Starbucks Financial and Business Analysis - Essay Example

Starbucks Financial and Business Analysis [Supervisor’s Memorandum Howard Schultz, Chairman, President and CEO From: Date: Subject: Recommendations for Starbucks The paper attempts to provide financial and business analysis of Starbucks Corporation while examining the company’s mission and vision statement. The paper discusses many issues faced by Starbucks in the 21st century and four factors related to the issues discussed in Starbucks case. Furthermore, the paper provides recommendations for the company to maintain its leadership in the market. Lastly, the paper provides a Pro forma for Starbucks to start its operations in India. Company Profile Starbucks Corporation starting off from 1971 is the world’s largest coffee shop chains whose headquarter is based in Seattle Washington United States. With peculiar recognition and deliverance, the corporation is settled with 19000 coffee stores all over the world (Bussing-Burks, 2009). The chain of Starbucks is widespread and it is located in almost 60 countries in the world. With such powerful recognition, Starbucks is compelling with its globalized customer chain order, which makes it a unique coffeehouse chain present in the global market (Bussing-Burks, 2009). There is a big range of items and products which Starbucks offer. The company offers three different categories of products which are coffee goods, handmade beverages and consumer goods. The items which are included in the three respective categories are espresso-hot coffee, cold drinks, snacks, sandwiches, or hot filtered coffee. The company holds an effective supply chain network which is to engage with its worldwide customers’ follow ship. The corporation also holds a place in retailer service, which is centrally operating in Seattle respectively (Bussing-Burks, 2009). Mission, Vision and Objective With an intensified one liner “one person, one cup and one neighborhood”, Starbuck’s mission is to drive human spirit in the most aspiring means, and that is by joining work and innovation at one time of service. The company strongly believes in providing quality and is passionate of outsourcing finest coffee beans and is tended with great care (Starbucks, 2012). Real issue in the Case (root cause): The company had numerous issues on hands that disrupted its sales and had a negative impact on growth of the company. In 2008, the aim of the company had solely remained to increase rapid growth of the company and its expansion instead of putting more efforts on improving customer services. The increase in intense competition is also the factor that is resulting in shutting down of operations of Starbucks in U.S. New Competitors have risen to offer low priced coffee cheaper than Starbucks itself. The competitors have taken account of diversification in their business and not limiting their business to just providing specialty coffee. McDonald’s when entered the business it started as a fast food restaurant. Today, McDonald’s have diversified its business by offering premium coffee, breakfast options and many other products ranging from different market segments to affect sales of Starbucks (Alkema, Koster, & Williams, 2010). The other issue related to Starbucks was that it was rationalizing its global portfolio by growing its store too fast. This is resulting in the cannibalizing of its products as the stores are closely located. Due to this reason the company had closed down 1,000 company operated stores. 8000 stores have been closed down in United States, and remaining stores in other international markets. Starbucks was affected by the financial crisis around the world due to which its stock price declined to $10 in 2009 from $35 in 2007. However, the company managed to overcome this change and recently in 2011, the stock price went to $30. But then, its net revenues were not maintained and did not rise along with the stock price which is a greater concern for the company (Alkema, Koster, & Williams, 2010). Four most important facts: The first most important factor that contributes to the decline in sales is the economic downturn around the world which has led to financial crisis for Starbucks. Starbucks is considered to be a high quality coffee but with a high price tag. This becomes an important factor in the contribution of worldwide shutting down of the Starbuck’s café. The other most important factor is the pressure from various competitors that are trying suppressing the existence of Starbucks in the market. Competitors such as McDonalds are trying to put pressure on the company to step down as the world market leader. Various companies are offering lower priced coffee in the expectation that it would drive Starbucks out of the business (Koehn, Besharov, & Miller, 2008). The third most important factor is the growth of the company and the expansion of its number of stores around the world. This had made the company to focus on its operation in expanding the business to many parts of the world and achieving their vision which was to open 40,000 café’s around the world. The company has diverted its focus from customers to international operations which has created disruption in its sales. The company can only survive in the market if they have care for their customers and always willing to satisfy their needs. The last important factor is to depend more on the coffee product instead of offering more varieties and diversification in its product portfolio. This has enabled customers to shift to from their brand because there is not much diversification and products to offer. This is creating many problems for the company as its majority of its revenues about 75% comes from sales of coffee products. If in the future there is a shortage of demand of coffee beans then the company would not survive. (Koehn, Besharov, & Miller, 2008). Business Canvas Model: The Business Model Canvas for Starbucks has been described below: Key Partners: Starbucks have key strategic partnership with its suppliers around the world that is responsible for delivering the high quality coffee beans to the company. The company has created a strategic alliance with other companies for the purpose to expand its business in different countries and to open up its franchises. It is the marketing strategy of the company to form strategic alliance for the promotion of its brand because they are well aware of their country’s market trends and their customer buying situation. Starbucks have formed a strategic alliance with Tata group of India to expand its operations in India. Moreover, the company has formed an alliance with United Airlines that offers Starbucks coffee in the airplane to its customers. Starbucks have also teamed up with Kraft foods to sell their coffee in grocery stores to compete with the biggest brands. The great strategic partnership of Starbucks is with the music industry (Larson, 2008). Key Resources: The image and reputation of the company in the market are the key resources for being the market leader of premium coffee. The company is known for making strategic alliance and outsourcing its operations (Starbucks, 2011). Value Proposition: The company offers the high quality premium coffee and claims that it is a desire of a customer for a better start to a day. The company offers various value creation offers such as Starbuck mobile phone application which enable customers for a unique experience of ordering the product of Starbucks. It allows customers to locate the nearest store in the vicinity which can also offer varieties of products offered by the company and their prices. They could easily pay for the product and order the product through this mobile phone application. It reduces the waiting time for the customer and also providing the experience for delivering well designed service (Starbucks, 2011). Customer Relationship: Starbucks consider customers as their assets and has a commitment to respond their unique preferences and wants. The company believes that they have to provide quality products to customers and for that the company has to connect with its customers according to their relevant culture (Mukerjee, 2007). Customer Segments: The company is focused on targeting students and adults who prefer drinking coffee before going to work. The company’s core customers have an average age of 24 which has been identified through market research. The company focuses on the niche market of gourmet coffee drinkers and the basis of its strategy is to make coffee that stand out as compared to its competitors (Quelch & Moon, 2006). Channels: To reach out to customers, Starbucks have opened various coffee shops and café’s that helps in providing best services to customers worldwide. The company has various strategic alliances with airlines, beverage companies to deliver their products straight to their customers who do not visit the stores frequently (Starbucks, 2011). Cost Structure: The company is focused on reducing their costs by $400 million till the end of the year 2009. The company is planning to enhance their profitability by putting more efforts on customer segments instead of making efforts in expanding their business too rapidly. The company is expected to save about $200 million which would make be helpful for the company to diversify its business portfolio (Starbucks, 2011). Revenue Streams: Starbucks generate revenues from the retail stores and specialty operations. The company has total revenues of $11.7 Billion for the year ended 2011. The company is focused towards increasing their profitability by decreasing their cost and increasing their savings which could help in managing customer’s needs and to cater different market segments (Starbucks, 2012). SWOT Analysis Strengths The major strength of Starbucks is that it is leading the coffee industry with 16,858 stores opened at the end of the year 2010. Starbucks is considered to be competing domestically as well as internationally with coffee companies. The company has also step up in the retail market by launching coffee beans for home makers. The idea had been to capture the large market that drank coffee at their homes (Starbucks, 2011). The company has a strong brand equity and strong brand recognition by the customers which has led to become the market leader. The company is financially sound but due to its financial crisis its stocks had fallen but Howard Shultz took pride in resolving the issues and made things right for the company. Starbucks is known for its quality products and has an environment that attracts customers that tends to be friendly. The company is operating in more than 40 countries around the world and has an international presence (Starbucks, 2011). Weaknesses Starbucks also have some weaknesses that are contributing towards shutting down its operations around the world even though the company had a vision to open 40,000 café’s around the world. Price is considered to be a major weakness for the company as many people cannot afford to buy the company’s product which makes them dissatisfied. The company claims that it is developing habits of their customers to buy quality coffee which can only be provided by Starbucks. Different competitors including McDonalds are targeting their low end customers by pointing out the high price products of Starbucks in their marketing campaign. These companies are trying to differentiate their products with respect to lower price (Starbucks, 2011). The other weakness of Starbucks is that 75% of the company’s profit has been generated from the coffee and other beverage market. This proves that the company is highly dependent on coffee market which makes it dependent on the coffee beans. (Larson, 2009). Opportunities Considering the opportunities for Starbucks, the main source for the company is to expand its business internationally because this is also considered to be their vision. The company had a vision that they have to expand internationally to survive in the market. The company should explore new countries by evaluating their opportunities for survival and high growth associated with particular countries (Starbucks, 2011). Emerging economy like India, China and Pakistan should be their priority. The BRIC nations and countries that have grown their upper and middle class would be a suitable option for the company. Starbucks is planning to operate in India which makes it highly possible for the company to achieve success. (Starbucks, 2011). Threats While considering threats for the company, Starbucks is facing numerous threats from all sides. Increase in the intense competition has given rise to many difficulties for the company as competitors have come up with a new low priced strategy to disrupt the sales of the company. McDonalds is considered to be a rising competitor that has opened McCafe’s around the world. McDonald’s have a greater reach than Starbuck’s in many markets due to its presence in many countries around the world. McDonalds does not have to invest higher amount of money in their because of their international presence but Starbucks would have to invest in million to expand its business and to familiarize its product amongst customers with various marketing campaigns. (Mukerjee, 2007). However, evaluating the overall situation Starbucks is considered to have a little edge over its competitors against their threats. The company has a unique environment in its café’s and a greater coffee quality which makes it different from other companies. By evaluating the situation analysis for the company, it is imperative that the company has a strong hold for its success in its future. The vision of the company is on its wheel and the company is implementing them for the success of its brands. Overall, the company is considered to be very sound because if it wasn’t the case, then Starbucks would have become unfit to compete in the international arena (Starbucks, 2011). Recommended Options Starbucks has been known to enter in the foreign markets and has done well to achieve success in those markets. Majority of its sales comes from United States which is considered to be a bigger market for Starbucks. Its expansion of its stores in United States has been the biggest downfall for the company in recent years due to which the company closed 600 Coffee shops in U.S. This is also affecting the international growth of the company as it is reluctant to expand internationally. It is recommended that the company has to expand more in the international market in the emerging economies to boost sales for the company. India would be the most desired place for the starting of its operations with 3 stores in a major city of the country. The Starbucks pro forma is based on opening 3 coffee shops in New Delhi, Mumbai and Calcutta in strategic alliance with Tata Corporation. This would enable the company to diversify its income base because the income generated from United States outweighs the income base from the other countries. The company has to put more focus on different regions of the world because if the market falls in United States, then the company would have to incur losses. Starbucks need to invest more on developing countries that have high purchasing power so they could purchase the product. Starbucks need to focus more on market scope of different countries by researching their market trends and their customer needs beforehand. The company has to blend its product according to the needs and desires of the people related to a particular market. The world is becoming globalized and products which are standardized have a high percentage of failure in the market because it does not cater the needs and wants of customers which is the biggest reason for failure of products. Another way for the company to maintain its dominance in the market is to diversify its product base and not to become too much dependent on the coffee beans alone. The company can offer different related products to coffee like tea and appetizers for the promotion of its company. But Starbucks is reluctant to diversify its business because it considers that customers would prefer its brand because it considers that customers would worth their money by having a premium coffee. The idea of Starbucks here is to build customer habits on drinking coffee regularly for a better start of the day. The company has to realize if it wants to enter the developing country and the emerging economies then it has to focus on providing diversified and economical products to their customers. The company has to put emphasis on targeting different market segments by exploring their needs for lower priced coffee. This is to capture the greater market share in every segment because this segment is highly catered by McDonalds which has started McCafe that provides various coffee brands and appetizers in their café at a lower price. Starbucks have to change the trend in catering the market because trend frequently changes. Many people living the emerging economies do not consider paying high bills for the coffee over buying of a car and an apartment. Majority of the people in developing countries are ignorant of the satisfaction brought up by a coffee. They would not be able to spend extra money on novelties such as the coffee of Starbucks. If Starbucks enables the option for students for a meal or a dessert then it would be a good option to expand and diversify their business portfolio. It is recommended that Starbucks must also focus on satisfaction of their customers and to cater the needs and wants of their customers. Customers are the asset for the company and it has to be dealt carefully. The company is focused on growing its business too fast that it is forgetting the need for targeting different market segments. The company must not plan to grow its business in U.S states alone but it has to put more focus on growth of the company in the international market. As the company has planned to begin its operation in India, it is recommended to Starbucks to focus on the value creation of customers by putting more efforts on managing the product efficiently. The company should follow an intersectional solution which aims at launching new products and to explore new markets due to its growth. The company has a good approach of growing too rapidly but it has to be more focused towards assisting the needs of customers which is essential in the success of the company. Allowing new products at a cheaper rate would allow customers to purchase the product and increase in sales of the company. As Starbucks have a strong equity, if it launches a new product it would automatically gain the hype for the marketing of the product. These recommendations if followed, would allow the company to reach the greater heights in the market and to sustain its market leadership. Financial Analysis 2012 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Annual Totals Coffees Sold 900 900 600 450 450 300 300 450 450 900 900 900 7,500.00 Sale price per Coffee 250.00 250.00 250.00 250.00 250.00 250.00 250.00 250.00 250.00 250.00 250.00 250.00   Total 225,000 225,000 150,000 112,500 112,500 75,000 75,000 112,500 112,500 225,000 225,000 225,000 1,875,000       2013 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14   Coffees Sold 1200 1200 800 600 600 450 450 600 600 1200 1200 1200 10,100.00 Sale price per Coffee 250.00 250.00 250.00 250.00 250.00 250.00 250.00 250.00 250.00 250.00 250.00 250.00   Total 300,000 300,000 200,000 150,000 150,000 112,500 112,500 150,000 150,000 300,000 300,000 300,000 2,525,000 Assumptions Financial year begins in January Coffee is consumed more in winter season which starts in October and ends in February Per unit sales price is kept constant during the two years The number of coffees sold in a month represents the total number of coffees sold by 3 outlets in that month. Current Month Ending mm/yy 2012 2013 1st QTR Jan-Mar Jan-Mar Cases Fcst 2,400 3,200 Sales Fcst 600,000 800,000 Cost Fcst 300,000 400,000 PROFIT 300,000 400,000 2nd QTR Apr-June Apr-June Cases Fcst 1,200 1,650 Sales Fcst 300,000 412,500 Cost Fcst 150,000 206,250 PROFIT 150,000 206,250 3rd QTR July-Sep July-Sep Cases Fcst 1,200 1,650 Sales Fcst 300,000 412,500 Cost Fcst 150,000 206,250 PROFIT 150,000 206,250 4th QTR Oct-Dec Oct-Dec Cases Fcst 2,700 3,600 Sales Fcst 675,000 900,000 Cost Fcst 337,500 450,000 PROFIT 337,500 450,000 Total Sales 1,875,000 2,525,000 Total Cost 937,500 1,262,500 Total Profit 937,500 1,262,500 Starbucks Pro Forma Statements of Income For the year ended Dec 31, 2013 and 2014 Particulars 2013 2014 INR INR Sales Revenue 1,875,000 2,525,000 Less: Cost of Sales 937,500 1,262,500 Gross Profit 937,500 1,262,500 Operating Expenses Payroll 112,500 151,500 Selling, general and administrative 93,750 126,250 Depreciation 17,500 17,500 Loan Installment 20,000 20,000 Total Operating Expenses 243,750 315,250 Operating Income 693,750 947,250 Income from other sources 5,000 5,000 Income before interest and taxes 698,750 952,250 Interest Expense 5,000 5,000 Income before taxes 693,750 947,250 Taxation Expense - 94,725 Net Income 693,750 852,525 Starbucks Pro Forma Balance Sheet As at Dec 31, 2013 and 2014 Particulars 2013 2014 INR INR Assets     Current Assets     Cash 1,198,750 2,056,275 Stock 65,000 204,725 Total current assets 1,263,750 2,261,000 Fixed (Long-Term) Assets     Long-term investments 100,000 100,000 Property, supplements, and equipment 500,000 500,000 (Less accumulated depreciation) 50,000 100,000 Net Property, Plant and Equipment 450,000 400,000 Total fixed assets 550,000 500,000 Total Assets 1,813,750 2,761,000 Liabilities and Owners Equity     Current Liabilities     Income taxes payable - 94,725 Current portion of long-term debt 20,000 20,000 Total current liabilities 20,000 114,725 Long-Term Liabilities     Long-term debt 100,000 100,000 Total long-term liabilities 100,000 100,000 Owners Equity     Owners Equity 1,000,000 1,000,000 Retained earnings 693,750 1,546,275 Total owners equity 1,693,750 2,546,275 Total Liabilities and Owners Equity 1,813,750 2,761,000 Starbucks Pro Forma Cash Flow Statement For the year ended Dec 31, 2013 and 2014 Particulars 2013 2014 INR INR Cash Flow from Operating Activities Inflow Sales Revenue 1,875,000 2,525,000 Outflow Cost of Sales 937,500 1,262,500 Payroll 112,500 151,500 Selling, general and administrative 93,750 126,250 Depreciation 17,500 17,500 Tax - 94,725 Total Outflow 1,161,250 1,652,475 Net Cash Flow from Operating Activities 713,750 872,525 Cash Flow from Investing Activities Inflow Owners Equity 1,000,000   Outflow Long Term Investment 100,000 - Property Plant and Equipment 500,000 - Total Outflow 600,000 - Net Cash Flow from Investing Activities 400,000 - Cash Flow from Financing Activities Inflow New Long-term Liabilities 100,000 - Interest income received 5,000 5,000 Total Inflow 105,000 5,000 Outflow Loan Installment 20,000 20,000 Net Cash Flow from Financing Activities 85,000 (15,000) Net Cash Flow 1,198,750 857,525 Opening Cash Flow 1,198,750 Ending Cash Flow 1,198,750 2,056,275 Starbucks Breakeven Units   Total Per Unit   2013 2014 2013 2014 Units Sold 7,500 10,100     Sales Revenue 1,875,000 2,525,000 250 250         - Variable Expenses       - Cost of Sales 937,500 1,262,500 125 125 Payroll 180,000 242,400 24 24 Selling, general and administrative 150,000 202,000 20 20 Total Variable Expenses 1,267,500 1,706,900 169 169 Contribution Margin 607,500 818,100 81 81 Total Fixed Cost ($) 37,500 37,500 5 4 Total Fixed Cost (INR) 1,987,500 1,987,500     Selling Price per Unit 250       Variable Cost per Unit 169       Total Fixed Cost 1,987,500       Breakeven Units Formula: Selling Price per unit (X) = Variable Cost per unit (X) + Total Fixed Costs         250X = 169X + 1,987,500       where, X = Break even Units         X (Break even Units) 24,537 units     In this report the project sales have been shown for next two years and the total number of units sold by Starbucks is expected to be 17,600 in two years. Therefore, break even is not likely to be achieved in the first two years. By keeping in view the trends the break even is like to be achieved in the 3rd year. 2012 2013 2014 Net Cash Flow (1,987,500) 1,198,750 857,525 Discount Factor 0.94 0.89 Net Present Value (NPV) (1,987,500) 1,130,896 763,194 (93,410) Cost of Capital (Assumed) 6% Although the projections suggest a negative NPV in the first two years but a business plan is likely to have a longer time horizon and it can be seen that the NPV is approaching a positive value in the 2nd year and if the business continues in the third year than positive NPV can surely be achieved. Therefore, the company should consider this project on at least 3 years time frame. Internal Rate of Return (IRR) 2.43% Conclusion Starbucks is the world’s leading Coffee shop with over 19,000 coffee stores operating globally. In order to maintain success for the company and to remain in the competition, it has to bring innovation to provide steady growth in the future. The company needs to identify market that are considered to be developing nations especially India to reach a bigger market for its product. Starbucks products generally are high end products which makes it difficult for the people to make purchases. The company has to identify a different market segment mainly the low end customers to have competitive advantage. Different competitors in the similar market have developed this idea and have been successful in capturing market share which has resulted in the closing down of various coffee shops for Starbucks. The company has to diversify its business to have opportunities for greater success and to collect revenues from different portfolio. This is because Starbucks is highly dependent on coffee beans and almost 75% of its business runs through the supply of coffee beans. Starbucks have an opportunity to grab the market share in different countries through targeting different segments and maintain their leadership in coffee business. If the company can apply particular strategies recommended, then it could help retain market share. Reference List Alkema, R., Koster, M., & Williams, C. (2010). Resuming Internationalization at Starbucks. Ontario: Ivey publishing. Bussing-Burks, M. (2009). Starbucks. California: ABC-CLIO. Koehn, N., Besharov, M., & Miller, K. (2008). Starbucks Coffee Company in the 21st Century. Boston: Harvard Business Press. Larson, R. (2009). Marketing Strategy and Alliances Analysis of. Virginia: Liberty Unversity Press. Larson, R. (2008). Starbucks a Strategic Analysis: Past Decisions and Future Options. Rhode Island: Brown University Press. Mukerjee, K. (2007). Customers Relationship Management: A Strategic Approach To Marketing. New Delhi: PHI Learning Pvt. Ltd. Quelch, J., & Moon, Y. (2006). Starbucks: Delivering Customer Service. Harvard Business School Review , 1-20. Starbucks. (2012). Financial Release. Retrieved September 25, 2012, from investor.starbucks.com: http://investor.starbucks.com/phoenix.zhtml?c=99518&p=irol-newsArticle&ID=1232636&highlight= Starbucks. (2012). Our Starbucks Mission Statement. Retrieved September 25, 2012, from www.starbucks.com: http://www.starbucks.com/about-us/company-information/mission-statement Starbucks. (2011). Starbucks Corporation Fiscal 2011 Annual Report. Washington: Starbucks Corporation. Read More