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Starbucks Corporation

Company Profile

Publication Date: 26 Mar 2008

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t:+852 2520 1177t:+49 69 9754 4517t:+44 20 7675 7000t:+1 212 686 7400f:+852 2520 1165f:+49 69 9754 4900f:+44 20 7675 7500f:+1 212 686 2626e:[email protected]:[email protected]:[email protected]:[email protected]

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ABOUT DATAMONITOR

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Starbucks Corporation

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TABLE OF CONTENTS

Company Overview..............................................................................................4

Key Facts............................................................................................................... 4

SWOT Analysis.....................................................................................................5


Starbucks CorporationTABLE OF CONTENTS
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COMPANY OVERVIEW

Starbucks Corporation (Starbucks) is a retailer of specialty coffee. It retails a variety of hot and coldbeverages, complementary food items, coffee-related accessories and equipment, teas and othernon-food products through retail stores in approximately 39 countries worldwide.The companyoperates primarily in the US. It is headquartered in Seattle, Washington and employs about 146,000people.

The company recorded revenues of $7,787 million during the fiscal year ended October 2006, anincrease of 22.3% over 2005. The operating profit of the company was $894 million during fiscalyear 2006, an increase of 14.5% over 2005. The net profit was $564.3 million in fiscal year 2006,an increase of 14.1% over 2005.

KEY FACTS

Starbucks CorporationHead Office2401 Utah Avenue SouthSeattleWashington 98134USA

1 206 447 1575Phone

1 206 447 0828Fax

http://www.starbucks.comWeb Address

7,787.0Revenue / turnover(USD Mn)

OctoberFinancial Year End

145,800Employees

SBUXNASDAQ NationalMarket Ticker


Starbucks CorporationCompany Overview

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SWOT ANALYSIS

Starbucks Corporation (Starbucks) is a specialty coffee retailer, retailing a wide variety of hot andcold beverages, pastries and confections through more than 13,000 locations across 39 countries.The company purchases and roasts high-quality whole bean coffees and sells them, along with freshcoffees and other products. Starbucks is a global brand. The company leverages its strong brandimage to boost its revenue growth. However, intense competition in the retail beverage segmentcould adversely affect the company's profit margins.

WeaknessesStrengths

Weak compliance functionStrong brand imageNarrow product mixRobust financial performanceLow employee productivityLarge scale of operations

ThreatsOpportunities

Intense competitionNew marketsVolatile coffee pricesHear Music LabelThe Forbidden City controversyGrowing specialty coffee market

Strengths

Strong brand image

Starbucks is a global brand. High quality products and a consistently-positive consumer experiencehave helped the company build a strong brand image. Starbucks, for instance, was ranked 91st inthe 100 Top Brands 2006 ranking of BusinessWeek and Interbrand, an international brandingconsulting firm.The BusinessWeek-Interbrand combine valued the Starbucks brand at $3,099 millionin 2006, up from $2,576 million in 2005.

Starbucks uses innovative and cost effective marketing strategies to build its image including

billboards, freestanding inserts in newspapers products and samplings, as well as innovative schemessuch as paying for a day of free parking in a downtown area. Strong brand image helps the companyattract new customers to its stores, which leads to additional revenues.

Robust financial performance

Starbucks has recorded robust financial performance in the past few years. During 2002-2006, thecompanys revenues, operating profit and net profit grew at a CAGR of 24%, 28.6% and 28.6%respectively. Moreover, the company's average return on equity and return on investment during


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2002-2006 were 19%, and 18% respectively, significantly higher than the industry averages of 15.3%and 11.3%. Robust financial performance enhances investor confidence and strengthens the financialposition of the company.

Large scale of operations

Starbucks has over 13,000 locations in 39 countries, which witness more than 44 million customervisits per week.The company employs over 146,000 people. Its competitors such as Diedrich Coffee,Green Mountain Coffee Roasters (GMCR) have a lower scale. Starbucks generated revenues of$7,787 million in 2006 against Diedrich Coffees $59.5 million and GMCRs $225.3 million in thesame period. Greater economies of scale provide a cost advantage to Starbucks in the marketplace.

Weaknesses

Weak compliance function

Starbucks has been involved in several legal proceedings, which taken overall indicate a weakcompliance function. In June 2004, two then-current employees of the company filed a lawsuit inthe US District Court for the Southern District of Florida claiming the company violated requirementsof the Fair Labor Standards Act (FLSA).Trial is currently set for August 2007. In October 2004, aformer hourly employee filed a lawsuit in San Diego County Superior Court alleging that the companyviolated the California Labor Code by allowing shift supervisors to receive tips. Trial is set for May2007.

In March 2005, a former employee filed a lawsuit in the US District Court for the Southern Districtof Texas claiming that the company violated requirements of the FLSA. No date has been set forthis trail. Several lawsuits alleging violations of existing laws indicate weaknesses in the companyscompliance function and procedures.

Narrow product mix

The company's retail sales mix by product is approximately 77% beverages, 15% food items, 3%whole bean coffees, and 5% coffee making equipment and other merchandise.The companys salesgrowth has been largely driven by innovative beverages. If consumers were to reduce theirconsumption of coffee for some reason or the other, then the companys performance would be

negatively impacted. High dependence upon a single product, however, increases the business riskof the company.

Low employee productivity

Although the company has a better scale than its competitors, its employee productivity is relativelylower. Starbucksrevenue per employee was $53,408 in 2006 as compared to an industry averageof $93,330 per employee. Diedrich Coffee, a competitor of Starbucks reported $84,054 revenue per



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employee during the same period. Furthermore Starbucks' net profit per employee is $3,870, ascompared to an industry average of $8,299 per employee. Lower revenues and net profit per employeeindicate scope for improving employee productivity.

Opportunities

New markets

Starbucks has opened stores in several new countries, including Jordan, the Bahamas and theRepublic of Ireland in 2005. In 2006, the company entered the ready-to-drink coffee category inSouth Korea through a licensing agreement with Dong Suh Foods.The Korean firm will importUS-produced bottled Starbucks Frappuccino coffee drinks. Starbucks entered Brazil and China in

late 2006. The coffee market in Brazil and China are expected to grow by 11.4% and 38.9%respectively during the 2007-2010 period.

In addition, Starbucks proposes to enter Russia. The company with its joint-venture partner, M.H.Alshaya, intends to open its first store in Moscow, Russia in the fourth quarter of fiscal 2007. Russiais one of the fastest growing economies in Europe. Economic growth combined with growing coffeeconsumption and popularity of western brands make Russia a key opportunity for Starbucks.Thecompany intends to enter India through a joint venture.The coffee market in India is expected togrow by approximately 12% during the 2007-2010 period. New markets diversify the revenue baseof the company.

Hear Music Label

Starbucks and Concord Music Group formed a new record label, Hear Music, in March 2007. HearMusic Label will form relationships directly with artists and distribute recordings at Starbucks locationsas well as through traditional music channels. During the same month, Starbucks and Concord MusicGroup announced that Hear Musics inaugural CD release will be from music legend Paul McCartney.The album is slated for release early this summer and will be available at all traditional music retailoutlets and Starbucks locations. Diversification into music industry would improve visibility of Starbucksand add stability to its revenues.

Growing specialty coffee market

The specialty coffee sector accounts for approximately 15% of the US retail coffee market.The USretail coffee market recorded a growth of 157% in value terms between 2000 ($3,258 million) and2005 ($8,372 million). This growth was driven by the appetite Americans have shown for up-marketand premium-priced coffees. Over the 2005-2010 period, coffee sales are expected to grow by afurther 125% to reach $18,839 million in 2010. Starbucks has a market share of over 40% of thespecialty coffee market.The expected growth in this category will offer the company opportunitiesfor expanding its revenue base.



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Threats

Intense competition

Starbucks faces intense competition in coffee beverage segment from other specialty coffee shops,restaurants, and doughnut shops. In almost all markets in which the company operates, it facesintense competition.The company's whole bean coffees compete directly with specialty coffees soldthrough supermarkets, specialty retailers and a growing number of boutique specialty coffee stores.In addition, regional specialty coffee companies also sell whole bean coffees in supermarkets.Increasing competition adversely affects the company's top line revenues.

Volatile coffee markets

Coffee is the company's largest input cost, accounting for between 10% and 20% of the cost ofgoods sold. The price of coffee, however, is subject to a high level of volatility. During the first fewmonths of fiscal year 2005 and 2006, commodity coffee prices rose significantly.

During 2007-2008, the coffee market is expected to witness a production deficit of 8 to 10 millionbags. This deficit is primarily attributed to fall in the coffee production of Brazil to 32 million bags,from 41 million bags in 2005-2006. The global coffee markets are expected to witness a demandsupply gap in 2007-2008, with demand (118 million bags) exceeding production (110 million bags).Any significant increase in the market price of coffee would adversely affect the company's financialperformance.

The Forbidden City controversy

The Starbucks outlet located in the Forbidden City in Beijing has received negative publicity in recentmonths.This outlet is seen to be conflicting with the rich Chinese culture of the Forbidden City.Therehas been considerable protest against Starbuckspresence in this location. Such controversies maycreate an impression among the public that the company is culturally insensitive, which wouldnegatively impact its brand image.



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