Starbucks

Providing One cup to Every person in the World

Starbucks is one of the worlds most recognized brands, and the leading market leader for
premium coffee sales. By utilizing their already popular brand, Starbucks is able to easily find
new international markets to penetrate, thus becoming the fastest growing company in the coffee
industry. Taking into account their already successful strategy, I believe the company could
further increase their growth by incorporating the ever-growing online market.

Financial Analysis
Starbucks is a stable company that enjoys steady growth over past eight years as shown
in Table 1. When comparing any year to the previous year, Starbucks revenue retains positive
growth, meaning the company is increasing its sales per year. Although in the 2003-2004 year,
Starbucks saw a large decrease in gross margin %; they recovered and was able to lower their
costs while keeping customer interest in their products as shown with an increase in growth
margin from 21.4 in 2004 to 57.7 in 2011. With this information, we can confidently assume
that Starbucks will continue to grow in the following years to come.
Now looking at Table 2, it shows Starbucks has greater revenue growth than its
competitors. Although its total revenue may not be as numerically impressive as McDonalds or
Nestles, its high gross margin % provides the proof that the company is efficiently generating
more and more sales. However, there is a problem with how effective the company is spending
to generate these sales. When comparing Starbucks operating margin with its competitors, the
company, at best, comes up on par with others; meaning the company has high variable costs,
which could be contributed by the surplus of store in some areas. In short, they are spending
more money to get an extra sale than their competition is spending.
For the other ratios in Table 2, you can tell that Starbucks is mostly keeping even with its
competitors. On the other hand, you can also deduce that the company is a little bit better off
than the rest by comparing its PEG to the others. Sitting at 1.33, lowest of its competitors, it
reflects greater unexpected growth than its competition. This is especially important to the
company as it represents greater growth potential, which in turn will translate directly into
revenue.

Internal Analysis
One of Starbucks greatest strength is its brand recognition. People all over the world
know Starbucks and can properly identify its iconic green mermaid on its white durable cups that
comes with each hot coffee purchase. Using this to their advantage, they can establish a lead in
global presence without spending on various advertising expenses associated with other lesser
known coffee brands. Similarly, Starbucks is associated with premium, high quality coffee as a
result from one of their key values: The perfect cup of coffee (Kembell, 2002). This is where
Starbucks advantage over its other competitors shines; they can keep costs low due to minimal
advertising while keeping prices high to fully maximize profits.
As mentioned before, Starbucks is one of the most recognized brands in the world, and it
allows them to gain access to new geographical markets such as developing or underdeveloped
countries. Using their brand and the Frappuccino, a product that they popularized, as leverage to
enter a new market, demand for their product will stay extremely high as people who have never
had a Starbucks Frappuccino will flock to new stores to try a drink that is not only non-
substitutable (they are the only company that can make and sell a Frappuccino) but has high
value as well (it is not a Frappuccino but a Starbucks Frappuccino).
On the other hand, because Starbucks only sells a few other products along with having
premium priced coffees, their customer base limits itself to middle class coffee drinking families.
This kind of weakness ultimately restricts growth to one segment of the industry and may cause
them to miss out on other opportunities in different industry segments.

External Analysis
The coffee industry is largely influenced by the industrial environment, however does
include some segments of the general environment. Because coffee is an everyday nondurable
product, environmental factors such as demographic, political, and technological do not
influence the market as heavily as new entrants, substitute products, or rivalry.
Threat of new entrants is always a challenge to overcome for any company; however, I
believe it is not as important for an industry with only a few large market leaders internationally.
Starbucks and its competitors dominate the coffee market with no real threats besides the intense
rivalry between the companies. Starbucks, currently the market leader in coffee sales at over
28% market share (Katje, 2012), has begun to expand into new areas such as the Nordic region.
However, the decision to move into an already-saturated market (leading coffee brand to that
specific region is Modelez) will test their core competencies in other foreign markets.
Then again, the coffee market is definitely not unfamiliar. Currently, coffee sales
worldwide are worth over $100 billion, which puts it as the second most traded commodity in the
world (Goldschein, 2012). The opportunities of growth provided by such a vast market is almost
unlimited, yet with large potential comes increased rivalry.
This is to say that Starbucks does have some leverage when dealing with competition.
The company has some buyer powers as they are large enough to buy in enormous quantities.
Since most of the coffee beans are grown in developing countries, Starbucks is able to provide
their suppliers with a relationship that will keep their coffee farms profitable and functional.
Similarly, Starbucks also has supplier power to keep their product pricing at a premium. As I
mentioned before, they are able to invoke this type of pricing strategy because they are widely
accepted as having high quality coffee. Threats of substitutes are, again, mostly only applicable
to selective products such as lattes or regular coffees because the Frappuccino is a drink that
was coined by the coffee giant itself.

Identification of its strategies and its competitors
The main strategy used by Starbucks is their emphasis on product quality. While it may
be obvious to have products of good quality, Starbucks stores are designed so customers can see
the barista make their drinks, allowing them to see the entire process into making the perfect cup
of coffee. In the food industry, competition strives to gain reputation through having the best
rated food, which will naturally attract new customers. With that being said, the coffee industry
is similar in the sense that product quality is highly valued. A company can have hundreds of
different flavors and aromas, but the how well it tastes is what actually keeps the customer
coming back.
On the other hand, its competitor, McDonalds, mostly employs a cost leadership strategy
rather than a differentiated one. With words such as fast and cheap associated with the
McDonalds brand, they reach out to the lower class with affordable drinks. However, recently
McDonalds has begun to remodel many of their stores into a classier look. This is in preparation
for a switch to a more differentiated strategy, as they want to change consumer outlook on their
brand to one of higher class. Similarly, Dunkin, a newcomer in the industry, also engages in a
cost leadership strategy. Using coupons and limited time deals, Dunkin is able to reach out to
the lower-mid class families while expanding its brand awareness.
Starbucks and its competitors strategies are quite different from one another, but they
both have their advantages and disadvantages. As shown in Table 3, becoming a cost leader
allows the company to interest buyers based on price while discouraging new entrants with low
prices. This is true, however it can be agreed upon that cheaper prices (especially with food and
drinks) are directly correlated to lower quality. Conversely, Starbucks is able to capture buyers
through its product quality and unique attributes. By referring back to Table 1, we can see that
Starbucks has a good P/E ratio for a large company. Any ratio over 25 for a company with over
$10 billion revenue reflects decent growth, and fundamentally outlines the correct strategies
made by Starbucks.

Value Chain
Inbound Logistics: Starbucks utilizes supplier relationships to meet the quantities required to
keep each store in stock, not to mention that Starbucks also enforces strict quality control of
products being received by the suppliers. After each successful transaction, Starbucks begins to
build strong trust between the suppliers, which in turn will expedite larger purchases with the
recent growth Starbucks is seeing. McDonalds as well as Dunkin also uses supplier
relationships to meet such a large demand; however, there is an intermediary facility that
specifically pre-grinds McDonalds coffee before shipping to its stores. This is to help speed up
the process of getting the drink to the customer.
Operation: Utilizing multiple suppliers around the world, Starbucks is able to create variety in
their product catalog. However, it is not known where or what process is undergone after
transporting the raw coffee beans from coffee bean farms to the Starbucks factory where it is
packaged. By using a discretionary tactic, Starbucks is able to keep a competitive edge over its
competitors. Its competitors use a similar procedure as it is common in this particular industry.
Outbound Logistics: Starbucks strongly emphasizes the customer being able to see the entire
process of making their drink. Each barista undergoes extensive training and mentoring until
they are confident enough to handle it by themselves. It is not certain whether Starbucks has a
facility that delivers on an as-need basis or a scheduled routine to its stores, but I do know that it
does have relationships with UPS and FedEx for delivering its online sales. McDonalds and
Dunkin has routine deliveries to each of its stores, which does help keep track of inventory, but
can be prone to having a surplus, thus leading to waste.
Marketing & Sales: Starbucks does not spend much on advertising and marketing. Most of its
marketing is done through word of mouth, or recently, through seasonal promotions. Dunkin is
more or less the same as Starbucks; however, McDonalds does graciously spend on advertising.
When they released the very first McCafe Iced Coffee, it was seen on many billboards, TV
commercials, and radio commercials. It was definitely effective as McDonalds is now
effectively competing in the coffee market.
Service: As mentioned above, each store barista is trained until they are confident in all the
drink recipes. Another point worth mentioning is the importance of customer satisfaction. By
introducing different customization options, such as giving customers the option to use soy milk,
they are able to personalize each customers drinks, thus satisfying and creating a relationship
with that specific customer. On the other hand, McDonalds as well as Dunkin has a
predetermined menu, thus limiting customizability.
Firm Infrastructure: One of the disadvantages of being such a large company is Starbucks has
it all: Accounting, management, finance, legal, government relations, public relations, etc. Yet,
their emphasis on customer satisfaction is directly transferred into their company culture in the
sense that the employees must be satisfied before they can satisfy the customer. Beginning from
the year 2010, Starbucks began to place importance in shareholders by increasing their dividends
and payout ratio as seen in Table 2. Dunkin and McDonalds place the same importance in
shareholders similar to Starbucks because they are the backbone of the company.
Human Resource Management: Starbucks offers opportunities to many high school or college
students seeking part-time work, while providing them with some benefits such as free coffee for
friends and family. They are given higher pay due to the higher expected work ethic from
customer interaction. McDonalds and Dunkin offer opportunities to the lower social class at
minimum wage and poor hours. Their employees are not expected to communicate with
customers, therefore ignoring customer relationships.
Technology Development: Even though the procedure is given to anyone that purchases a
Starbucks coffee, it is still difficult to reproduce because coffee is solely dependent on its
supplier. Furthermore, Starbucks innovates new drinks every year specifically for the holiday
seasons. McDonalds undergoes innovation more so than Starbucks, largely due to the company
not being restrained to certain food or drink categories. However, it does backfire as some new
drinks may receive poor reviews and hurt their brand reputation.\
Procurement: With so many countries supplying many different coffee beans, it is possible for
every brand of coffee to have a different supplier. The coffee market is vast, which benefits
Starbucks because they can be stricter on their suppliers (quality not up to par, then they will go
to a different coffee farm). Starbucks competitors does not use a different procurement method.
With no large differences between Starbucks and its competitors, there is not much
temporal comparisons. After the recession in 2007, Starbucks strengthened its brand and began
to rapidly expand to different nations, realizing that being confined in the U.S. could hinder their
growth. Now, Starbucks is strong financially and has the international awareness to become
even larger.

Recommendation
Many recent articles about Starbucks are about them expanding to new locations nationally and
internationally, which is no surprise as we looked at the recent financial success of Starbucks
previously. However, rapidly expanding has its downsides such as cannibalism (placing two
stores in proximity to one another) or even poor demographic research (culture restricting coffee
consumption). Although there is no one right way to expand, I believe I have two
recommendations that would better benefit Starbucks in the long run.
Proposal 1: While expanding into new geographical markets should be important,
diversifying into new product markets should be just as important. Currently, Starbucks is
putting most of its resources into creating new stores and innovating new concoctions, but that
means they are still limited to one customer base: coffee drinkers. By using what stores they
currently own, and instead focusing on serving to a larger customer base, it could effectively
increase revenues while keeping store costs static. An example of a product they could further
expand into is tea. Even though they do currently sell different types of teas, most people tend to
stray away from them because of lack of quality? Or perhaps they just dont know about them?
I believe the answer lies between a combination of lack of quality and lack of awareness.
Starbucks has historically been known to invent new drinks every year like gingerbread latte or
pumpkin spice latte, but none of them are ever tea related. If they were to transfer resources into
creating new and exciting teas one year and then coffees the next, non-coffee drinking customers
may give the store a chance (not to mention costs would not increase).
Proposal 2: Keeping their emphasis on new stores, Starbucks should consider advertising
to countries that they are unfamiliar in. Even though it would increase their costs, advertising
could generate public awareness, widen their customer base, and in turn increase their profits.
For example, Vietnam currently has no Starbucks stores or any American-owned stores besides
KFC. This is largely due to the fact that many fast food joints such as McDonalds prides itself
on getting food to customers quickly, but the differences in culture prevent such a restaurant to
enter. If Starbucks advertised and positioned themselves in Vietnam as a laid back caf one
could stop by on the way home, it could be a gold mine of customers as the Vietnamese are
already familiar with drinking coffee (Vietnamese coffee). Also, global expansion can never
hurt a company and will grant them more business as well as a larger global presence.
While both recommendations are beneficial in different ways, I believe the first proposal
will generate the greatest returns because of these reasons:
Diversifying not only expands the customer base, it also minimizes risk. Lets say it is
the year 2020 and Starbucks accepted my idea and is flourishing in both the coffee and tea sales.
Suddenly, in the following year, a drought hits all of South America, destroying 75% of the
coffee farms located there. As a result, coffee bean prices shoot up by 700%, which at this time
Starbucks remains relatively unfazed because tea sales are now booming. By distributing its
sales across teas and coffees, Starbucks was able to minimize the risk of disaster and recover
some of its lost profits.
Expanding the product catalog also creates brand awareness. This reason is self-
explanatory as the more people see your brand, in this case seeing the Starbucks logo on coffee
pots, tea kettles, water bottles, and even mugs versus only mugs, the more they will be aware of
it. Then, it could provide the competitive advantage the company needs to penetrate a new
market.
Last of all, the company can easily minimize costs by utilizing each store as a medium of
advertisement. It was seen recently with the successful launch of additional baked goods in the
San Francisco bay area stores. Even though Starbucks did no prior advertisement, they knew as
customers walked through the line to place an order, they would be allured to their new bagels
and croissants through sight and smell. In the end, there is no better way to advertise products
than to have the audience directly interact with it themselves. With that being said, historically,
Starbucks has successfully used their stores to test a product before an official release, so there is
no reason not to use a method that already works.
The costs of new market entry should not be a big issue for such a large company like
Starbucks. Considering the size of the market, the steady growth, and a loyal customer base,
Starbucks has the chance to really provide one cup to every one person of the world.


Table 1 (Yahoo Finance, 2012)
Current Year Key Ratios
Starbucks Dunkin Brand McDonalds
Qtrly Rev Growth (yoy): 0.11 0.05 0
Revenue (ttm): 13.30B 664.98M 27.44B
Gross Margin (ttm): 0.56 0.8 0.39
EBITDA (ttm): 2.38B 298.24M 9.78B
Operating Margin (ttm): 0.14 0.37 0.3
Net Income (ttm): 1.38B 85.43M 5.45B
EPS (ttm): 1.79 0.45 5.31
P/E (ttm): 28.3 69.13 16.18
PEG (5 yr expected): 1.33 1.41 1.91
P/S (ttm): 2.86 4.84 3.19


Table 2 (Morning Star Financials, 2012)







Starbucks Key Financials
2003 2004 2005 2006 2007 2008 2009 2010 2011
Revenue USD Mil 4,076 5,294 6,369 7,787 9,411 10,383 9,775 10,707 11,700
Gross Margin % 58.6 21.4 22 21.3 23.3 19.2 55.8 58.4 57.7
Operating
Income USD Mil
425 610 781 894 1,054 504 562 1,419 1,729
Operating Margin
%
10.4 11.5 12.3 11.5 11.2 4.9 5.7 13.3 14.8
Net Income USD
Mil
268 392 494 564 673 316 391 946 1,246
Earnings Per
Share USD
0.34 0.48 0.61 0.71 0.87 0.43 0.52 1.24 1.62
Dividends USD 0.23 0.52
Payout Ratio % 18.6 32.1
Table 3

Firm Name Strategy Highlights Rationale for Strategy Pros and Cons
Starbucks

Differentiation
High quality products,
emphasis on customer
satisfaction,
innovative products,
classy store interiors
Differentiating
themselves from the
competition by
keeping product
quality will create a
positive brand
association. Premium
coffees are what
Starbucks are known
to serve, which should
be coupled with
customer satisfaction
as well as a nice store
design.
Customers are loyal to
firms offering
differentiated products
Uniqueness reduces
sensitivity of buyers
to price increases
High margins shield
the firm from losses to
powerful suppliers
Customer loyalty to
differentiated products
deters new entrants
Unlikely to switch to
substitutes when loyal
to products

McDonalds
Cost Leadership
Fast and affordable,
emphasis on time,
variety of products
(burgers and fries)
Keeping prices low
will be able to cater to
the lower class
population. Also, the
emphasis on getting
their product out
quickly is attractive
for many busy
businessmen.
Can compete against
rivals on price
Can price below rivals
to interest buyers
Can absorb prince
increases by suppliers
better than rivals
Discourages new
entrants that cant
endure low profit
margins
Can reduce prices to
maintain
attractiveness over
substitutes

Dunkin
Cost Leadership
Using their Dunkin
Donuts stores to
promote coffee sales,
affordable coffee,
combos with their
other breakfast
products
Using their current
stores to their
advantage by coupling
breakfast items with
coffee. It helps
promote their brand
and diversify their
products.
Can compete against
rivals on price
Can price below rivals
to interest buyers
Can absorb prince
increases by suppliers
better than rivals
Discourages new
entrants that cant
endure low profit
margins
Can reduce prices to
maintain
attractiveness over
substitutes

References
Choi, C. (2012, Oct 04). Starbucks baked goods: Coffee chain tests new products in san
francisco. Retrieved from http://www.huffingtonpost.com/2012/10/05/starbucks-baked-
goods_n_1943951.html
Goldschein, E. (2011, Nov 14). 11 incredible facts about the coffee indsutry. Retrieved from
http://www.businessinsider.com/facts-about-the-coffee-industry-2011-11?op=1
Katje, C. (2012, Oct 02). mcdonald's could be selling coffee beans: Should starbucks, dunkin'
donuts be scared?. Retrieved from http://seekingalpha.com/article/905551-mcdonald-s-
could-be-selling-coffee-beans-should-starbucks-dunkin-donuts-be-scared
Kembell, B. (2002). Starbucks marketing strategy , unconventionally effective. Retrieved from
http://www.voteforus.com/starbucksmarketingstrategy.html
Coffee statistics report. (2012). Retrieved from http://www.e-
importz.com/Support/specialty_coffee.htm
Morningstar financials. (2012). Retrieved from
http://financials.morningstar.com/ratios/r.html?t=SBUXion=USA&culture=en-us
Starbucks mission statement. (2012). Retrieved from http://www.starbucks.com/about-
us/company-information/mission-statement
Yahoo! finance. (2012). Retrieved from http://finance.yahoo.com/q/co?s=SBUX Competitors