Sales Forecasting in Starbucks Corporation - Case Study Example

SALES FORECASTING: STARBUCKS Name University Course Tutor Date Sales Forecasting: Starbucks Introduction Starbucks Corporation is a retailer, roaster, and marketer of specialty coffee. The company has a mission of inspiring and nurturing the spirit of humans; this makes use of the famous slogan that mentions one person, cup, and neighborhood. Starbucks has retail stores operated by the company that are responsible for the purchase, roasting, and selling of packaged coffees (Lynch, 1989). These stores have also been selling freshly brewed teas, coffees, alongside other beverages; in addition, they also sell a number of beverage-making accessories and equipment, and fresh foods. The company has also been selling various tea and coffee products via such other channels as warehouse clubs, national service accounts, grocery stores, and convenience stores. Alongside Starbucks brand, the company has other brand portfolios which are inclusive of Seattle’s Best Coffee®, Tazo® Tea, and Starbucks VIA® Ready Brew (Starbucks, 2015). The company has an objective of maintaining the Starbucks brand as among the world’s most respected and recognized brands. In addition, the company exhibits commitment in establishing a balance between social responsibility and profitability. The generation of revenues by Starbucks is subject to foodservice operations, company-operated stores; consumer packaged goods, and licensed stores. Stores operated by the company with locations in high traffic and high visibility areas have been benefiting from an immense deal of customer loyalty. Ideally, Starbucks is not characteristic of franchising operations but enters into licensing arrangements with an objective of penetrating selected locations which could otherwise have been impossible. These arrangements see the company provide tea, coffee, alongside other related products for resale; the company also receives royalties and a license fee on sales. Notably, CPG revenues are inclusive of international and domestic sales of packaged tea and coffee, alongside an immense deal of single-serve coffee, ready-to-drink beverages, warehouse club, and grocery tea products. In addition, it is inclusive of product sales’ revenues, licensing revenues obtained from manufacturers’, alongside Seattle’s Best Coffee brands market Starbucks brand via agreements of licensing. On the other hand, foodservice revenues are subject to companies that have been servicing industry and business, office coffee distributors, healthcare, airlines, education, restaurants, and hotels (Starbucks, 2015). Forecasting Sales forecasting is an essential component of business management that refers to the procedure of estimation of the prospected sales of a business. It is challenging for Starbucks to manage cash flow, growth plans, or inventory if it does not have a clue of future sales. For instance, a combination of general industry and economic trends alongside sales of the same month in consecutive years can be essential for the prediction of the sales of a business in that particular month for future years. Starbucks can employ various models for sales forecasting. The forecasting methods can either be quantitative or qualitative (Globaldata, 2010). The qualitative forecasting method makes use of subjective judgment with the basis of such non-quantifiable information as labor relations, management expertise, development, and research. Ideally, the qualitative method has no requirement for a history of demand for the service or product. On the other hand, the quantitative method refers to research method dependant on questionnaires, interview, observations, case studies, subjective reports, and focus groups. Starbucks has been exposed to various significant risks via quantitative and qualitative methods with the capability of causing a variation on the actual results of the company with respect to projections, forecasts, and targets. The main risks are average value transactions or lower customer traffic. Ideally, these have been found to have negative effects on comparable store sales, earnings per share, net revenues, and operating income (Goldman, 2008). Reportedly, these risks arise from the effect of initiatives by competitors alongside enhanced competition and lack of acceptance by customers with regard to price increase to cater for new products’ costs (Globaldata, 2010). Scarcity of desirable locations for real estate leasing (at fair rates) or delays in the opening of stores as a result issues that cannot be solved by the company bars the company from realizing its annual targets thus significant negative impact on earnings per share, operating income, and net revenues. There are also other risks which are inclusive of interruption of material supply which may result from failures among third-party suppliers, problems with Starbuck’s roasting plants, and problems with carriers that are involved in shipping of goods within the distribution channels of Starbucks. Notably, the qualitative method best fits sales forecasting involving three consecutive years considering that it has emphasis on real time analysis of expert’s research. It makes use of variable numbers which are changed on the basis of consumers’ opinions and economical changes having the most significant impact on sales (Clark, 2007). Revenue from Sales for 2012, 2013, and 2014 with forecasts for 2015 and 2016 Year Revenue from Sales 2012 $7,463,500 2013 $8,484,500 2014 $9,589,000 2015 $10,587,000 2016 $11,434,000 Figure 1: Starbucks revenue from sales showing forecasted sales for 2015 and 2016 (Geereddy, nd) Explanation of the Data To come up with sales forecasts for Starbucks for 2015 and 2016, some assumptions have been made. One of these assumptions is revenue decomposition. While forecasting revenues from sales, segmentation has been made to three components, which are: channel development, company-operated, and licensed revenue (Motley, 2009). In addition, segregation of licensed and company-operated revenue has been made on grounds of geographical regions. It is estimated that, there will be an 8% revenue increase in the American region (Starbucks, 2013). There is the belief that, the historical growth rate in the American region is an outstanding proxy for the future considering the economic situation and the current company. Ideally, Starbucks has a target of approximately 3000 new stores by the year 2018 in the American region. The historical expansion is this region has the capability of achieving this prospected growth. By the year 2015, the company also targets to have 1500 company-operated stores in China. Thus, by the year 2015, it is expected that the CAP region will have at least 2000 company-operated stores. The European economy is characterized by an immense deal of uncertainties. Consequently, the EMEA region expects a growth of 2-4% of company-operated stores. Notably, licensing activities offer the best opportunity in this region considering that Starbucks is exposes to minimum risks in EMEA. This forecast has also made the assumption of operating margins. In this discussion, Starbucks falls in the category of growth stages. In business, market maturation follows growth period thus pressurization of margins. Through the year 2018, the company is expected to make investments primarily in such high margin segments as CPG and CAP thus expanding operating margins (from 13.4% to 14.8%). Ideally, these margins may face significant threat from close competitors, inflation, commodity prices, and wage. These threats will, however, be offset considering the company’s focus on CAP and CPG, which are characteristic of 20% operating margins with exclusion of joint ventures (IBIS World, 2013). Discussion of Results From the results, it is evident that Starbuck’s sales will show gradual growth for the years 2015 and 2016. High rates of growth are, however, not expected as a result of a number of reasons. Notably, the future prospects of Starbucks are subject to both strengths and weaknesses. One of the reasons why the company’s sales are expected to grow is Starbucks brand loyalty. Ideally, brand popularity and recognition are essential assets for the company as they allow Starbucks to establish a loyal consumer base. Ideally, customers have been enjoying discounts and incentives for all purchases via “My Starbucks Rewards” and the “Gold” program (Bell, 2009). It thus can thus be said that Starbucks’ commitment in retaining customers has been crucial towards the company’s position of an industry leader. The prospected growth of the company’s sales is also expected to be as a result of diversified product lineup. Coffee will still make the core business of Starbucks, but the company is exhibiting an immense deal of efforts towards the diversification of its product line. This draws substantial illustration from recent acquisitions of Teavana, Evolution Fresh, and Tazo. Business analysts have a common belief that these acquisitions alongside other strategic moves have the capability of broadening the product mix of Starbucks thus a better global position for the company. In addition, these acquisitions are a sign of Starbucks’ commitment to health-conscious customers. The sales forecasting of Starbucks Corporation also indicates prospects for the growth of sales as a result of the company’s entry into the wellness and health spaces. As a result of increasing consumer demand of natural meals’ and drinks’ ingredients, Starbucks made the acquisition of the Evolution Fresh brand in the year 2011 thus an expansion plan for its choices of products. Starbucks is already achieving an edge over its close competitors despite the fact that it entered the wellness and health space most recently. The expected growth in Starbucks’ sales could also be attributed to Channel Development growth. Ideally, the channel development sector is expected to be of much essence to the forward movement of all revenues. At the moment, CPG makes 11.7% of the company’s total sales with the figure expected to be 18.3% by the year 2018. This sector is characteristic of an excellent upside potential as result of high demand and margin of consumers. Notably, profitability and growth of Starbucks will have a lot to do with the progressive success of emergent products. Despite the expected growth of Starbucks, projections reveal that the growth of sales will not be explosive. A number of factors explain why the company’s sales are expected to show a gradual growth but not a rapid one. One of the reasons for this slow down in growth is the dependence on international performance (Gillespie, 2008). Such volatilities in economic factors as employment rates, discretionary income changes, and labor costs are major contributing factors to uncertainty in retail sales. On an international scale, in the Financial Year 2012, Starbucks was reported to close 79 company-operated stores most of which were in the EMEA region. Ideally, the weak performance of EMEA has the capability of hindering Starbucks’ growth goals. Price premium is also expected to be one of the reasons for the slow down in growth of Starbucks’ sales in the near future. Starbucks is a leader in the industry that makes use of high quality ingredients; consequently, a cup of coffee is expected to go at a higher price at Starbucks than other retailers. Price premium is found to be beneficial in times of economic boom characterized by less cautiousness among consumers when it comes to spending. However, in unfavorable economic conditions, Starbucks could become quite vulnerable as a result of price premium considering that customers may opt for cheaper alternatives (Mizrahi, 2008). Substitute goods form another reason why Starbucks does not expect explosive increase in sales in the next two years. With the continued success of Starbucks, there is every expectation that competitors will reach out at its customers. Reports indicate that McDonald’s is the most recent threat to Starbucks. For instance, it has been recently observed that, McDonald’s has engaged itself in intensive promotion of its McCafe products’ “premium” line (Parnell, 2006). McCafe exhibits an immense deal f convenience and lower prices than Starbucks thus the possibility of a significant number of customers abandoning Starbucks. The forecasted results of Starbucks can also be explained by government oversight and legislation. In the recent past, NYC passed a legislation banning a number of “junk” items. It is believed that, this legislation will oppose an immense deal of challenge to the operations of Starbucks. This measure has the capability of limiting the sale of sugary drinks thus leading to lower sales in these markets. However, analysts have the belief that the company is still at an outstanding position to make up for the sales which are expected to be lost as a result of this measure. Conclusion Starbucks’ sales are expected to record a gradual growth in the next two years. There are a number of factors favoring growth while others are expected to limit growth. Thus, on average, the company’s management expects some gradual growth rather than an outburst. The forecasted growth will draw an immense deal of influence from CAP sales. Ideally, the CAP region is currently characteristic of an attractive economic trend, however, this may not last for long. In the case of a strong CAP’s economy, high sales are expected in the CAP region; on the other hand, weak CAP’s economy is expected to have the consequence of low sales in the region. This is one of the illustrations why the forecasting of Starbucks’ sales is possible. The forecast takes into consideration all business segments of the company, alongside segmentation on grounds of regions. Notably, business is not expected to grow at the same rate in all segments of business, neither is it expected to grow at the same rate in all geographical regions. Executive Summary Starbucks Corporation is a retailer, roaster, and marketer of specialty coffee with a mission of inspiring and nurturing the spirit of humans. Sales forecasting is of much essence in order to predict the position of the company in future years. It will be quite impossible to make a strategic plan for the company if the management does not have a clue of the expected position of the company in years to come. The expected position of the company can easily be reflected by sales forecasts. Sales forecasting is an essential component of business management that refers to the procedure of estimation of the prospected sales of a business. Starbucks can employ various models for sales forecasting. The forecasting methods can either be quantitative or qualitative. The qualitative forecasting method makes use of subjective judgment with the basis of such non-quantifiable information as labor relations, management expertise, development, and research. Ideally, the qualitative method has no requirement for a history of demand for the service or product. On the other hand, the quantitative method refers to research method dependant on questionnaires, interview, observations, case studies, subjective reports, and focus groups. From the results, it is evident that Starbuck’s sales will show gradual growth for the years 2015 and 2016. High rates of growth are, however, not expected as a result of a number of reasons. Growth is expected because of brand loyalty, diversified products, entry into wellness and health spaces, and growth of channel development. On the other had, growth is expected to be limited by substitute goods, legislation and government oversight, price premium, and dependence on international performance. References Geereddy, N., nd. Strategic Analysis Of Starbucks Corporation. Starbucks Case Analysis. IBIS World, 2013. The Coffee & Snack Shop Industry in the US Report. Lynch, P., 1989. One Up on Wall Street. New York: Simon & Schuster Paperbacks. Mizrahi, C., 2008. "Starbucks Vs. McDonals." Gurufocus.Com. Available at: . [Accessed 24 April 2015] Parnell, J., 2006. Strategic Management. 2nd ed. Cincinnati: Atomic Dog. . Starbucks, 2015. Starbucks Corporation. Available at: http://www.starbucks.com/ [Accessed 24 April 2015] Bell, D., 2009. Lattes Lure Brits to Coffee; Tea Sales Fall as Starbucks Draws the Young; Fighting Back With New Tea Flavors, Travel Cup, Wall Street Journal, p.B1. Clark, T., 2007. Starbucked: A Double Tall Tale pf Caffeine, Commerce and Culture, Little. New York: Brown and Company. Globaldata., 2010. Starbucks Corporation-Financial and Strategic Analysis Review. Global Data. Motley, L., 2009. Learning About Customer Satisfaction from Starbucks. ABA Bank Marketing, December, p.43. Gillespie, M., 31 Jan 2008. "Starbucks Axes Sandwiches as Part of Fix." Available at: http://biz.yahoo.com [Accessed 24 April 2015] Goldman, D., 12 Feb 2008. "Starbucks Puts the Brakes on New Stores." CNNMoney.Com. Available at: . [Accessed 24 April 2015] Starbucks, 2013. 10-K Form for FY ended on September 29th, 2013. Read More