Case Study:

Starbucks
Prof. Sonu Goyal Presented By:
Group 3

Avinav C Thakur
(12)
Bhuwan Jawa
(13)
Devdeep Majumdar
(14)
Devraj Roy
Introduction to
Starbucks
• 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 Statement
Establish Starbucks as the premier purveyor
of the
finest coffee in the world while maintaining
our
uncompromising principles as we grow
Guiding 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 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 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
Industry 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
Porter’s Five Forces
(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 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
SWOT Analysis
• 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
SWOT Analysis
• 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
SWOT Analysis
• 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:
Creating 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 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:
Company 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: 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 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
Strategies
Product Diversification
Coffee Beans & coffee equipment
Fresh brewed coffee, espresso & cappuccino
Lattes
Wi-Fi
Music CDs
Food Items
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
 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
 YEAR LIQUIDITY
2008 2007 RATIOS
2006 2005 2004
CURRENT 1,748.01,696.491,529.791,209.33 1,350.9
ASSESTS

CURRENT 2,189.72,155.571,935.62 1,227.0 746.26

LIABILITY

CURRENT 0 .8 0.79  0.79 0.99 1.81

LEVERAGE
YEAR 2008 2007 2006 2005 2004
DEBTS
RATIO 3181.7 3,059.76 2,200.441,423.43 916.33

EQUITY 2490.9 2,284.12 2,228.512,090.262,470.21

CAPITAL

DEBT – 1.28 1.34 0.99 0.68 0.37

EQUITY
RATIO
 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 20.57 18.96 12.90
Annual Avg.)
Net Income (5- 3.52 9.23 15.13
Year Annual
Avg.)
Dividends (5- NA NA 11.79
Year Annual
Avg.)
Profit Margins %

Company Industry S&P 500

5Yr Gross 23.0 29.6 39.4
Margin (5-Year
Avg.)
5Yr Net Profit 6.3 8.9 11.5
Margin (5-Year
Avg.)
OVERVIEW OF 2008 & STRATEGIES
FOR 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
FINANCIAL TARGET 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.
 Willingness to Pay

The

VALUE
Competiti
W
ed
g e

ve Wedge

Costs
Product 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 Differentiation
(the value chain)
Firm Infrastructure
Financing, Legal Support, Accounting

Human Resources
Recruiting, Training, Incentives, Feedback

Technology &
Equipments, Production, Packaging, Selling Development

Procurement
Getting the coffee : Where & How

Inboun Billing Promotion Customer Primary activities

Deliveri
d and s and satisfactio
ng the Advertisin n and
Logistic collectio
product g feedback
s n
Customer Willingness to
Pay
• Starbucks charged Why go to Starbucks?
coffee at slightly higher
rates A place to think and Imagine
• Location A place to gather and talk
• Ambience (Everything A Third Place beyond Work and
matters), seating, Home
comfort and convenience
Leather Chairs Newspapers
• COFFEE centered theme Couches The Authentic Coffee
• Wi-Fi … more value, Experience: the artistry of
more time, more espresso making
business Fast Service and Quiet Moments
Stores Designed on 4 stages of
coffee making: growing,
roasting, brewing and aroma
Mails, Music, Work
New 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 Differentiation

Willingness to pay Starbucks

Willingness to pay Others

Costs Starbucks

Costs Others
Future 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
challenges
• 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….!!!