Starbucks Analysis
... is becoming lifestyle of American people during rush hour. 3.3 Relationship with suppliers. Buyers commit number of purchasing with suppliers and apply JIT basis delivery. Long-term commitment helps buyers a lot for availability of supply over time 3.4 Increasing globalization of the industry. Natural resources are available in all area in the world for example Brazil and Asian countries. Demand for industry¡¦s product also pop up in more countries such as Asia Pacific area. 3.5 Entry or exit of major firms. New entrants put competition in new directions 3.6 Consumer potential changes rapidly. Sellers have to build customer loyalty to maintain them 3.7 Marketing innovation. Internet is becoming vehicle for marketing innovations and the trend that firms will use is increased. 4. Strategic Group Map >500 No. of 251 stores - 500 <250 Specialty Moderate Broad Product line From Strategic Group Map, Starbucks stands at the high end in the position. Its stores locations are estimated to 2,000 stores all around the world. Second cup is about onethird in size of Starbucks, has not reached 250 stores all around the world. The other small coffee specialty stores that are notably New World Coffee, Coffee People, Coffee Starbuck s Second Cup Other stores 6 Station, Java Centrale, and Caribou Coffee expected to merge regional chains in effort to get bigger and better position themselves as an alternative to Starbucks. 5. Industry Attractiveness Is Coffee specialty industry attractive? Yes, but it is for the firm who can distinguish itself from others and it should have long term strategic vision to gain competitive advantage from competitors over time. 6. Key Success Factors 6.1 Skill-related KSFs - Superior workforce talent (barista, high professional services skills in terms of product knowledge) - An ability to develop innovative products and product improvements (like Starbucks introduced Power Frappuccino in 1997 and Chai Tea Latte in 1998) 6.2 Organizational Capacity - Superior ability to employ the Internet or Electronic commerce to conduct business (Starbucks offers E-commerce for purchasing products online) - Managerial know-how 6.3 Marketing-Related KSFs - Courteous customer service. - Breadth of product line and product selection 6.4 Other types of KSFs - Convenient locations (Starbucks had totally 1,364 stores in continental North America area in 1997 as compared to 165 stores in 1992) - Pleasant, courteous employees in all customer contact positions 7. SWOT Analysis Strength and competitive capabilities „FƒnValuable human resources: Howard Schultz His superb idea: Starbucks should offer drinking beverages, open stores outside Seattle and go abroad (Canada). He also worked with store employees to develop custom-friendly sales skills and produce brochures for customers Olsen His superb idea: Forming and communicating a vision, raising money, finding good store locations, building a brand name and planning for growth „FƒnProduct innovation skill. Starbucks introduced the new cold coffee drink, called Frappuccino in 1995, and it had proven to be a hot-weather seller „FƒnA reputation for good customer service: Starbucks has commitment to quality and customer satisfaction „FƒnAcquisition with Starbucks in August 1987 and built a new name ¡§Starbucks Corporation¡¨ 7 Weaknesses and competitive deficiencies „FƒnFalling behind in R&D. Starbucks did not emphasis on R&D program for product innovation. „FƒnShort on financial resources. Starbucks fell behind profit from 1984-1990 because of debt financing according to Schultz¡¦s idea for entering beverage part of coffee business or expand number of Starbucks stores. Potential Company Opportunities „FƒnServing additional customer groups. Starbucks expanded into new geographic markets or product segments outside Pacific Northwest (see figure 2). Also, Starbucks had licensing agreement in areas where it didn¡¦t have ability to locate its own outlets. Figure 2: Starbucks branches and growth in expansion (1992-1997) No. of stores open 97 growth 96 growth 95 growth 94 growth 93 growth 92 Continental North America Company-operated stores 1270 37% 929 48% 627 57% 399 53% 260 60% 162 Licensed stores 94 25% 75 53% 49 88% 26 117% 12 300% 3 OutsideNorth America Licensed stores 17 750% 2 200% - - - - - - - Total 1381 37% 1006 49% 676 59% 425 56% 272 65% 165 „FƒnInternational expansion. Starbucks created a new subsidiary called SCI, to orchestrate overseas expansion and begin to build Starbucks brand name globally via licensees Strength and competitive capabilities (continued) „FƒnStarbucks was listed in the Hoover¡¦s Handbook 1996 as one of the up and comers in the industry „FƒnBusiness Enterprise Trust Award for innovative benefits plan ¡V Dec 6, 1994 „FƒnNamed one of America¡¦s 100 fastest growing companies¡XFortune magazine Aug 8,94 „FƒnJoint venture with PepsiCo to create new coffee-related products for mass distribution through Pepsi channels, including cold coffee drinks in a bottle or can. „FƒnStrong financial condition: Revenues, profits, return on total assets increased over time from 1993 to 1998. Leverage ratio decreased. EPS increased from 0.14 in 1993 to 0.86 per share in 1998. „FƒnStarbucks avoided debt and financed new stores entirely with equity capital. It improved company profitability and strengthen balance sheet „FƒnLow employee turnover rate (for baristas ran about 65% out of 400% in average and managers 25% out of 50% avarage) 8 8. Financial Analysis 8.1 Operating Growth Figure 3 shows growth rate of Starbucks operation. Notice that Starbucks growth in a decreasing rate from 1994 ¡V 1998. This was due to Starbucks expansion rapidly throughout the country. Revenue increase compensated with investment settled at the beginning periods so profitability ratio showed in a decreasing way. Figure 3: Starbucks growth comparison (1994-1998) Potential external Threats to a company¡¦s Well-Being „FƒnLikely to entry of potent new competitors. Growth rate of Starbucks increased rapidly from one year to five year so it attracts competitors to join in the industry. Starbucks growth 0.00% 50.00% 100.00% 150.00% 200.00% 1 2 3 4 5 Year Grow Net Revenues Operating income Net earnings EPS growth Potential Company Opportunities (continued) „FƒnStarbucks went public in June 1992. It could capture more funding from investors and this incident helped Starbucks profit increased. Since it went public, Starbucks stock price increased greatly, from 3.7812 in September 1992 to 15.7812 in September 1998 „FƒnStarbucks had specialty sales group that provided its coffee products to restaurants, airlines, hotels, universities, hospitals, business offices, country clubs and select retailers. „FƒnPartnership with Dreyer¡¦s Grand Ice Cream to supply coffee extract for a new line of coffee ice cream. Also, in 1995, Starbucks worked with Seattle¡¦s Redhook Ale Brewery to create Double Black Stout, a stout beer with a shot of Starbucks coffee extract. 9 8.2 Ratio comparisons According to Figure 4: Ratio comparisons of Starbucks from year 1993 ¡V 1998 next page, Starbucks profitability ratio was increased slightly from time to time. Leverage ratio also improved better. Capital structure of Starbucks was strong. Look at debt-to-equity ratio, the company reduced debt from 61% of total capital in 1996 to 25% in 1998. It also showed high financial position of Starbucks overtime too. Also, Activity ratio was better as fixed assets turnover ratio improved. However, the company had problems with liquidity as liquidity ratio decreased annually from 1999 to 1998. This was because the company had an increasing amount of short-term debts, from 101.1 $Mil in 1996 to 179.5 $Mil in 1998, a 77.6% increase. 10 Figure 4: Ratio comparison Ratio Comparison Starbucks 98 97 96 95 94 93 Profitability ratio Operating profit margin 8.345% 9.124% 8.183% 8.623% 8.177% 7.147% Net profit margin 5.224% 5.937% 6.049% 5.611% 3.582% 5.200% Return on Total assets 6.887% 6.749% 5.798% 5.575% 4.410% 4.106% Return on Stockholder's Equity 8.61% 10.80% 9.33% 8.36% 9.29% 9.34% EPS 0.86 0.73 0.54 0.36 0.17 0.14 Liquidity ratio Current ratio 1.879 2.277 3.359 N.A. N.A. N.A. Quick ratio N.A. 1.418 2.534 N.A. N.A. N.A. Inventory to Net Working Capital N.A. 0.673 0.350 N.A. N.A. N.A. Leverage ratio Debt-to-assets ratio 0.200 0.380 0.378 N.A. N.A. N.A. Debt-to-equity ratio 0.250 0.608 0.609 N.A. N.A. N.A. Long-term-debt-to-equity ratio N.A. 0.338 0.385 N.A. N.A. N.A. Interest coverage ratio 84.1 13.800 8.900 12.300 5.700 20.900 Activity ratio Inventory turnover N.A. 8.090 8.354 N.A. N.A. N.A. Fixed assets turnover 2.178 2.001 1.885 N.A. N.A. N.A. A/R turnover 25.675 31.678 39.526 N.A. N.A. N.A. Average collection period 14.216 11.522 9.235 N.A. N.A. N.A. Other ratio P/E ratio 47.6 63.4 61.1 52.6 64.1 85.5 Price/Sales 2.48 3.42 3.67 2.89 2.35 4.56 11 8.3 Shareholder values Shareholders of Starbucks enjoyed its high stock price. Because Starbucks had very good operating results, as shown in a percentage increase in operating results and good financial ratios, Starbucks stock prices had increased eventually over the period of 1992 ¡V 1998. As stated in figure 5, market stock price for September 1992 was $3.7812 and for August 1998 was $15.7812, a 317% increase. Also, EPS increased over time from $0.17 in 1994 to $0.86 in 1998, which was 405.88% increase. Figure 5: Starbucks stock quotes Shareholders could be assured for safety of the company. In figure 6, P/E ratio for Starbucks tended to decrease. P/E ratio valued 85.5 in 1993 to 47.6 in 19...