Starbucks purchases and roasts high-quality whole bean coffees and sells them along with espresso beverages, pastries, and coffee-related accessories and equipment, primarily through its company-operated retail stores. Starbucks also sells whole bean coffees through a specialty sales group, a direct response business, supermarkets, and online at Starbucks.com. Additionally, Starbucks produces and sells bottled Frappuccino® coffee drink, a line of premium ice creams, and premium teas produced by its wholly owned subsidiary, Tazo Tea Company.
Starbucks Mission Statement:
Starbucks Coffee defines its mission as to “Establish Starbucks as the premier purveyor of the finest coffee in the world while maintaining our uncompromising principles while we grow”. Its objective is to establish Starbucks as the most recognized and respected brand in the world, rapidly expanding its retail operations, growing its specialty sales and other operations, as well as introducing and developing new products and distribution channels. Starbuck’s guiding principles include respect, dignity, diversity, and excellence, and customer satisfaction, contributions to the community, environmental responsibility, and profitability. At an environmental level, Starbucks is committed to innovative and flexible solutions, and to buy, sell, and use environmentally friendly products.
In 1971 Starbucks started selling whole-bean coffee in Seattle’s Pike Market Place. Howard Schultz joined Starbucks as manager of retail sales and marketing, and proposed the creation of a national chain of cafes stylized on the Italian coffee bar, which was not accepted. Schultz opened his own coffee bar, Il Giornale, and in 1987 his company acquired Starbucks Coffee.
Starbucks Coffee changed the concept consumers had about drinking coffee transforming it into a lifestyle accessory; its success over the past 25 years relates to the quality of the product, and customers’ loyalty. Originally a seller of packaged, premium, roasted coffees, in 1984 Starbucks introduced Christmas blend. The product mix has changed significantly over the years, with beans accounting for about 15% of the chain’s actual sales. The company has diversified its products and now serves in coffee bars, where people learn about coffee and can choose between a variety of these and many other options. Starbucks introduced brewed coffee and espresso beverages and since the mid 80’s it has developed and introduced a variety of products including compact disks, Frappuccino blended beverages, ice cream, ice cream bars, Milder Dimensions coffee, Tiazzi blended juice tea, and a variety of high quality and Gourmet coffees like the Shade Grown Mexico coffee.
Beginning the new millennium, Starbucks implemented high speed wireless Internet in its locations, developed the Starbucks card, and added the Starbucks Barista Quattro thermal coffeemaker to its variety of automated home espresso machines; in addition, the Starbucks DoubleShot ready to drink coffee category, and non-coffee options such as Chai, Vanilla, and Coconut Cr?me Frappuccino were introduced to the market.
Starbucks has been considered one of the fastest growing companies in the United States. In 1987, Il Giornale Coffee Acquired Starbucks and adopted its brand name. After the acquisition, Starbucks developed in 1988 a mail order catalog to serve 50 states in United States. In addition to an aggressive locations expansion, since the 1990’s Starbucks has acquired three roasting plants, as well as competitors such as the Seattle Coffee Company, Coffee Connection, and Tazo Tea Company; Starbucks went public in 1992, amplified its roasting facilities in 1995, launched Starbucks.com in 1998, and acquired Hear Music Company in 1999.
National Market Expansion:
Starbucks started in Seattle’s Pike Place Market and selling coffee to fine restaurants and espresso bars. In 1988 Starbucks introduced a mail order catalog that allowed it to serve 50 states in U.S., in addition to its now existing 33 locations.
During the next years, Starbucks acquired accounts and strategic relationships with Horizon Air, CARE, Nordstrom, Barnes & Noble, Itt/Sheraton, United airlines, Canadian Bookstore, Westin, Pepsi Cola, Canadian Airlines, Albertson’s Inc, Transfair USA, and Hyatt Hotels Corp.; meanwhile, Starbucks continued its national and international expansion raising more than 5100 National locations and more than 900 locations around the world. The company continues to develop sales in alternative outlets, including foodservice and non-traditional retail sites.
Starbucks decided to sell fair trade coffee, and meet many of Global Exchange’s demands, buying the best fair trade coffee, and finding ways to market the product to support the company’s positioning as a socially responsible purveyor of the highest quality coffee.
The U.S. coffee market is considered saturated. The increase of coffee costs lowered the margins and intensified competition among big chains and smaller coffee bars. Given this situation, Starbucks turned its attention to foreign markets in order to continue growing. It was also taken into consideration the potential of the Emerging markets, mainly Japan, given their increasing income and growing economy.
The gourmet coffee industry exploded in the 1990’s presenting growth rates of around 30% per year. Since 1995, Starbucks implemented an international expansion strategy that has led to the establishment of nearly 900 coffeehouses in 32 countries outside North America. This expansion started in 1996 in Japan, where 300 Starbucks locations operate nowadays thanks to the joint venture with Sazabi.
Starbucks then expanded trough Hawaii, Singapore, Philippines, Thailand, Taiwan, New Zealand, Malaysia, China, Kuwait, Korea, Lebanon, Canada, Dubai, Hong Kong, Shanghais, Qatar, Bahrain, Saudi Arabia, Australia, Switzerland, Israel, Austria, Oman, Indonesia, Germany, Spain, Puerto Rico Mexico, Greece, and Southern China. Starbucks is now evaluating its expansion though South America with the opening of a new location in Peru in June 2003, and future locations in Chile.
The breakdown of foreign stores as of July 2002 is as follows:
The Gourmet Coffee Industry
Here are some other facts concerning coffee consumption as published in the March 27, 2000 issue of Coffee Fax newsletter:
1. According to the National Coffee Association’s (NCA) 2000, 79 percent of adults 18 years or older consumed coffee over the past year, compared to 78 percent in 1999 and 75 percent in 1997.
2. Daily consumption in 2000 was 54 percent, or 110 million American adults, an increase of one million new daily drinkers over 1999, due to the development of new quality beverages, an expanding coffee menu, and a new public place for coffee’s social consumption: the gourmet coffee house.
3. Daily consumption in the gourmet coffee sector has grown from less than three percent of the adult population in 1995 to nine percent in 2000.
4. Occasional consumption in the gourmet coffee sector has increased from 35 percent of the population in 1997 to 53 percent in 2000.
5. Thirty-six percent of coffee drinkers said they drink from cups larger than eight ounces, compared to 30 percent in 1998.
There are basically two major types of coffee beans: arabica and robusta, of which arabica beans are far superior in quality, taste, and price. The two largest producers of coffee in the world are Brazil and Colombia. Unlike ten years ago, Vietnam is now becoming the robusta leader, with 12% share of the world market, exporting to U.S. over half of U.S. Robusta consumption in 2001, raising its production 16% that year, while the production of quality Central American beans fell 25%.
Tempted by the lower prices, some packagers of lower-priced coffee brands are substituting cheaper beans for some of the better beans they used to put in their blends. Meanwhile, some importers of quality beans are finding it hard to source them, and are seeing prices rise. Many coffee farmers are very poor and thus have been forced to cut production of the better beans, which are more expensive for them to produce, forcing the prices to rise.
Michael Porter’s Five Forces Model can be used to examine the opportunities and threats posed against Starbucks by the external environment. The five forces to be examined are risk of entry by potential competitors, rivalry among established firms, bargaining power of buyers, bargaining power of suppliers, and threat of substitute products. Management can make decisions about where Starbucks is at presently and in what direction they need to go by analyzing these five conditions.
The first of Porter’s five forces is risk of entry by potential competitors. According to Charles Hill and Gareth Jones, “potential competitors are companies that are not currently competing in an industry but have the capability to do so if they choose”. Presently the gourmet coffee industry is a very appealing industry to enter into. According to James Surowiecki of the New Yorker, “During the nineties, the number of coffee drinkers rose by almost forty million”. Yet there are many factors, such as barriers to entry, that turn many companies away. “Barriers to entry are factors that make it costly of companies to enter an industry”. Barriers to entry are indirectly related to the risk of potential competitors. The greater the barriers the less likely a firm will enter into that industry.
One barrier to entry in the gourmet coffee sector is brand loyalty. Starbucks is such a well-known and admired brand name they don’t need to spend very much on advertising, only about 1% of total revenues . Many firms will not even consider opening a coffee shop operation if a Starbucks is located close by. Another barrier to entry is absolute cost advantages. Starbucks has been in business since 1971, and in that time have perfected roasting almost to an art form some might say. “Roasters are promoted from within the company and trained for over a year, and it is considered quite an honor to be chosen”. While this promotion means higher wages, it also makes production more efficient and increases quality as well. Starbucks, by being such a sound and lucrative corporation, also enjoy access to cheaper funds because there is such little risk involved. Economies of scale are another barrier to entry aspiring firms face. Starbucks has a big advantage over incoming firms because of their size they can use economies of scale. This means that Starbucks can buy raw materials in bulk at savings smaller firms can’t get. Also Starbucks can spread fixed, marketing, and advertising costs over more sold units. Although these barriers exist, many companies do enter into the industry because of the high demand and relatively low start-up costs compared to other food and beverage retail outlets.
The next of Porter’s Forces is Rivalry among established companies. Already established firms can drive prices down or create a rise in costs, both of which will cause a decrease in industry profits. Starbucks deals in both whole-bean coffee and coffee beverages. Both of these markets are a fragmented industry, which means there are many sellers, none of which have any price setting capabilities. In the beverage sector Starbucks’ biggest competitors were Second Cup, out of Canada, and Seattle’s Best Coffee (SBC), out of Seattle. Starbucks bought out Seattle’s Best Coffee in April 2003, acquiring 51 SBC caf?s. Starbucks also competes with many other small, independent firms as well. As of mid-2002, there were 13500 coffee shops in the United States, 4070 of which were Starbucks. Amid the plethora of coffee retailers, Starbucks has relied on its superior quality and high demand to not let the competition drive down prices in the states or abroad. “In London, a tall latte sells for $ 2.93, while the same drink goes for $ 2.12 at the rival Caffe Nero Group PLC” .
Bargaining power of buyers is another external factor to consider. The more bargaining power buyers have, the less control over price and quality the producer has. In the coffee industry, buyers have a lot of power. This is partly due to the fact that there are so many sellers. The more sellers there are of a product, the more choices and the more opportunity a buyer has to find the best deal. Another reason buyer power is so high is that switching costs are so low. Switching costs are the implicit and explicit costs associated with changing brands. If a customer is unsatisfied with Starbucks’ price or service, it won’t cost that customer very much to find a different coffee shop that can suit the buyers needs. Also, buyers of coffee have the option of buying whole coffee beans and brewing the coffee themselves. This takes away from Starbucks’ power because it gives the buyers alternatives if they are not satisfied with Starbucks.
The fourth competitive force is the bargaining power of suppliers. Suppliers with a lot of bargaining power can charge higher prices or produce lower quality products. One reason this is true is because there are many buyers. Yet in the coffee industry there are just as many producers of coffee beans as there are buyers. Therefore the supplier is not as powerful as other industries and the price of coffee beans are reasonably cheap. Another reason that suppliers in the coffee industry are not as powerful is because coffee beans are a rather homogenous product. There are only two types of coffee beans on the market, Arabica and Robusta beans. Robusta beans are the cheapest beans on the market, and they are the type usually found on the grocery market shelves. Arabica beans are considered a better quality bean, and they are the type that Starbucks uses in their roasters. The best Arabica beans used to come from Brazil and Columbia, but once the world started realizing the huge demand for coffee beans places like Kenya, Indonesia and Vietnam started producing more coffee beans. This increase in suppliers decreased the amount of buyer power and drove the price of coffee beans down.
Threat of substitute products is the last of Porter’s five forces. Substitute products are “the products of different businesses or industries that can satisfy similar customer needs” . In the coffee industry, substitute products include tea, pop, milk, juices and other non-alcoholic beverages. The more substitutes available and the closer they are related the stronger the competitive force and the less opportunity the industry will have to raise prices. Because in the non-alcoholic beverage industry, there are many options open to consumers, if the price of coffee gets to high it is easy and cheap for customer to switch to a different drink of choice. One way to reduce this strong competitive force is to diversify your product line. Starbucks has done that by introducing two new types of drinks. One is called Frappucino, which is a chilled blend of coffee and milk. Double Shot, a coffee flavored stout, is another product Starbucks recently introduced to help cut into the non-coffee drinking market.
Industry Life Cycle
Another indicator of opportunities and threats in the external environment is the stage of the life cycle an industry is in. Over time industries go through five stages in which environmental conditions change. Businesses must assess where they are at in this life cycle in order to make important decisions and plan where they want to go. Presently, Starbucks is in the shakeout stage of the life cycle. The shakeout stage is characterized by a reduction in demand and growth. The shakeout stage gets its name because this is where many smaller, less efficient firms get forced out of the industry. The market begins to reach saturation in the shakeout stage. This means that there is enough firms to service the entire market demand. Thus, any new firms cannot depend on first time buyers and must compete for all customers. Also in the shakeout stage, existing companies continue to grow at the same rate as in earlier stages despite declining demand growth. This condition leads to excess capacity and eventual cutbacks. This is apparent in the coffee industry. In 1995, Starbucks expanded into Japan. After a few years of profitability, Starbucks lost $3.9 million in 2002 due to market saturation according to Stanley Holmes of Business Week.
Financial analysis is the heart of a company. Without knowing what profits are being made and money spent on expenses, there is no way of telling how well a company is developing in the industry. While researching Starbucks, the industry to the company ratios were analyzed and discussed. Also, different comparisons were made from year to year to determine the financial success or failure of Starbucks.
Profitability ratios are one of the most important financial indicators that can be made for a company. It explains and measures how efficient the company is using their resources throughout a fiscal year. For the profitability ratios, Return on Invested Capital (ROIC), Return on Total Assets (ROA), and Return on Stockholders’ Equity (ROE) will be evaluated.
ROIC measures the profit that is earned on the invested capital. Comparing Starbucks as a company to the industry in the year 2003, the Return on Investments was:
5 year Average 13.82 10.02
This comparison indicates that Starbucks as an individual company has a higher percentage when creating value than the overall industry during this last year.
ROA focuses on the ratio of net income to total assets after interest and taxes:
5 year Average 10.92 8.18 8.92 8.62
Because Starbucks has a relatively low use of debt this enables the ROA ratio to be higher than the Industry.
ROE is the most important accounting ratio, representing the ratio of net income to common equity. This ratio tells stockholders how large their return will be on their invested capital.
5year Average 14.08 13.43
If the company has zero percent debt this ratio will be the same as ROIC. However, the Starbucks ratio is greater than the industry ratio, resulting in a better rate of return for their investors. An overall average results in a greater return for the industry.
Liquidity Ratios shows Starbucks ability to meet maturing debt by comparing their current assets and current liabilities. Current Ratio and Quick Ratio will be calculated to determine the amount of short-term obligation assets. These ratios answer the question of; will Starbucks be able to pay off its debts as they come due?
Current Ratio is used to measure the credibility that Starbucks will have to their short-term creditors.
Because Starbucks has a higher current ratio than the average of the industry, they will be more likely to attract creditors. Creditors generally like to see a high current ratio. So, when evaluating short-term solvency on upcoming debts, creditors view Starbucks as having a relatively high liquidity position. In stockholder terms, this may suggest that Starbucks may have a lot of money tied up in other nonproductive assets. This would not be a great advantage for some shareholders.
Quick Ratio is a measure of a company’s ability to pay off short-term obligations without relying on the sales of their inventories. Inventories are considered the least liquid of a company’s assets. So, with Starbucks the Quick Ratio is considerably higher than the industry.
Since Starbucks has a high quick ratio it is expressing that they are able to pay off their current liabilities without having to convert their inventory into cash. Therefore, this suggests that Starbucks has enough liquid assets that will pay for its short-term obligations.
Activity Ratios are mainly used so a company can identify effective or ineffective use of their assets. It is important for a company to have the correct amount invested in assets because too much could result in a reduction of free cash flow and the companies stock price. If not enough assets are present the company could loose sales and even some of its profitability. Two primary activity ratios that are calculated include the Inventory Turnover and Days Sales Outstanding ratios.
Inventory Turnover is a ratio that helps to determine how often a company’s inventory is turned over. This ratio is directly affected by the company’s profits.
Starbucks has a relatively low inventory turnover compared to the industry, which shows that they are holding too much inventory. This in turn represents a very low rate of return for the invested inventory.
Days Sales Outstanding ratio is used to appraise accounts receivable. The average amount of time that a company must wait until receiving cash is a helpful ratio when concerning billing and collection procedures.
This calculation is stating that Starbucks must wait approximately eleven days before the cash is received for a sale. This information is useful when dealing with cash flow for the company. Knowing that it will take eleven days to fully collect the payment, the company has a more concise method for determining the preparation of the billing process.
Performance over the years
Starbucks has become more profitable throughout the years. Comparisons of revenues, profits, net income as well as an increase in the number of stocks and stockholders, indicates that Starbucks is growing at a rapid pace. It has almost tripled its financial statements over the course of five years. This comparison is a great indication that Starbucks is profitable and will continue its growth for more years to come.