Starbucks - Report Example

Starbucks Battling the recession blues The Performance: The overall and segmental sales performance of Starbucks is portrayed in the graph below: Fig.1. Source: Values from Form 10-K Starbucks Corps - SBUX The major business segments of Starbucks reported are; the US, International and the Consumer Product Group. The US constitutes 76% of its operations, while International and Consumer Product Group constitute 20% and 4% respectively. The consumer product group includes; packaged coffee, branded products sold through various channels such as grocery stores, warehouse clubs and convenience stores through strategic alliances. The Revenue Streams The two revenue streams of the company are; Company operated retail and Specialty. The specialty operations are those outside the Company’s own retail operations. These are through licensing and sale of food products such as bean and ground coffee. The growth of the revenue streams are shown below: Starbucks: Revenue Streams All Values in US$ Million Year Ending Oct 3 2004 Oct 2 2005 Oct 1 2006 Sep 27 2007 Sep 28 2008 CARG Net Revenues   Company operated retail 4457.4 5391.9 6583.1 7998.3 8771.9 18.4% Specialty:   Licensing 565.8 673 860.6 1026.3 1171.6 20.0% Food Services and other 271 304.4 343.2 386.9 439.5 12.8% Total Specialty 836.8 977.4 1203.8 1413.2 1611.1 17.8% Total Net Revenues 5294.2 6369.3 7786.9 9411.5 10383 18.3% Operating Income (2) 606.5 780.5 894 1053.9 503.9 -4.5% Table 1. Source: Values from Form 10-K Starbucks Corps - SBUX From the year ending Oct 3, 2004 till the year ending September 28, 2008, the net revenues of the company registered a Compounded Annual Rate of Growth (CARG) of 18.3%. But the operating income saw a considerable decline in the year ending September 28, 2008 when it plunged 52% to $ 503.3 million from $1053.9 million in the preceding year. This is due to substantial increase in the cost of inputs. The prices of coffee and fluid milk, of the quality sought by Starbucks went up during 2008 squeezing the margins. Among the revenue streams, the company operated retail constitutes around 84 to 85% of the revenues, the specialties constitute the rest. While the Company operated retail notched a CARG of 18.4% from Oct 3, 2008 to Sep 28, 2008, specialties as a group grew at 17.8% in the corresponding period. In specialties, licensed retail grew at a higher CARG of 20%, while the food services and others trailed at 12.8% during the same period. The Performance of stores Percentage change in comparable store sales@ Oct 3 2004 Oct 2 2005 Oct 1 2006 Sep 27 2007 Sep 28 2008 Unites States 11% 9% 7% 4% -5% International 6% 6% 8% 7% 2% Consolidated 10% 8% 7% 5% -3% @Includes only Starbucks Company operated retail stores open 13 months or longer. Comparable store sales percentage for fiscal 2004 excludes extra sales week. Table 2. Source: Values from Form 10-K Starbucks Corps - SBUX A decline in comparable store sales was witnessed in the United States, while the increase was marginal in the international arena viewed in aggregate. Due to the economic conditions, the pace of expansion of channels of company’s retail also decelerated. The company opened fewer stores in the US during the year under review as compared with the preceding year. The pace of addition of company operated stores abroad also slowed down. But during the same period it increased its pace in adding greater number of licensed stores abroad. Stores opened during the year net of closures Description Oct 3 2004 Oct 2 2005 Oct 1 2006 Sep 27 2007 Sep 28 2008 Unites States   Company operated stores 521 580 810 1065 445 Licensed Stores 417 596 733 723 438 International   Company operated stores 160 177 240 286 236 Licensed Stores 246 319 416 497 550 Total 1344 1672 2199 2571 1669 Table 3: Fig.1. Source: Values from Form 10-K Starbucks Corps - SBUX The problem with Starbucks The Fast Food Industry is facing a slow down over the past three months. This is borne out by a study conducted by M/A/R/C(R) Research (PR Wire, Nov 10, 2008). The revelation that emerged from the study was that 48% of fast food consumers reduced their visits to quick service restaurants (QSR) over the past three months. They preferred eating at home to cut costs. Similar was the conclusion by Booz & Co. consumer spending survey (Glover. Katherine. Oct 21, 2008 P 9). There was however an exception to the rule. Some indeed increased their visit to QSR to save on cooking gas (PR Wire, Nov 10, 2008 P1). Compounding the downturn in the consumer visits to the QSRs is the increase in commodity prices. Starbucks has not been able to pass on the soaring input costs to the customer. This is evident from the decline in operating income despite increase in revenues. While the competitors like McDonald’s could successfully reposition its products offering lower calories at the same price, Starbucks has not embarked on such repositioning. Starbucks being perceived as a premium brand would find it hard to play to the masses. Solution to Starbucks In the present dismal state of the US economy, Starbucks will face an uphill task to reorient its ‘exclusive’ image. Shedding its differentiation strategy to cater to consumers with little propensity for spending would be diluting its brand equity. In these hard times, cost cutting in stores in terms décor is a seductive idea. But, they should standardize the store design and suppress the temptation to scale down from comfortable sofa and couches to hard wooden furniture. Similarly, automating the process to reduce labor intensity would be a good proposition provided there is no tradeoff in the taste of coffee. A differentiator competing on cost eroding the bases of differentiation loses brand equity. The effect will last even beyond this recession. The brand image, once eroded, is hard to reclaim. Starbucks should take a relook at its product and service portfolio. At the outset, it should clean up its product and service portfolio. It should divest businesses which have no synergy with its core value proposition. Selling CDs, books and DVDs should be shed from its portfolio for a start. Starbucks should also offer a value proposition to new niches such as calorie conscious generation who seek healthy low calorie food. Positioning products in this niche would mean lower input costs at the same price. Deploying new channels of delivery such as the internet would also be a viable proposition. Many companies in the fast food industry have successfully used E-retailing in their delivery model. Widgets on the PC enabling ordering with a click, customer order tracking features will offer value addition to the customer. There are many geographic regions, which are less impacted by the present recession in the US. Countries such as China and India are emerging economies, where Starbucks has little presence. The challenge in globalization is two fold; retaining global brand equity and being local in catering to the local tastes. For instance, when consumers in Europe resented the McDonald’s entry with the apprehension that the American brand is trying to alter its eating habits and culture, McDonald went out with a advertising blitz about its local contribution like job creation. Further, they designed menu to suit local tastes in each country in Europe. (Werdigier. Julia, August 25, 2007) Business model would therefore be; offering better value proposition at the same price, protecting the bases of differentiation, expanding the global reach while remaining local, deploying new channels of retailing, Standardizing and serving new niches. Though all differentiated brands like Starbucks are in a bind now, once the revival sets in these brand owners will be on a roll again. References Form 10-K Starbucks Corps – SBUX. (filed 2008,Nov 28), Annual Report which provides comprehensive overview of the company for the past year. Glover, Katherine. (2008, Oct 21). “Value Meal” Explosion Squeezes McDonald’s, Other Fast-Food Eateries http://industry.bnet.com/food/1000244/value-meal-explosion-squeezes-mcdonalds-other-fast-food-eateries/ PR Newswire. (2008, Nov 10).Fast Food Industry Sees Shorter Lines Due to Current Economy..http://www.highbeam.com/doc/1G1-188743512.html Werdigier, Julia. (2007,Aug 25). “McDonald’s but With Flair, New York Times, http://query.nytimes.com/gst/fullpage.html?res=990DEEDD113CF936A1575BC0A9619C8B63 Read More