Starbucks

Case Study: Case Study:

StarbucksStarbucks

Presented By:Presented By:Group 3Group 3

Avinav C Thakur (12)Avinav C Thakur (12)Bhuwan Jawa (13)Bhuwan Jawa (13)Devdeep Majumdar (14)Devdeep Majumdar (14)Devraj Roy (15)Devraj Roy (15)Gaurav Ganda (16)Gaurav Ganda (16)

Prof. Sonu GoyalProf. Sonu Goyal

Introduction to Introduction to StarbucksStarbucks• Company started in 1971 in Seattle,

Washington• Grew from 55 stores in 1989 to over 15,000

stores today• Products sold include:

- beverages - pastries- whole coffee beans- coffee-related retail items

Mission StatementMission Statement

Establish Starbucks as the premier purveyor of thefinest coffee in the world while maintaining ouruncompromising principles as we grow

Guiding PrinciplesGuiding Principles

• Provide a great work environment and treat each other with respect and dignity

• Embrace diversity as an essential component in the way we do business

• Apply the highest standards of excellence to the purchasing, roasting, and fresh delivery of our coffee

• Develop enthusiastically satisfied customers all of the time• Contribute positively to our communities and our

environment• Recognize that profitability is essential to our future success

Coffee: Some FactsCoffee: 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

Industry DefinitionIndustry 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 Industry and Competitive AnalysisAnalysis

• 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

Industry PEST AnalysisIndustry 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 ForcesPorter’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

Porter’s Five Forces Porter’s Five Forces (contd.)(contd.)• 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

SWOT AnalysisSWOT Analysis

• Strengths– Never experienced a strike or work stoppage– Good relationships with coffee suppliers– Value employees– Located in high traffic areas– Employee turnover rate is 60%, compared to 140% in the

fast food business– They don’t move into new markets until they dominate

the ones they expand into

• Weaknesses– Excessive focus– Employees report to two division heads– Increasing shareholders dilutes their interest– They have expanded too quickly, and have already

saturated the US market– They do not allow smoking in their stores, alienating

some of their customers


• Opportunities– Expansion into European and Latin American markets– Distribution agreements, such as hotels, airlines, and

office coffee suppliers– Reducing alcohol consumption in the US leads to bars

being used less which leads to people needing another place to go

– Use supermarkets as a way of expanding into international markets

– Numerous brand extension– Improve on perception of instant and decaffeinated

coffee to expand that market share


• Threats– The coffee market is saturated– Cost of coffee beans is expected to rise in the near future– Supermarkets threaten whole bean sales– Farmers might switch from coffee to vegetable crops– High competition from Japanese competitors– Consumers trend toward more healthful fare


VALUABLE RESOURCES:VALUABLE RESOURCES:Creating Competitive EdgeCreating Competitive Edge• Physical Resources

– Large number of outlets (Hub & Spoke Model)– Operations in 40 countries with 9000 cafes– Hi-tech coffee machines & equipments

• Intangible Resources– Techniques to roast & brew coffee– Large satisfied customer base– Building employee relationship– Reputation for having the finest products and

services in the world

Core CompetenciesCore Competencies

• High quality of products• Quality of Workforce• Strategic Store Location• Tangible Resources

• Coffee beans (Ex. They have sole ownership of the Narino Supremo beans, which is considered to be one of the highest quality coffee beans in the world.)

• Intangible Resources• Perception/Reputation of quality (beans, company

name, etc)• Largest and best known of coffee house chains

Corporate Culture: Corporate Culture: Company ValuesCompany Values

• No compromise on Quality• No Franchising• Not selling artificially flavored coffee beans• Employee freedom of expression• Customer is of Prime Importance

• “Just Say Yes” to customer requests• Modify Products as per customer’s preferences• Satisfy customer at all costs

» Eg: Providing a free-drink coupon if the customer is not satisfied

Strengths: EmployeesStrengths: Employees

• Employee/Company culture• Higher than industry wage• Comparatively lower employee turnover

» 65% as compared to 150 to 400 percent a year in most fast-food chains

• Employee Fringe Benefits» Medical Insurance» Life Insurance» Paid Vacations» Short & Long-term disability» 30% Product Discounts» Stock Option Plan (Bean Stock)

• Employee training program

CSR strategyCSR strategy

• Major contributor to CARE since ‘91• Financial support to community literacy

organizations• Green Store Task Force

– 10 cent discount to customers bringing their own mugs

• Coffee grounds given as soil amendments

Diversification Diversification StrategiesStrategiesProduct DiversificationProduct DiversificationCoffee Beans & coffee equipmentFresh brewed coffee, espresso & cappuccinoLattesWi-FiMusic CDsFood Items

International CompetitorsInternational 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

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

YEAR 2008 2007 2006 2005 2004

CURRENTASSESTS 1,748.0 1,696.49 1,529.79 1,209.33 1,350.9

CURRENT LIABILITY 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

LEVERAGEYEAR 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 –EQUITYRATIO

1.28 1.34 0.99 0.68 0.37

Net Profit Margin (%)

YEAR 2008 2007 2006 2005 2004 2003 2002 2001 2000

% 3 7.1 7.5 7.8 7.3 6.5 6.4 6.8 4.3

RETURN ON EQUITY

YEAR 2008 2007 2006 2005 2004 2003 2002 2001 2000

% 12.7 29.4 26.1 23.7 15.7 12.8 12.3 13.1 8.2

RETURN ON ASSESTS

YEAR 2008 2007 2006 2005 2004 2003 2002 2001 2000

% 5.6 12.6 13.1 14.1 11.5 9.6 9.5 9.8 6.3

GROWTH RATES %

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

Company Industry S&P 500

5Yr Gross Margin (5-Year Avg.) 23.0 29.6 39.4

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

6.3 8.9 11.5

Profit Margins %

OVERVIEWOVERVIEW OF 2008 & STRATEGIES OF 2008 & STRATEGIES FOR NEXT FISCALFOR NEXT FISCAL

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; and• Increased efficiencies and effectiveness in the general and administrative infrastructure, to become more capable of navigating through the fluctuations in the external environment.

FINANCIALFINANCIAL TARGET FOR 2009TARGET FOR 2009

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 targetting:

• 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; and• Earnings per share in the range of $1.02 to $1.05, representing 17% to 21% growth, with earnings per share expansion expected to be greater in the second half of fiscal 2009.

The The CompetitiCompetitive Wedgeve Wedge

Willingness to Pay

Costs

Wedge

VALUE

Product DifferentiationProduct Differentiation

• Products: Coffee, beans, pastries, equipment, mugs, containers, accessories, music CDs

• “Everything matters” store ambience• Retention of coffee aroma• City specific mugs and t-shirts• Season special coffees, rare exotic coffees,

handcrafted beverages etc• Custom drinks and customer attention

Process DifferentiationProcess Differentiation(the value chain) (the value chain)

Financing, Legal Support, Accounting

Recruiting, Training, Incentives, Feedback

Equipments, Production, Packaging, Selling

Getting the coffee : Where & How

Inbound Logistics

Delivering the

product

Promotions and

Advertising

Customer satisfaction

and feedback

Billing and collection

Firm Infrastructure

Primary activities

Human Resources

Technology & Development

Procurement

Customer Willingness to Customer Willingness to PayPay• Starbucks charged coffee

at slightly higher rates• Location• Ambience (Everything

matters), seating, comfort and convenience

• COFFEE centered theme• Wi-Fi … more value,

more time, more business

Why go to Starbucks?

A place to think and ImagineA place to gather and talk

A Third Place beyond Work and Home

Leather Chairs Newspapers Couches The Authentic Coffee Experience: the

artistry of espresso making Fast Service and Quiet Moments

Stores Designed on 4 stages of coffee making: growing, roasting, brewing and

aromaMails, Music, Work

New Products and PlacesNew Products and Places

• Music CDs• The Starbucks card• The Duetto Visa card• Wifi internet• Starbucks coffee in supermarkets (in Flavorlock packaging)• Airports, Universities, airlines, equipment in hotel rooms,

business offices• Mail order sales• Amazon.com and other websites

Costs versus DifferentiationCosts versus Differentiation

Others

Starbucks

Starbucks

Others

Willingness to pay

Costs

Costs

Willingness to pay

Future ChallengesFuture Challenges

• Deteriorating global economy• Revenues down 6%• Decline of 9% in same store sales

• Declining customer confidence levels – lowest in past 40 years

Ways to overcome the Ways to overcome the challengeschallenges

• Re-architect cost structure• Containing costs• Improving operations

• Invest $500 mn in partner benefits, stock compensations• Closing 300 under-performing stores globally• Laying off 6000 partners

• Severance package to be paid

Thank You….!!!

?

Starbucks

Business

Transcript of Starbucks