promoted asside snacks. Different sorts of cakes could also be added, asthey are very popular in Bangladesh to go with a cup of coffee ortea. Products that could be served as lunch could be healthysandwiches and salads. Sweet products should never be promoted aslunch products as they are normally seen in Bangladesh as snacksas opposed to lunch food. On the other hand, one should neverchange a winning formula. It is wise to slightly adapt theStarbucks formula to fit the Bangladesh market, but this shouldnot be overdone, because then Starbucks would run the risk of

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becoming like ‘others’. In other words Starbucks should keep itsidentity and make slight adjustments to serve the Bangladeshmarket best.

Product Quality Variety Sizes Brand

High Quality coffee - Comes from Asia Pacific and other places,offering only the BEST.Variety: Wide selection of coffee, food, tea and more > toprovide customer satisfaction.Sizes: We offer all sizes from tall, Grande, venti and more toaccommodate our customer’s needs.

Brand: “STARBUCKS” … our name is our brand “Starbucks”= premiumquality which is also our strength

Another product category consists of the products that are notimmediately consumed at the spot. Starbucks merchandise, likecoffee mugs, and coffee in packages are important products here.A regular Starbucks customer can purchase his or her own coffeemug or buy the real Starbucks coffee to create the same kind ofcoffee at home to get a consumption experience that matches theone at Starbucks. Fair trade products are quite popular inBangladesh and one of the most consumed fair trade products iscoffee. Another opportunity within this product category isformed by a link with the other, direct consumption, products.This link is given shape by the possibility of launching a savingand bonus system. Almost every popular store in Dhaka uses asaving and bonus system. Starbucks could, for instance, givecustomers that frequently order coffee at Starbucks the

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opportunity to save certain saving units (for instance ‘Bucks’)in order to get free merchandise (for instance a free coffeemug). Also, to fit the notion of servitization: the adding ofservices to make a product a more complete one, one could begiven to opportunity to customize his/her own coffee mug.Evidently, this service should be launched later on and only ifthe coffee mugs prove to be a commercial success.

Another aspect of the Starbucks ‘product’ is the service part.Maybe the biggest part of the Starbucks service is the creationof a very cosy, home-like atmosphere that invokes socialinteraction (which is beautifully characterized by the Americanhit television series ‘Friends’). This intangible atmosphere issupported by certain tangibles like comfortable couches and biglounging chairs. This creation of tangibles is very important asit makes the intangible atmosphere ‘tangible’. This relaxed andfriendly atmosphere is also enhanced by the way customers aretreated by Starbucks personnel. The ordering system does not lookextremely streamlined and therefore sends out a comfortable andrelaxed atmosphere. Ironically, all ‘customization’ of the coffeeand tea is done by the customers themselves at specially designedcorners with sugar, milk and other products. This customer‘freedom’ contributes to the relaxed and cosy atmosphere while italso helps Starbucks to reduce personnel tasks and handle/servemore customers than otherwise would be possible. A possibilitywhen launching Starbucks in Dhaka could be providing a free WiFiwireless internet connection. This service would also enhanceconsumption at Starbucks within certain targeted segments (mainlyyoung to middle-aged people and business people) like, universitystudents in Banani and Dhanmondi area, and it could gently helpkeeping other customer groups out of the Starbucks location(youth hanging on the streets). Therefore it could help Starbuckscreate more of a sophisticated image as WiFi wireless internetconnections are not yet a common service at lunch places and

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chains in the Bangladesh as opposed to other countries. Thispossible service thus provides Starbucks Dhaka with a valuableopportunity.

Price

According to the Economist and CNN/Money a Tall Latte inStarbucks (one of the most ordered coffees) costs in Europearound $3.72, or € 3.10. Our suggestion is to use this price. Wehave several reasons for this. First of all, this is a Talllatte, a coffee what is not going to be popular in Bangladeshbecause of the size. It is too big. So a smaller coffee would bea fraction cheaper, what could result in a price around BDT 320-360. This is a reasonable price for a location in Dhaka. It isstill premium pricing, compared to the competition. We’ve chosento pursue a premium pricing strategy because that is in line withthe Starbucks’ ideology.

We can illustrate this best with the next anecdote:

“What's more, Starbucks already has a reputation for havingthe most expensive coffee in the marketplace. When I leftMoneybox's New York headquarters to conduct research at theclosest Starbucks (a block away), I passed a half-dozenother coffee vendors. There's the guy with the cart whosells the little Greek diner cups for 50 cents; the deliwith the scalding 75-cent generic joe and the thin papercup; the convenience store with $1.00 faux gourmet stuff;and Cosi, where a latte costs $3.59. Only after running thisgantlet could I enter Starbucks, where a java chipFrappuccino runs $4.75.”

D. Gross, Oct.5, 2004

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Price Premium Value Based Pricing Competitors

Premium: Consumer perception > physiological approach strategy-the higher price products = higher quality.Value Based Pricing: Best Quality and serviceCompetitors: Price is slightly higher than our competitorsbecause Starbucks offers more benefits to blow away ourcustomers.

Place

The first Starbucks in Bangladesh will be opened in Dhaka, thecapital city. This choice is rather obvious for several reasons.We quote the Starbucks Marketing policy: 1 “Starbucks customersare people of diverse ethnic, income and age groups with varyingtastes and interests”.

Dhaka is a very diverse, dynamic and busy city. The city wherehistory and future meet each other, the city with approximately60,000 students, 100 ethnicities, lots of large both global andlocal firms, thousands of small firms, ten million tourists peryear, and a city without Starbucks. We see Dhaka as anopportunity for Starbucks, because of the striking similaritybetween the marketing policy of Starbucks, and thecharacteristics of Dhaka.

Place Convenience Speed Responsibility Number

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Convenience: Quick and efficient. 7- ElevenSupermarkets: Sells brewed and whole bean Starbucks coffee suchas Shaw's, Peapod, Whole Foods.Discount Stores: Target > Starbucks mini café while also sellingtheir products.Number: Intensive distribution (being able to shop at anyconvenient store and spend minimum time buying the product).

Whereas the decision of first city in Bangladesh to launchStarbucks was not a problem, it is a lot harder to decide wherein the city we can place the first Starbucks. As you already mayknow, Dhaka is a segregated city in which different customergroups are divided throughout the city. The large amount of thetourists can of course be found in the center of Dhaka. InBanani, Gulshan and Dhanmondi, there some business firms officesand universities. The Gulshan area is known for its primelocation, as most of the foreign officials are living in thisarea. At first sight, this looks the best area to place the firstStarbucks. It is the most popular area, with alarge amount ofpeople, and therefore a large amount of potential customers. Butit is also an area with a lot of problems. Small (sometimes evencriminal) groups create a lot of trouble here, and this couldcreate a negative image for Starbucks. These groups are well-known and last thing a shop wants is such a group inside. This isespecially important for coffee places such as Starbucks, becausethere is a strong chance these groups will tend to go inside.

Promotion Inner city Residents Promotional ads Emphasis.

Audience Target Market

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Channels

Response Sought Stock it Push it Recommend it

Message Point of difference Competitive advantage Message to consumer

Justification of Promotion Young inner city professionals Supermarkets Convenience stores Keep it in stock in convenience store (always available

even if not in Starbucks store) Promotional sales, loyalty programs and free giveaways to

push the Starbucks brand and products Have popular users recommend it to potential and current

users The message we want to get to the buyer is, “ Starbucks

best suits your need, as Starbuck is the best”

Key Success Factors:We cannot iterate enough how much Starbucks strives for success.We believe there are a couple “Success Factors” that contributeto our accomplishments:

Key Success Factors Quality of the products Speed of the buying process Access of the Starbucks products

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OUR OFFERINGS

Drinks: Never a dull sip

We will offer the new Vanilla Macchiato. This multi‐layeredbeverage offers a delightful combination of freshly steamed milk,rich espresso and Madagascar Bourbon vanilla. (It’s just asdelicious iced.) Or indulge in one of our other signaturebeverages—Caramel Macchiato or Hazelnut Macchiato. We will alsotry to introduce some new flavors of coffee for Bangladeshicustomers. Like in India, apart from the usual products offeredinternationally, Starbucks has some Indian style productofferings such as Tandoori Paneer Roll, Elaichi Mawa Croissant,Murg Tikka Panini and Chai Tea Latte to suit Indian customers.

1. Starbucks Iced tea Refreshers Beverages2. Bottled drinks - you can take Starbucks with you wherever

you go.3. Brewed Coffee - Artfully roasted and brewed fresh all day

long, every day.4. Chocolate Beverages - Luxurious hot chocolate for the

sophisticated palate.5. Espresso Beverages - Lattes, cappuccinos, macchiatos, mochas

and much more6. Frappuccino Blended Beverages - the icy cold original

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7. Kids drinks and others - some fun, favorable alternativesfor anyone to enjoy

8. Smoothies - Nourishing blends made with real fruit and othergood stuff.

9. Teas - Made from the world's most delicious teas andbotanicals.

10. Iced Coffe

Foods: They will turn into anyone a morning person

From classic flavors to inspired combinations, we will introducea variety of breakfast sandwiches to help you kick‐start yourday. Discover our new Vegetable & Fontiago, Slow‐Roasted Ham &Swiss, toasty Reduced‐Fat Turkey Bacon and melty Egg & Cheese.

1. Bakery - Muffins, scones and more were made to go withcoffee.

2. Starbucks Petites - Petite‐sized treats.3. Bistro Boxes - Hungry for lunch? Find the complete package

here – all good stuff.4. Hot breakfast - Hearty, hot and full of flavor ‐ that's how

to start a morning.5. Sandwiches and Salads - We've added a little gourmet flair

to the menu.6. Yogurt and fruits - Enjoy the goodness of real fruit.

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PRICING, BREAK-EVEN, AND MARGIN ANALYSIS

Determining price is one of the most important marketing-mixdecisions. The limiting factors are demand and costs. Demandfactors, such as buyer-perceived value, set the price ceiling.The company’s costs set the price floor. In between these twofactors, marketers must consider competitors’ prices and otherfactors such as reseller requirements, government regulations,and company objectives. Current competing coffee shop productssell at retail prices between BDT 60 and BDT 500. Starbucks plansto introduce its products at a premium price in order to expandthe market and to gain market share rapidly.

Setting Price Based on Costs

We start with the cost-based approach to pricing. Cost-pluspricing (or markup pricing), simply adds a standard markup to thecost of the product. To use this method, however, we must specifyexpected unit sales so that total unit costs can be determined.Unit variable costs will remain constant regardless of theoutput, but average unit fixed costs will decrease as outputincreases. To illustrate this method, suppose Starbucks has fixedcosts of BDT 20 million, variable costs of BDT 250 per unit, and

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expects unit sales of one million cups of coffee. Thus, the costper unit is given by:

Unit cost = variable cost + (fixed costs/ unit sales) = BDT 250 + (BDT 20,000,000/BDT 1,000,000) =

BDT 270

Note that we do not include the initial investment of BDT 10million in the total fixed cost figure. It is not considered afixed cost because it is not a relevant cost. Relevant costs arethose that will occur in the future and that will vary across thealternatives being considered.

Also notice that if we sell its product for BDT 270, the price isequal to the total cost per unit. This is the break-even price,the price at which unit revenue (price) equals unit cost andprofit is zero. Suppose Starbucks does not want to merely break-even but rather wants to earn a 25 percent markup on sales. Thenthe markup price will be:

Markup price = unit cost / (1-desired return on sales) = BDT 270 / (1-.25) =BDT 360

This is the price at which we would sell the product to customersto earn a 25 percent profit on sales. Another approach we could use is called return on investment(ROI) pricing (or target-return pricing). In this case, thecompany would consider the initial BDT10 million investment, butonly to determine the dollar profit goal. Suppose the companywants a 30 percent return on its investment. The price necessaryto satisfy this requirement can be determined by:

ROI Price = unit cost+ (ROI X investment) / unit sales

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= BDT 270 + (0.3 X BDT 10,000,000) /1,000,000 = BDT 273

That is, if we sell coffee product for BDT 273, it will realize a30 percent return on its initial investment BDT BDT10 million.

Break-Even and Margin Analysis

The previous analyses derived a value-based price of BDT 360.Although this price is higher than the break-even price of BDT270 and covers costs, that price assumed a demand of 1 millionunits. But how many units and what level of dollar sales must weachieve to break even at the BDT360 price? And what level ofsales must be achieved to realize various profit goals? Thesequestions can be answered through breakeven and margin analysis.

Determining Break-Even Unit Volume and Dollar Sales

Based on an understanding of costs, consumer value, thecompetitive environment, and reseller requirements, we havedecided to set its price BDT 360. At that price, what sales levelwill be needed for us to break even or make a profit on itsCoffee? Break-even analysis determines the unit volume and dollarsales needed to be profitable given a particular price and coststructure. At the break-even point, total revenue equals totalcosts and profit is zero. Above this point, the company will makea profit; below it, the company will lose money. We can calculatebreak-even volume using the following formula:

Break-even volume = fixed costs / (price - unitvariable cost)

Our break-even unit volume is:

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Break-even volume = fixed costs / (price - unitvariable cost)

= BDT 20,000,000 / (BDT 360 –

BDT 250) = 181,818.18 unitsOur break-even dollar sale is:

BE sales = BEvol X Price = 181,818.18 X BDT 360 = BDT65,454,544.80

Such break-even analysis helps Starbucks by showing the unitvolume needed to cover costs. If production capacity cannotattain this level of output, then the company should not launchthis product. However, the unit break-even volume is well withinStarbucks capacity.

“Breakeven” for Profit Goals

Although it is useful to know the break-even point, mostcompanies are more interested in making a profit. AssumeStarbucks would like to realize a BDT5 million profit in thefirst year. How many must it sell at the BDT360 price to coverfixed costs and produce this profit? To determine this, Starbuckscan simply add the profit figure to fixed costs and again divideby the unit contribution to determine unit sales:

Unit volume = (fixed cost - profit goal) / (price -variable cost)

= (BDT 20,000,000 + BDT 5,000,000) / BDT360 – BDT 250

= 227,272.73 units

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Thus, to earn a BDT 5 million profit, we must sell 290,698 units.Multiply by price to determine dollar sales needed to achieve aBDT 5 million profit:

Dollar sales = 227,273 units X BDT 360 = BDT81,818,280.00

THE PROFIT-AND-LOSS STATEMENT AND MARKETING BUDGET

All marketing managers must account for the profit impact oftheir marketing strategies. A major tool for projecting suchprofit impact is a pro forma (or projected) profit-and-lossstatement (also called an income statement or operatingstatement). A pro forma statement shows projected revenues lessbudgeted expenses and estimates the projected net profit for anorganization, product, or brand during a specific planningperiod, typically a year. It includes direct product productioncosts, marketing expenses budgeted to attain a given salesforecast, and overhead expenses assigned to the organization orproduct. A profit and- loss statement typically consists ofseveral major components:

Net sales—gross sales revenue minus returns andallowances (for example, trade, cash, quantity, andpromotion allowances). Our net sales for 2014 areestimated to be BDT 125 million, as determined in theprevious analysis.

Cost of goods sold—(sometimes called cost of sales)—theactual cost of the merchandise sold by a manufactureror reseller. It includes the cost of inventory,purchases, and other costs associated with making thegoods. Starbucks cost of goods sold is estimated to be50 percent of net sales, or BDT 62.5 million.

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Gross margin (or gross profit)—the difference betweennet sales and cost of goods sold. Starbucks grossmargin is estimated to be BDT 62.5 million.

Operating expenses—the expenses incurred while doingbusiness. These include all other expenses beyond thecost of goods sold that are necessary to conductbusiness.

Operating expenses can be presented in total or brokendown in detail. Here, Starbuck estimated operatingexpenses include marketing expenses and general andadministrative expenses.

Marketing expenses include sales expenses, promotion expenses,and distribution expenses. The new product will be sold throughStarbucks sales force, so the company budgets BDT 5 million forsales salaries. However, because sales representatives earn a 10percent commission on sales, Starbucks must also add a variablecomponent to sales expenses of BDT 12.5 million (10 percent ofBDT 125 million net sales), for a total budgeted sales expense ofBDT 17.5 million. Starbucks sets its advertising and promotion tolaunch this product at BDT 10 million. However, the company alsobudgets 4 percent of sales, or BDT 5 million, for cooperativeadvertising allowances to retailers who promote Starbuck in theiradvertising. Thus, the total budgeted advertising and promotionexpenses are BDT 15 million (BDT 10 million for advertising plusBDT 5 million in co-op allowances). Finally, Starbucks budgets 10percent of net sales, or BDT 12.5 million, for freight anddelivery charges. In all, total marketing expenses are estimatedto be BDT 17.5 million + BDT 15 million + BDT 12.5 million = BDT45 million.

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General and administrative expenses are estimated at BDT 5million, broken down into BDT 2 million for managerial salariesand expenses for the marketing function and BDT 3 million ofindirect overhead allocated to this product by the corporateaccountants (such as depreciation, interest, maintenance, andinsurance). Total expenses for the year, then, are estimated tobe BDT 50 million (BDT 45 million marketing expenses + BDT 5million in general and administrative expenses).

Net profit before taxes—profit earned after all costs arededucted. Our estimated net profit before taxes is BDT 12.5million.

In all, as Table shows, Starbuck expects to earn a profit on itsnew product of BDT 12.5 million in 2011. Also note that thepercentage of sales that each component of the profit and lossstatement represents is given in the right-hand column. Thesepercentages are determined by dividing the cost figure by netsales (that is, marketing expenses represent 36 percent of netsales determined by BDT 45 million / BDT 125 million). As can beseen, Starbucks projects a net profit return on sales of 10percent in the first year after launching this product.

Pro Forma (Projected) Profit-and-Loss Statement for the 12-MonthPeriod EndedDecember 31, 2014

Net Sales BDT125,000,000 Cost of Goods Sold 62,500,000 Gross Margin BDT62,500,000Marketing Expenses

Sales expenses BDT 17,500,000

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Promotion expenses 15,000,000Freight 12,500,000

45,000,000General and Administrative Expenses

Managerial salaries and expenses BDT 2,000,000Indirect overhead 3,000,000

5,000,000Net Profit Before Income Tax BDT12,500,000

Pro Forma (Projected) Balance Sheet for the 12-Month Period EndedDecember 31, 2014

ASSETSCurrent assets:Cash and cash equivalents BDT

9,167,00Accounts receivable, net of allowances

7,348,00Inventories

53,474,00Total current assets

69,989,00Long-term investments -Equity and other investments

10,432,00Property, plant and equipment

59,564,00Other assets

6,767,00Other intangible assets

5,667,00TOTAL ASSETS 152,419,00 LIABILITIES AND SHAREHOLDERS' EQUITYCurrent liabilities:Accounts payable

15,241,90

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Short-term borrowings 18,243,00

Total current liabilities 33,484,90Long-term debt

73,004,20Other long-term liabilitiesShareholders' equity:

9,213,00Retained earnings

-Other additional paid-in-capital

3,232,00Total shareholders' equity

-TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY BDT

152,419,00MARKETING PERFORMANCE MEASURES

Now let’s fast-forward a year. Starbucks product has been on themarket for one year and management wants to assess its sales andprofit performance. One way to assess this performance is tocompute performance ratios derived from Starbucks profit and lossstatement (or income statement or operating statement). Whereasthe pro forma profit-and-loss statement shows projected financialperformance, the statement given in Table below shows Starbucksactual financial performance based on actual sales, cost of goodssold, and expenses during the past year. By comparing the profit-and-loss statement from one period to the next, Starbucks cangauge performance against goals, spot favorable or unfavorabletrends, and take appropriate corrective action. The profit-and-loss statement shows that our lost BDT 1 million rather thanmaking the BDT 12.5 million profits projected in the pro formastatement. Why? One obvious reason is that net sales fell BDT 25million short of estimated sales. Lower sales translated intolower variable costs associated with marketing the product.

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However, both fixed costs and the cost of goods sold as apercentage of sales exceeded expectations. Hence, the product’scontribution margin was 21 percent rather than the estimated 26percent. That is, variable costs represented 79 percent of sales(55 percent for cost of goods sold, 10 percent for salescommissions, 10 percent for freight, and 4 percent for co-opallowances). Recall that contribution margin can be calculated bysubtracting that fraction from one (1 – 0.79 = 0.21). Total fixedcosts were BDT 22 million, BDT 2 million more than estimated.Thus, the sales that Starbucks needed to break even given thiscost structure can be calculated as:

Break-even sales = fixed costs / contribution margin = BDT 22,000,000 / 0.21

= BDT 104,761,905

If we had achieved another BDT 5 million in sales, it would haveearned a profit.

Profit-and-Loss Statement for the 12-Month Period Ended December31, 2014

Net Sales BDT100,000,000Cost of Goods Sold 55,000,000Gross Margin BDT45,000,000Marketing Expenses

Sales expenses BDT 15,000,000Promotion expenses 14,000,000Freight 10,000,000


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7,000,000Net Profit Before Income Tax (BDT1,000,000)

PROJECTED PROFIT AND LOSS INFORMATION

We projected 2015 and 2016 profit and loss information to showthat, we may have incurred loss in initial stage, but ourfranchise will be profitable in future years.

Projected Profit and Loss Statement for the 12-Month Period EndedDecember 31, 2015





9,000,000Net Profit Before Income Tax BDT 258,000,000

Projected Profit and Loss Statement for the 12-Month Period EndedDecember 31, 2016

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9,000,000Net Profit Before Income Tax BDT 358,000,000

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Starbucks Coffee-In Bangladesh-Marketing & Pricing Strategy