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Starbucks

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Starbucks

  1. 1. Case Study: Starbucks Presented By: Group 3 Avinav C Thakur (12) Bhuwan Jawa (13) Devdeep Majumdar (14) Devraj Roy (15) Gaurav Ganda (16) Prof. Sonu Goyal
  2. 2. Introduction to Starbucks <ul><li>Company started in 1971 in Seattle, Washington </li></ul><ul><li>Grew from 55 stores in 1989 to over 15,000 stores today </li></ul><ul><li>Products sold include: </li></ul><ul><ul><li>- beverages - pastries </li></ul></ul><ul><ul><li>- whole coffee beans - coffee-related retail items </li></ul></ul>
  3. 3. Mission Statement <ul><li>Establish Starbucks as the premier purveyor of the </li></ul><ul><li>finest coffee in the world while maintaining our </li></ul><ul><li>uncompromising principles as we grow </li></ul>
  4. 4. Guiding Principles <ul><li>Provide a great work environment and treat each other with respect and dignity </li></ul><ul><li>Embrace diversity as an essential component in the way we do business </li></ul><ul><li>Apply the highest standards of excellence to the purchasing, roasting, and fresh delivery of our coffee </li></ul><ul><li>Develop enthusiastically satisfied customers all of the time </li></ul><ul><li>Contribute positively to our communities and our environment </li></ul><ul><li>Recognize that profitability is essential to our future success </li></ul>
  5. 5. Coffee: Some Facts <ul><li>First consumed in East Africa during the 11 th century </li></ul><ul><li>Quality of beans – Robusta & Arabica </li></ul><ul><li>Produced in 70 countries </li></ul><ul><li>Global coffee production – 134.2 mn bags </li></ul><ul><li>More than $70 bn retail sales globally </li></ul>
  6. 6. Industry Definition <ul><li>Specialty Eatery Industry </li></ul><ul><ul><li>Food and beverages </li></ul></ul><ul><ul><li>Steady growth in the 90s leading to increased competition </li></ul></ul><ul><ul><li>Demand for specialty food services has increased in recent years </li></ul></ul>
  7. 7. Industry and Competitive Analysis <ul><li>Market Structure </li></ul><ul><ul><li>Monopolistic Competition </li></ul></ul><ul><li>Competitive Activity </li></ul><ul><ul><li>Many companies are in the market and competition is fierce </li></ul></ul><ul><ul><li>Competitors use location, product mix, and store atmosphere differentiation to establish market niche </li></ul></ul><ul><li>Industry Costs and Capital Structure </li></ul><ul><ul><li>Low to moderate costs for each location </li></ul></ul><ul><ul><li>Major start-up expenditures are property and equipment </li></ul></ul><ul><ul><li>Major operating costs are labor and cost of sales </li></ul></ul>
  8. 8. Industry PEST Analysis <ul><li>Political Influences </li></ul><ul><ul><li>State & Local government controls </li></ul></ul><ul><li>Economic Influences </li></ul><ul><ul><li>Changes in disposable income could influence purchase levels </li></ul></ul><ul><li>Social Influences </li></ul><ul><ul><li>Consumer preferences could shift from coffee to other beverages </li></ul></ul><ul><li>Technological Influences </li></ul><ul><ul><li>Use of technology can improve operational efficiencies </li></ul></ul>
  9. 9. Porter’s Five Forces <ul><li>Competition </li></ul><ul><ul><ul><ul><ul><li>Tully’s Coffee, Gloria Jean’s, Caribou Coffee etc. </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Competition nowhere in terms of volume of operations </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Competitors selling similar products, incl. specialty coffees & high quality food </li></ul></ul></ul></ul></ul><ul><li>Threat of new entrants </li></ul><ul><ul><ul><ul><ul><li>Controlled access of distribution channels </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Innovation & product differentiation </li></ul></ul></ul></ul></ul>
  10. 10. Porter’s Five Forces (contd.) <ul><li>Bargaining power of buyers </li></ul><ul><ul><ul><ul><ul><li>More options due to no. of competitors </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Large variety of products </li></ul></ul></ul></ul></ul><ul><li>Bargaining power of suppliers </li></ul><ul><ul><ul><ul><ul><li>Over crowding of market </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Rise in prices of coffee beans </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Choose suppliers based on quality, social, environmental & economic issues </li></ul></ul></ul></ul></ul><ul><li>Threat from substitutes </li></ul><ul><ul><ul><ul><ul><li>Tea </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Soft drinks </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Juices </li></ul></ul></ul></ul></ul>
  11. 11. SWOT Analysis <ul><li>Strengths </li></ul><ul><ul><li>Never experienced a strike or work stoppage </li></ul></ul><ul><ul><li>Good relationships with coffee suppliers </li></ul></ul><ul><ul><li>Value employees </li></ul></ul><ul><ul><li>Located in high traffic areas </li></ul></ul><ul><ul><li>Employee turnover rate is 60%, compared to 140% in the fast food business </li></ul></ul><ul><ul><li>They don’t move into new markets until they dominate the ones they expand into </li></ul></ul>
  12. 12. <ul><li>Weaknesses </li></ul><ul><ul><li>Excessive focus </li></ul></ul><ul><ul><li>Employees report to two division heads </li></ul></ul><ul><ul><li>Increasing shareholders dilutes their interest </li></ul></ul><ul><ul><li>They have expanded too quickly, and have already saturated the US market </li></ul></ul><ul><ul><li>They do not allow smoking in their stores, alienating some of their customers </li></ul></ul>SWOT Analysis
  13. 13. <ul><li>Opportunities </li></ul><ul><ul><li>Expansion into European and Latin American markets </li></ul></ul><ul><ul><li>Distribution agreements, such as hotels, airlines, and office coffee suppliers </li></ul></ul><ul><ul><li>Reducing alcohol consumption in the US leads to bars being used less which leads to people needing another place to go </li></ul></ul><ul><ul><li>Use supermarkets as a way of expanding into international markets </li></ul></ul><ul><ul><li>Numerous brand extension </li></ul></ul><ul><ul><li>Improve on perception of instant and decaffeinated coffee to expand that market share </li></ul></ul>SWOT Analysis
  14. 14. <ul><li>Threats </li></ul><ul><ul><li>The coffee market is saturated </li></ul></ul><ul><ul><li>Cost of coffee beans is expected to rise in the near future </li></ul></ul><ul><ul><li>Supermarkets threaten whole bean sales </li></ul></ul><ul><ul><li>Farmers might switch from coffee to vegetable crops </li></ul></ul><ul><ul><li>High competition from Japanese competitors </li></ul></ul><ul><ul><li>Consumers trend toward more healthful fare </li></ul></ul>SWOT Analysis
  15. 15. VALUABLE RESOURCES: Creating Competitive Edge <ul><li>Physical Resources </li></ul><ul><ul><li>Large number of outlets (Hub & Spoke Model) </li></ul></ul><ul><ul><li>Operations in 40 countries with 9000 cafes </li></ul></ul><ul><ul><li>Hi-tech coffee machines & equipments </li></ul></ul><ul><li>Intangible Resources </li></ul><ul><ul><li>Techniques to roast & brew coffee </li></ul></ul><ul><ul><li>Large satisfied customer base </li></ul></ul><ul><ul><li>Building employee relationship </li></ul></ul><ul><ul><li>Reputation for having the finest products and services in the world </li></ul></ul>
  16. 16. Core Competencies <ul><li>High quality of products </li></ul><ul><li>Quality of Workforce </li></ul><ul><li>Strategic Store Location </li></ul><ul><li>Tangible Resources </li></ul><ul><ul><ul><li>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.) </li></ul></ul></ul><ul><li>Intangible Resources </li></ul><ul><ul><ul><li>Perception/Reputation of quality (beans, company name, etc) </li></ul></ul></ul><ul><ul><ul><li>Largest and best known of coffee house chains </li></ul></ul></ul>
  17. 17. Corporate Culture: Company Values <ul><li>No compromise on Quality </li></ul><ul><li>No Franchising </li></ul><ul><li>Not selling artificially flavored coffee beans </li></ul><ul><li>Employee freedom of expression </li></ul><ul><li>Customer is of Prime Importance </li></ul><ul><ul><ul><li>“ Just Say Yes” to customer requests </li></ul></ul></ul><ul><ul><ul><li>Modify Products as per customer’s preferences </li></ul></ul></ul><ul><ul><ul><li>Satisfy customer at all costs </li></ul></ul></ul><ul><ul><ul><ul><ul><li>Eg: Providing a free-drink coupon if the customer is not satisfied </li></ul></ul></ul></ul></ul>
  18. 18. Strengths: Employees <ul><li>Employee/Company culture </li></ul><ul><li>Higher than industry wage </li></ul><ul><li>Comparatively lower employee turnover </li></ul><ul><ul><ul><ul><ul><li>65% as compared to 150 to 400 percent a year in most fast-food chains </li></ul></ul></ul></ul></ul><ul><li>Employee Fringe Benefits </li></ul><ul><ul><ul><ul><ul><li>Medical Insurance </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Life Insurance </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Paid Vacations </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Short & Long-term disability </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>30% Product Discounts </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Stock Option Plan (Bean Stock) </li></ul></ul></ul></ul></ul><ul><li>Employee training program </li></ul>
  19. 19. CSR strategy <ul><li>Major contributor to CARE since ‘91 </li></ul><ul><li>Financial support to community literacy organizations </li></ul><ul><li>Green Store Task Force </li></ul><ul><ul><li>10 cent discount to customers bringing their own mugs </li></ul></ul><ul><li>Coffee grounds given as soil amendments </li></ul>
  20. 20. Diversification Strategies Product Diversification <ul><li>Coffee Beans & coffee equipment </li></ul><ul><li>Fresh brewed coffee, espresso & cappuccino </li></ul><ul><li>Lattes </li></ul><ul><li>Wi-Fi </li></ul><ul><li>Music CDs </li></ul><ul><li>Food Items </li></ul>
  21. 21. International Competitors <ul><li>Dunkin Donuts </li></ul><ul><ul><ul><li>Sells coffee beans both online & at physical outlets </li></ul></ul></ul><ul><ul><ul><li>Fresh brew coffee </li></ul></ul></ul><ul><ul><ul><li>Similar services & products as Starbucks </li></ul></ul></ul><ul><li>Mc Donald’s </li></ul><ul><ul><ul><li>Offers number of specialty coffees </li></ul></ul></ul><ul><ul><ul><li>Huge penetration </li></ul></ul></ul><ul><ul><ul><li>Established fast-food retailer </li></ul></ul></ul>
  22. 22. Financial Analysis Solvency <ul><li>Not extremely liquid but capability in Financing short-term debt will not be a problem </li></ul>Profitability <ul><li>Profitable </li></ul><ul><li>Below industry standards </li></ul><ul><li>Declining in 2008 due to higher operating costs </li></ul>Financial Leverage <ul><li>Initially the company was financed majorly by equity capital later over the years it accepted debt majorly long term </li></ul><ul><li>Has ability to cover debt obligations </li></ul>
  23. 23. LIQUIDITY RATIOS LEVERAGE YEAR 2008 2007 2006 2005 2004 CURRENT ASSESTS 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 YEAR 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
  24. 24. Net Profit Margin (%) RETURN ON EQUITY RETURN ON ASSESTS 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 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 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
  25. 25. GROWTH RATES % Profit Margins % 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
  26. 28. 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 external environment.
  27. 29. 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.
  28. 30. The Competitive Wedge Willingness to Pay Costs Wedge VALUE
  29. 31. Product Differentiation <ul><li>Products: Coffee, beans, pastries, equipment, mugs, containers, accessories, music CDs </li></ul><ul><li>“ Everything matters” store ambience </li></ul><ul><li>Retention of coffee aroma </li></ul><ul><li>City specific mugs and t-shirts </li></ul><ul><li>Season special coffees, rare exotic coffees, handcrafted beverages etc </li></ul><ul><li>Custom drinks and customer attention </li></ul>
  30. 32. Process Differentiation (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
  31. 33. Customer Willingness to Pay <ul><li>Starbucks charged coffee at slightly higher rates </li></ul><ul><li>Location </li></ul><ul><li>Ambience (Everything matters), seating, comfort and convenience </li></ul><ul><li>COFFEE centered theme </li></ul><ul><li>Wi-Fi … more value, more time, more business </li></ul>Why go to Starbucks? A place to think and Imagine A 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 aroma Mails, Music, Work
  32. 34. New Products and Places <ul><li>Music CDs </li></ul><ul><li>The Starbucks card </li></ul><ul><li>The Duetto Visa card </li></ul><ul><li>Wifi internet </li></ul><ul><li>Starbucks coffee in supermarkets (in Flavorlock packaging) </li></ul><ul><li>Airports, Universities, airlines, equipment in hotel rooms, business offices </li></ul><ul><li>Mail order sales </li></ul><ul><li>Amazon.com and other websites </li></ul>
  33. 35. Costs versus Differentiation Others Starbucks Starbucks Others Willingness to pay Costs Costs Willingness to pay
  34. 36. Future Challenges <ul><li>Deteriorating global economy </li></ul><ul><ul><ul><li>Revenues down 6% </li></ul></ul></ul><ul><ul><ul><li>Decline of 9% in same store sales </li></ul></ul></ul><ul><li>Declining customer confidence levels – lowest in past 40 years </li></ul>
  35. 37. Ways to overcome the challenges <ul><li>Re-architect cost structure </li></ul><ul><ul><ul><li>Containing costs </li></ul></ul></ul><ul><ul><ul><li>Improving operations </li></ul></ul></ul><ul><li>Invest $500 mn in partner benefits, stock compensations </li></ul><ul><li>Closing 300 under-performing stores globally </li></ul><ul><li>Laying off 6000 partners </li></ul><ul><ul><ul><li>Severance package to be paid </li></ul></ul></ul>
  36. 38. Thank You….!!! ?

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