STARBUCKS A Case Analysis

PREPARED AND PRESENTED BY: WASSEM AMIN, DARREN APPLEGATE, TIM KELLY, BARBARA KERSHNER, ERALD SINO, EWA SITARSKI, KLITON XHEMALI

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STARBUCKSA Case Analysis

GR 732 Marketing Management 2007

Case Analysis Outline 2

I. Executive Summary ~ T. Kelly

II. Situation Analysis ~ W. Amin / E. Sino / K. Xhemali Environment Industry Organization Marketing Strategy

Problems Found in Situation Analysis ~ D. Applegate / B. Kershner Statement of Primary Problems Statement of Secondary Problems

Strategic Alternatives for Solving Problems ~ D. Applegate / B. Kershner

Selection of Strategic Alternative and Implementation ~ D. Applegate / B. Kershner Statement of Selected Strategy Justification for Selected Strategy Description of Implementation of Strategy

VI. Summary ~ T. Kelley

VII. Appendices ~ E. Sitaskri Financial Analysis Technical Analysis

Vision4

• Be known as one of the world’s great companies

• Create one of the world’s greatest brands

• Maintain an uncompromising commitment to coffee quality

• Create a great work environment and believe in the power or our people

• Lead with integrity, courage and passion

• Maintain our commitment to our communities and the environment

WORLDS LARGEST COFFEEHOUSESells drip brewed coffee, espresso-based hot drinks, other hot and

cold drinks, snacks, ice cream, and items such as mugs, coffee beans, and music.

OVER 13000 STORES IN OVER 40 COUNTRIESRetail brick and mortar locations as well as licensed outlets,

grocery stores, and the internet. ANNUAL REVENUES IN EXCESS OF $7 BILLION OVER 140,000 EMPLOYEES FOUNDED IN 1971 IN SEATTLE, WASHINGTON STARBUCKS INCORPORATED IN 1987 (HOWARD SHULTZ) HAS AGGRESSIVE GROWTH PLANS:

40,000 retail stores worldwide

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EXECUTIVE SUMMARY

Situational Analysis

Consumption Trends108 million consumers164 million per year54% of the population

Consumption Data9.7 lbs of coffee3.1 cups per day

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• Today’s Consumption Trends Coffee- Soft Drinks Younger Drinkers

Situational Analysis

Labor disputes 2004 Workers joined IWW 2005 Kent, Washington 2006 Reinstatement of 5 workers 2006 Pay increase in New Zealand

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SITUATIONAL ANALYSIS11

Coffee bean market

Although it has endured much criticism for its purported monopoly on the global coffee-bean market, Starbucks only accounts for roughly two percent of global coffee production.

According to Starbucks, they purchased 4.8 million pounds (2,180 t) of Certified Fair Trade coffee in fiscal year 2004 and 11.5 million pounds (5,220 t) in 2005. They have become the largest buyer of Certified Fair Trade coffee in North America (10% of the global market) and the only company licensed to sell Certified Fair Trade coffee in 23 countries.

Of the almost 300 million pounds of coffee Starbucks purchased in 2006, about 6 percent was certified as fair trade.

Starbucks ~ Organizational and Marketing

Strategy12

Industry Restaurants

Products Starbucks /Seattle’s Best Coffee•Frappuccino •Tazo Tea•Torrefazione Italia Coffee•Hear Music•Pasqua Coffee

Revenue $7.786 billion USD (2006)

Net income

Employees 147,436

Slogan

Website www.starbucks.com

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Products •Coffee•Doughnuts•Timbits•Bagels•Muffins•Soups•Sandwiches•Iced Cappuccinio

Revenue $1.482 billion CAD (2006)

Net income $191.1 million CAD (2006)

Employees 70,000 (2005)

Slogan “Always Fresh at Tim Horton’s”

Website www.TimHortons.com

Tim Horton’s ~ Tim Horton’s ~ Organizational and Marketing StrategyOrganizational and Marketing Strategy

Dunkin Donuts ~ Dunkin Donuts ~ Organizational and Marketing StrategyOrganizational and Marketing Strategy

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Products •Coffee•Doughnuts•Munkins•Bagels•Muffins•Breakfast Sandwiches•Iced Coffee

Revenue $4.7 billion USD (2006)

Net income $???????million CAD (2006)

Employees ???? (2005)

Slogan “America Runs on Dunkin”

Website www.DunkinDonuts.com

ORGANIZATION:

FINANCIAL CONDITION:15

SITUATIONAL ANALYSIS

Starbucks has continued to post net income and revenue since 2002

The company recorded revenues of $7787 million in the fiscal year of October 2006, an increase of 22.3% over 2005.

Starbucks Corporation generates revenues through three business divisions: US (79.3& of total), international (16.7%), and consumer products group (3.9%).

Its very strong financial position allows it to expand aggressively domestically Internationally.

ORGANIZATION:MANAGEMENT PHILOSOPHY AND ORGANIZATIONAL CULTURE

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SITUATIONAL ANALYSIS

Top Management believes in Day-to-Day involvement in the activities of the Corporation: Hands On approach.

Employees enjoy unsurpassed benefits in the industry. Schultz strongly believes that Employee satisfaction is directly related to customer satisfaction.

“Partners are at the heart of the Starbucks Experience. One of the reasons Starbucks has been so successful is because of the human connection customers and partners share every day in our stores around the world. We remain steadfastly committed to creating a great work environment, and to offering health benefits for eligible full- and part-time partners despite The significant rise in health care costs. In turn we are gratified to see partners provide a great experience for our customers.”

Organizational Culture (contd)17

However, although the company has a better pay scale than its competitors, individual employee productivity has remained relatively lower.

Starbucks’ revenue per employee was $53,408 in 2006 as compared to an industry average of $93,330 per employee.

Additionally, Starbucks' net profit per employee is $3,870, as compared to an industry average of $8,299 per employee.

Attributed to higher cost of training per employee.

Marketing Strategy:Analysis of Sales, Profit, and Market Share

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The companies purchases and sells high quality coffees, along with whole coffee beans, espresso beverages, a variety of food items such as sandwiches and baked goods, coffee related equipments and accessories, a line of premium teas, and a record label which features prominent artists and a satellite radio channel.

Three operating segments: US, International, and Global Consumer Products Group (CPG).

At the end of fiscal year 2006, Starbucks had over 16,200 Corporate accounts.

The company recorded revenues of $7,787 million at the end fiscal 2006, which was an increase of 22.3% over 2005.

Analysis (Cont’d)

Revenue divided per division was US (79.3%), International (16.7%), and CPG (3.9%). In dollars and cents, each group posted $6,178.6 million, $1,302.9, and $305.5, respectively.

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SWOT Analysis20

Strengths Weaknesses

Widely recognized and strong brand image

Strong Financial Performance

Economies of Scale, large operations

Narrow product mix

Low Employee Productivity

Opportunities Threats

New Markets

Increasingly growing specialty coffee market

Intense competition

Volatile coffee and dairy prices

SWOT Analysis

Strengths Worldwide Brand Ranked 91st in top 100 Global Brands Combined Value of the brand was $3.1 Billion Dollars Profit has increased an average of 26% over the past

four years. Over 13,000 stores, 44 million customers per week,

and 146,000 employees.

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SWOT Analysis

Opportunities New markets domestically and internationally Announced a plan to increase stores from 11,000 to

40,000! Growing specialty market accounted for 15% of U.S

Coffee Purchases. Expected to grow 125% in the next 3 years.

Weaknesses Retail sales are derived from 77% beverages, 15%

food items, 3% whole coffee beans, and 5% coffee making equipment and other merchandise.

Low Employee Productivity

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SWOT Analysis (Continued)

Threats Intense Competition from restaurants, donut shops,

and local coffee shops. Pricing Strategy Internationally Extremely Volatile Coffee and Dairy Prices

Coffee is the largest cost input, accounts for 20% of COGS

Had to increase domestic prices by 5 cents recently, the second time in less than 12 months, due to dairy prices

There is an expected gap in Worldwide Coffee production between 2007-2008.

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242424

STARBUCKS PERFORMANCE

The Company’s stock symbol is SBUX

$24.47 price per share as of 9/21/07

16,653 shareholders as of 12/06

The company never paid dividends on its common stock and plans to use the retained earnings in its business.

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Stock Mkt Cap $Mil

Sales $Mil

Growth Profit-ability

FinancialHealth

Starbucks Corporation 20,501 8,974 A A+ A

Industry Average 2,057 1,305 C+ C+ B-

McDonald's Corporation 65,309 22,780 B- A- A+

Yum Brands, Inc. 17,824 9,884 D+ A+ B+

Tim Hortons, Inc. 6,470 1,770 B+ A A

Cheesecake Factory, Inc. 1,755 1,416 B A A

Sonic Corporation 1,555 744 B A+ A-

Panera Bread Company, Inc. 1,387 931 A+ A+ A

Bob Evans Farms, Inc. 1,365 1,676 C- B A-

Rare Hospitality International, Inc. 1,164 1,025 A B+ B+

IHOP Corp. 1,143 356 D- B C+

Domino's Pizza, Inc. 1,079 1,442 D- A+ B

CBRL Group, Inc. 1,009 2,706 C A- B

Comparison to Major Competitors

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REVENUES GROWTH

PERCENTAGE OF THE REVENUE Retail stores

Grocery andwarehouse club

Branded products

Foodservice

Other initiatives

272727

REVENUE GROWTH

-

2,000,000

4,000,000

6,000,000

8,000,000

02 03 04 05 06

REVENUES

REVENUES

282828

REVENUES GROWTH

292929

REVENUES GROWTH

-

5,000

10,000

15,000

02 03 04 05 06

STORES OPENED @ YEAR END

USA

INTERNAT.

3030

Fiscal 2008 Targets30

· New store openings of approximately 2,600

· International openings by 200 stores

· Comparable store sales growth in the range of three to seven percent

· Total net revenue growth of approximately 18 percent

· Fiscal 2008 earnings per share growth of approximately 20 percent to 22 percent

Problems Found in Situation Analysis

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Is Starbucks overextending themselves by expanding their food base?

Can Starbucks continue to compete locally with their current pricing strategy?

Can Starbucks compete internationally with their current pricing strategy

Is Starbucks a “rich-man’s” coffee?

Primary and Secondary Problems

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Can Starbucks continue to compete locally with their current pricing strategy? Fewer Starbucks stores around Reduced customer base Not willing to pay increased prices

Can Starbucks compete internationally with their current pricing strategy? Regular cup of coffee in Egypt was 28 Egyptian

Pounds equivalent to a three course dinner. Coffee quality was not different then other

competing shops

Strategic Alternative for Solving Problems

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Should Starbucks reduce the price of their coffee?Should they reduce the quality of their beans?Should they not focus on environment awareness

programs to save money and purchase cheaper / non recycled products?

Should they continue to expand their other lines such as clothing and food to make money their and reduce the price of their coffee

Should Starbucks purchase Dunkin DonutsShould Starbucks open a “generic” branch of

itself?

Alternatives Discussed34

Should Starbucks reduce the price of their coffee? Reduce profits Gain more market share Not feasible

Should they reduce the quality of their beans? Starbucks IS STARBUCKS because of the quality of their beans Lose customer base Not advisable

Should they not focus on environment awareness programs to save money Starbucks prides themselves on being environmentally aware This change would not follow their mission and values

statement Not advisable


Should they continue to expand their other lines such as clothing and food to make money there and reduce the price of their coffee Valid Strategic plan However, risk losing the “feel” of Starbucks by expanding

their product base. More “shop-like” Not advisable, “stick with what you know”

Should Starbucks purchase Dunkin Donuts Worth looking into Risk of blending brands, confusing customers Question social and environmental beliefs of the Starbucks

customers Continue to carry out Starbucks “mission and values” in a

Dunkin Donuts environment? Advised against this option


Should Starbucks open a “generic” branch of itself? How would this be perceived? Could we do this and still maintain Starbuck's

mission and values? Can we hit a “happy medium” and still maintain

our environmentally aware ethics? This was a do-able, valid option to expand

Starbuck’s customer base without compromising their mission and values

Our Solution37

Starbucks welcomes LIL’ Bucks Cater to the “on-the-go” crowd Enhance drive-thru service Reduce product base

Focus on regular coffees No extra products such as sandwiches, ice creams, etc…

Less training for employees needed More casual environment, therefore less $$ needed to

support computers, fireplace, music, etc… Same quality of coffee and beans Maintain environmental awareness Maintain Community values Maintain and support current Starbuck’s mission and

value statements

Justification of LIL’S Bucks38

Great potential for expanding their market share into a different group of consumers

Capture some of the Dunkin Donuts consumer base

Attract consumers who could not afford Starbuck’s coffee before

Enable current customer base to have another alternative for faster “on-the-go” service along with increased Starbuck’s locations

LIL’ Bucks Implementation Strategy

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Same Mission and ValuesSame quality of beansSame dedication to community and

environmentSame interest and dedication to employeesSame welcoming environmentSame great service, just faster

LIL’ Bucks Implementation Strategy

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More casual environment No sofas or fireplaces No internet set up New trendy, comfortable, casual environment with the same

Starbuck’s feel More limited coffee selection

No specialty drinks Reduce price of running LIL’ Bucks Less training for employees Less costly equipment

Overall Welcoming to everyone Encourages current customer’s to utilize the new locations when

“on-the-go” Enables more customer’s to afford the same great taste Promotes a feeling of acceptance / trend when being seen with a

Starbuck’s coffee Allows a broader customer base to support an environmentally

aware company with a solid mission and value statement

LIL’ Bucks’ Prepares for Opening

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Current factories will be utilized to prepare needed inventory / equipment

Already established delivery routes with slight deviations to expand the current market base

Coffee and menu already established, just needs to be trimmed to fit new customer base

Promotional advertising with coupons, frequent visitor cards and other specials

International appeal as “everyone” is on the run

LIL’ Bucks’ Roll Out Plan42

In order to make this new venture work for Starbucks they must take some time getting the market used to the idea. This entails opening up “LIL’ Bucks” in select cities around the U.S. The markets we suggest focusing on are ones where one of two things is true.

1) Dunkin’ Donuts has a large market share. 2) Low-income areas where Starbucks is struggling. By focusing on these two segments, Starbucks will be able

to see the actual effects of the new stores. In addition to seeing immediate effects they will also be introducing the new stores directly into the heart of the target markets.

Roll Out Plan Continued43

With the role out of the new stores, there will be lots of advertising starting slowly about two months before the actual opening. The level of advertisements will grow steadily until two days before the grand opening. This will be the climax in the number of advertisements and then with the grand opening there will be a general pull back in the number of ads. This will maximize the brand awareness in the areas that are targeted. Due to the fact that the areas targeted are not high income we are not expecting the overall cost of the ad campaign to be too expensive.

In the ads, there will be an emphasis on the convenience of our locations as well as the low cost of the product offering. The low cost is a key but only in conjunction with the high quality of the coffee offered.

The stores will have well trained and helpful partners who will make every customers visit impeccable. Speed and quality will be the main goals of the baristas during the first few weeks. This will be done in order to get people talking about “LIL’ Bucks

“LIL-BUCKS” – PRIVATE LABEL (LEVERAGE STARBUCKS BRAND)

CONTINUED FOCUS ON COMPANY OVERALL GROWTH

MAINTAIN STARBUCKS: CULTURE, VALUES, GUIDING PRINCIPLES AND ‘SOUL’.

SOLUTION TO COMPETITIVE PRICING PROBLEM: DIVERSIFICATION AND INNOVATION.

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SUMMARY

Latest Company Updates

July 26, 2007: Starbucks plans to enter Argentinean Market.

July 26, 2007: Starbucks increases prices by 9 cents

July 24, 2007: Starbucks puts off plans to enter Indian Market.

July 20, 2007: Starbucks and Hershey’s announce collaboration.

June 22, 2007: Starbucks and Ethiopia reach licensing agreement.

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QUESTIONS ?

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STARBUCKS

GR 732 Marketing Management 2007

STARBUCKS A Case Analysis

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