Strategic Analysis of Starbucks

OVERVIEW Introduction Coffee Facts History – Time Line Mission Statement Industry Analysis External Assessment Internal Assessment Strategies in Action Strategy Analysis and

Choice Implementing Strategies Evaluation and Control Recommendation

Introduction Starbucks started in 1971 in

Seattle, Washington Founded by – Zev Seigel, Jerry

Baldwin & Gordon Bowker Grew from 17 stores in 1987

to over 17,200 stores in 49 countries, including around 9,177 in the United States

Revenue - $9.411 billion (2008)

Employees – 172,000 worldwide

Products line include: Beverages Pastries whole coffee beans coffee-related retail items

Coffee: Some Facts

First consumed in East Africa during the 11th century

Quality of beans – Robusta & Arabica

Produced in 70 countries

Global coffee production – 134.2 mn bags

More than $70 bn retail sales globally

History & Time Line

1971 Starbucks Coffee, Tea, and Spice opens in Seattle by Zev Seigel, Jerry Baldwin & Gordon Bowker

19831984198619871989

Schultz was impressed with the espresso bars culture in Italy. Schultz convinces the founders to test the coffee bar concept Mr. Schultz sees the future of coffee – Opens Il GiornaleMr. Schultz buys Starbucks concept. Total = 17 LocationsAchieved profitability. Total = 55

199019211993199519971998

1999

Builds a new roasting plant in Seattle. Total = 84IPO traded at Nasdaq. Total = 165Opens second roasting plant in Kent. Total = 272 First Joint Venture with Japan. Total = 676 Opens in the Philippines. Total = 1,412 Partners with Kraft to distribute coffee in supermarkets. Opens in Taiwan, Thailand, New Zealand, and Malaysia. Total = 1,886 Opens in China, Kuwait, Korea, and Lebanon. Total = 2,135

2000 Howard Schultz Became chairman and chief global strategist. Opens in Dubai; Hong Kong; Shanghai; Qatar; Bahrain; Saudi Arabia and Australia. Total = 3,501

History & Time Line

2001

2002

2003

2004

20052006

2007

2008

2009

Begins to offer high-speed wireless internet access and third roasting plant located in Carson Valley. Opens in Switzerland , Israel, and Austria. Total = 4,709 Introduces Starbucks Barista Quattro™ thermal coffeemaker Opens in Oman; Indonesia; Germany; Spain; Puerto Rico; Mexico; Greece and Southern China. Total=5,886 Develops Starbucks Card, a stored value card for customers to use and reload. Opens in Turkey, Chile, and Perú. Total = 7,225 Opens in France, San Jose, Costa Rica. Launches in-store CD burning service powered by HP. Total = 8,337Opens in India.Closed location in the former imperial palace in Beijing due to ongoing controversy with protests on AmericanizationStarbucks cancelled plans to expand into India but opened its first store in Russia.Continued its expansion, settling in Argentina, Bulgaria and PortugalStarbucks entered Poland. Total 17,200 in 49 countries

The Business Mission

Mission Statement

Industry Assessment

Industry Definition

Specialty Eatery Industry Food and beverages Steady growth in the

90s leading to increased competition

Demand for specialty food services has increased in recent years

Industry and Competitive Analysis

Market Structure Monopolistic Competition

Competitive Activity Many companies are in the market and

competition is fierce Competitors use location, product mix, and

store atmosphere differentiation to establish market niche

Industry Costs and Capital Structure Low to moderate costs for each location Major start-up expenditures are property and

equipment Major operating costs are labor and cost of sales

International Competitors

Dunkin Donuts Sells coffee beans both online &

at physical outlets Fresh brew coffee Similar services & products as

Starbucks

Mc Donald’s Offers number of specialty

coffees Huge penetration Established fast-food retailer

The External Assessment

PEST Analysis

Political Influences State & Local government controls

Economic Influences Changes in disposable income could

influence purchase levels Social Influences

Consumer preferences could shift from coffee to other beverages

Technological Influences Use of technology can improve operational

efficiencies

Porter’s Five Forces

Competition Tully’s Coffee, Gloria Jean’s, Caribou Coffee etc. Competition nowhere in terms of volume of operations Competitors selling similar products, incl. specialty coffees

& high quality food Threat of new entrants

Controlled access of distribution channels Innovation & product differentiation

Bargaining power of buyers More options due to no. of competitors Large variety of products

Bargaining power of suppliers Over crowding of market Rise in prices of coffee beans Choose suppliers based on quality, social, environmental

& economic issues Threat from substitutes

Tea Soft drinks Juices

External Factor Evaluation Matrix

Opportunities W.t Rating

Total

1  Expansion into European and Latin American markets

0.15 4 0.6

2 Distribution agreements with hotels, airlines, and office

0.05 2 0.1

3 Use supermarkets as a way of expanding into international markets

0.05 2 0.1

4 Numerous brand extension according to local taste 0.05 3 0.15

5 Improve on perception of instant and decaffeinated coffee to expand that market share

0.2 2 0.4

Threats

1 The coffee market is saturated 0.05 2 0.1

2 Cost of coffee beans is expected to rise in the near future

0.15 3 0.45

3 Supermarkets threaten whole bean sales 0.05 2 0.1

4 Farmers might switch from coffee to vegetable crops 0.05 1 0.05

5 Consumers trend toward more healthful fare 0.2 4 0.8

1.0 1-4 2.85

Internal Assessment

Internal Factors

Management - Howard Schultz – CEO Organization’s structure - Empowered employees Organizational culture – friendly & relax culture Marketing Finance/ Accounting Research & Development - Continuous testing and

innovation Customer Service - Second to none Human Resources - Overtime plus fringe benefits Managing Information system - ERP Value chain Analysis - Roasting plants supply chain

Financial Analysis

Solvency Not extremely liquid but capability in Financing short-term debt will not be a problem

Profitability Profitable Below industry standards Declining in 2008 due to higher operating costs

Financial Leverage Initially the company was financed majorly by equity capital later over the years it accepted debt majorly long term Has ability to cover debt obligations

LIQUIDITY RATIOS

LEVERAGE

Years 2008 2007 2006 2005 2004

Current Assets 1,748.0 1,696.49 1,529.79 1,209.33 1,350.9

Current Liabilities 2,189.7 2,155.57 1,935.62 1,227.0 746.26

Current Ratio 0 .8 0.79 0.79 0.99 1.81

Years 2008 2007 2006 2005 2004

DEBTS 3181.7 3,059.76 2,200.44 1,423.43 916.33

EQUITY CAPITAL 2490.9 2,284.12 2,228.51 2,090.26 2,470.21

DEBT –EQUITY RATIO 1.28 1.34 0.99 0.68 0.37

Financial Analysis

STARBUCKS INDUSTRY S&P 500

Sales (5-Year Annual Avg.) 20.57 18.96 12.90

Net Income (5-Year Annual Avg.)

3.52 9.23 15.13

Dividends (5-Year Annual Avg.) NA NA 11.79

STARBUCKS INDUSTRY S&P 500

5Yr Gross Margin (5-Year Avg.) 2Profit Margins % 3.0

29.6 39.4

5Yr Net Profit Margin (5-Year Avg.)

6.3 8.9 11.5

5- YEAR PLAN

GROWTH RATES %

Starbuck percentage Share Worldwide

Yearly Sales Data of Starbucks

Internal Factors Evaluation Matrix

Strengths W.t Rating Total

1 Never experienced a strike or work stoppage 0.05 2 0.1

2 Good relationships with coffee suppliers 0.1 4 0.4

3 Value employees 0.05 2 0.1

4 Located in high traffic areas 0.2 3 0.6

5 Successful Beverage Innovator 0.1 4 0.4

Weaknesses

1 Rumors of support for the Israeli military 0.1 3 0.3

2 Employees report to two division heads 0.05 2 0.1

3 Increasing shareholders dilutes their interest 0.1 3 0.3

4 Saturated US market due to quick expansion 0.05 2 0.1

5 Do not allow smoking in their stores 0.2 4 0.8

1.0 1-4 3.2

Strategies in Action

Alternative Strategies

Backward Integration – Coffee roasting plants

Forward Integration - Partners with Kraft to distribute coffee in supermarkets.

Market Penetration – Europe, China & Japan Market Development – Egypt, Pakistan Product Development – Coffee Ice Cream Related Diversification – DUETTO value card Unrelated Diversification - Thermal

coffeemaker, Wi-Fi & in store CD- burning Retrenchment - Eliminating Non-Profitable

Operations and expansions.

Long term plan: from 2003 to 2010 Starbucks opens

17,970 new stores

YearTotal North America International

About 20% growth annual 9.5% growth annual

35.8% growth annual

2003 7,086 5,324 1,762

2004 8,543 5,830 2,393

2005 9,633 6,384 3,249

2006 12,000 6,990 4,413

2007 14,400 7,654 5,992

2008 17,280 8,381 8,138

2009 20,736 9,177 11,051

2010 25,057 10,049 15,007

Overview of 2008 & Financial Target for 2009 Throughout fiscal 2008, Starbucks experienced a consistent

weakening in its U.S. business,. Management recognizes that it faces a more challenging environment from an economic, operational and competitive standpoint entering fiscal 2009. In response to those challenges, management intends to focus in the following key areas: Better operational excellence at the store level; More meaningful innovation to continue to differentiate the

store experience; Increased efficiencies and effectiveness in the general and

administrative infrastructure, to become more capable of navigating through the fluctuations in the external environment.

In setting targets for fiscal 2009, management’s goal was to

balance the long-term opportunity for store growth with the near-term realities of the challenging economic and operating environment. For fiscal 2009 the Company is targeting: Opening approximately 2,500 new stores Comparable store sales growth in the range of 3% to 5% Total net revenue growth in the range of approximately 17%

to 18%, to over $11 billion Earnings per share in the range of $1.02 $1.05, representing

17% to 21% growth, with earnings per share expansion expected to be greater in the second half of fiscal 2009.

Strategy Analysis and Choice

Identifying the markets

Current market: over 50% of world’s coffee consumption

Current market: 12-15% of world’s coffee consumption

Current market: under 10% of world’s coffee consumption

Well-developed market, long-standing coffee drinking traditionsAffluent population, room for gaining market share

Developing market, long-standing tea drinking traditions

High potential for market growth

Traditional coffee growing countries

Less affluent population, room for gaining market shares

Life-cycle model of coffee consumption

Latin America

Development Growth Shakeout Maturity Decline

Few:trial of early

adopters

Few:competitors

Growing adopters

trial of product/service

Entry of competitors

Attempt to achieve trial

Fight for sale

Undifferentiated products

Growing selectivity of

purchase

Deepening competition

Shakeout of weakest

competitors

Saturation

Fight to maintain share

eEmphasis on efficiency, low costs

Exit of some distributors

eSelective

distribution

Drop-off in usage

e

Buyers

Competitive conditions

Europe

AsiaUSALatin

America

Possible long-term penetration in Europe

Implementing Strategies

Implementation2004 Hire Senior Management and develop 5-year plans for

each division.

2005 Senior Staff recruits and hires additional staff for each country’s division. Begin Market Research and developing relationships with local, provincial and national officials

2006 & 2007

Individual divisions use market research to develop market specific menus where wanted. Procure lease agreements or real estate, develop working relationships with local officials, identify and contract with suppliers, hire and train staff.

2008 & 2009

Achieve goals for store openings

Continuously

Monitor and assess success of store openings and operations, make adjustments as necessary

Evaluation and Control

Evaluation and Control

Establish Quantifiable goals:Number of store openingsProfitabilitySame store growthAllow sufficient time to achieve profitability

Tie Goals to:BonusesPromotions

Continue to focus on R&D 5 years – Evaluate each country’s level of

success Stay/Exit Develop new 5 year plan

Score Card

Score Card 1 2 3 4 5 6 7 8 9 10

Active:

Educational:

Family:

Historic:

Local Flavor:

Romantic:

Scenic:

Tourist Trap:

Value:

Weather:

Our Score Card system gives users a snap shot of this venue's qualities

Recommendations

Recommendations for the Future

Social Gathering Environment Expand Internationally Keep pace with Technology Product Placement Drive Thru Learn from cultural experience Revamp the employee reward system

Thank you!Questions & Answers Session