Starbucks

We offer coffee one cup at a time and we are building our company one person at a time

Ben Streeter Chris Henn Jason Neal Cathy Meneses

Company Overview
1971 - Starbucks Coffee opens is first store in the Pike Place Market in Seattle, Washington 1984 - Howard Schultz convinces the original founders of Starbucks to test the coffee bar concept 1988 - Starbucks comes out with their first mailorder catalog, enabling mail-ordering of their coffee in all 50 states

Company Overview
1991 - Starbucks becomes the first U.S. privately owned company in history to offer a stock option program (Bean Stock) to all its employees 1992 - They go public, with common stock being traded on NASDAQ 1993 - Expands into the East Cost market 1994 - The Coffee Connection Inc., becomes a wholly owned subsidiary of Starbucks

Company Overview
1995 - Starbucks Coffee International forms a partnership with Sazaby, Inc., a Japanese retailer and restauranteur, called Starbucks Coffee Japan, Ltd. 1996 - Makes development agreement with three leading digital media companies (Digital Brands, Inc., Watts-Silverstein & Associates, and Cyberstruction, Inc.) to develop a broad online strategy

Mission Statement
Establish Starbucks as the premier purveyor of the finest coffee in the world while maintaining our uncompromising principles as we grow

Guiding Principles
Provide a great work environment and treat each other with respect and dignity Embrace diversity as an essential component in the way we do business Apply the highest standards of excellence to the purchasing, roasting, and fresh delivery of our coffee Develop enthusiastically satisfied customers all of the time Contribute positively to our communities and our environment Recognize that profitability is essential to our future success

Strategic Issues
Should they continue their development in Asia (with Europe being next) Attempt to increase American's awareness of quality coffee (ex. Starbucks is high quality) Find a way to overcome the saturation of the US coffee market

SWOT Analysis
Strengths
Never experienced a strike or work stoppage Good relationships with coffee suppliers Value employees Located in high traffic areas Employee turnover rate is 60%, compared to 140% in the fast food business They dont move into new markets until they dominate the ones they expand into

SWOT Analysis
Weaknesses
Excessive focus Employees report to two division heads Increasing shareholders dilutes their interest They have expanded too quickly, and have already saturated the US market They do not allow smoking in their stores, alienating some of their customers

SWOT Analysis
Opportunities
Expansion into European and Latin American markets Distribution agreements, such as hotels, airlines, and office coffee suppliers Reducing alcohol consumption in the US leads to bars being used less which leads to people needing another place to go Use supermarkets as a way of expanding into international markets Numerous brand extension Improve on perception of instant and decaffeinated coffee to expand that market share

SWOT Analysis
Threats
The coffee market is saturated Cost of coffee beans is expected to rise in the near future Supermarkets threaten whole bean sales Farmers might switch from coffee to vegetable crops High competition from Japanese competitors Consumers trend toward more healthful fare

Core Competencies
Human Resources
Employee/Company culture. Starbucks values its employees, and shows this through employee benefits. Employee training program.

Core Competencies
Tangible Resources
Coffee beans (Ex. They have sole ownership of the Narino Supremo beans, which is considered to be one of the highest quality coffee beans in the world.)

Core Competencies
Intangible Resources
Perception/Reputation of quality (beans, company name, etc) Largest and best known of coffee house chains

Financial Ratios
Current Ratio
September 1997 $316.61 Current Assets Current Liabilities $139.03 2.28 Current Ratio September 1998 $337.28 $179.47 1.88 September 1999 $386.50 $251.59 1.54

Starbucks assets have not been increasing as fast as their liabilities have increased. With a current ratio below 2 in 1998 and 1999, which is considered unhealthy, Starbucks has to find a way to buck this trend before it is too late.

Financial Ratios
Gross Profit Margin
September 1997 $939.13 Gross Profit $966.95 Sales Gross Profit Margin 97% September 1998 $730.21 $1,308.70 56% September 1999 $939.13 $1,680.14 56%

The gross profit margin is an efficiency measure. The higher the margin is, the more efficient the business is. So obviously Starbucks has been becoming less efficient over the years. This number decreasing means that it is costing Starbucks more to manufacture and sell their products (as well as costs from foreign expansion), than they are earning from doing so.

Financial Ratios
Total Asset Turnover
Sales Total Assets Turnover September 1997 $966.95 $850.67 1.14 September 1998 $1,308.70 $992.75 1.32 September 1999 $1,680.14 $1,252.51 1.34

The Total Asset Turnover is a measure of how efficiently and effectively a company uses its assets to generate sales. By looking at Starbucks ratio for the last three years, there has been a steady increase in the total assets turnover. This means that Starbucks has been finding ways to use their assets more efficiently, which is a good thing for the company

Strategies
Diversification Strategy: Due to the saturation of the U.S. coffee market, and the decreasing of their gross profit margin, Starbucks has started to move from having a concentrated business strategy to a diversification strategy. Starbucks has realized that once a market matures that it is too risky to be concentrated, and we agree that they should keep diversifying their business product lines in an effort to stay profitable, and competitive. They should diversify into products such as candy, bagels, and other food related products.

Strategies
Controlled Growth Strategy: We also think that Starbucks should slow down their current rapid pace of expansion, because their liabilities have been increasing faster than their assets have. As we showed in our current ratio the amount of Starbucks liabilities has doubled in the past two years, and this is a very disturbing trend. That is why we think that they should slow down their expansion pace, because if they keep expanding as fast as they are now then they are going to be in over their heads in debt.

Strategies
Internal Growth Strategy: Since most Americans are used to drinking low-quality coffee Starbucks needs to find a way to increase their interest and appreciation for highquality coffee. We recommend that Starbucks develop and invest in new marketing approaches, in order to increase instant coffee consumer awareness of the quality of their coffee, their product line, and the overall Starbucks experience.

Value Chain
Inbound Logistics: To get one of the highest quality beans available Starbucks collaborated with a mill in the tiny town of Pasto. They set up a special operation there to single out the Narino Supremo Bean (considered to be one of the best coffees in the world), and Starbucks guaranteed to purchase the entire stock.

Value Chain
Operations: Starbucks has their coffee roasted in a powerful gas-fired drum roaster for 12-15 minutes while roasters use their sight, smell, hearing, and computers to judge when beans are perfectly done. The color of the beans is even tested in an Agtron blood-cell analyzer, with the whole batch being discarded if the sample is not perfect.

Value Chain
Marketing and Sales: Currently Starbucks has not really been marketing a lot on TV and Radio. The company has built its popularity through its seductive atmosphere, word of mouth, and rapid expansion. They have also developed some unique marketing strategies for new markets, such as its passport promotion (where a customer receives a buyer bonus stamp when they buy a half-pound of coffee, and after they collect ten they receive a free half-pound).

Value Chain
Service: Starbucks helps its current customers by helping them to make decisions about beans, grind, and coffee/espresso machines, as well as giving some home brewing tips. Procurement: Starbucks purchased The Coffee Connection in 1994, and the United Kingdoms Seattle Coffee Company, and reopened them under the Starbucks name.

Value Chain
Technology/Development: Starbucks has developed a web-site that allows its customers to buy specialty items and coffee directly through the internet. Consumers can also research products, look up current financial info, current Starbucks store locations, and also see answers to some of the sites most frequently asked questions.

Value Chain
Human Resource Management:

All Starbucks employees must have at least 24hrs of training (where they are taught to brew the perfect cup). Starbucks also offers its employees benefits packages, with dependent coverage available as well as stock options. The Starbucks bean stock plan is a contributing factor to the low rate of employee turnover.

Value Chain
Administration: The firm is organized as a matrix between functional and product divisions. Starbucks has avoided a hierarchical organization structure, and therefore have no formal organizational chart.

Conclusion
Starbucks has been increasing its debt every year, and at a pace that is faster than their assets are growing (which is clearly unhealthy). This is why we chose for the firm to slow down its expansion and to focus more on marketing their products. In such a saturated market as the one that they are in Starbucks needs to focus on increasing consumer awareness and to decrease debt as much as possible. In closing we believe that Starbucks can become even more profitable if they slow down their expansion and concentrate on the stores that they already have open.

Update
Entered supermarket arena Extended to ice cream, wholesale food service, music compilations, office coffee program Elaborate web site to sell supplies and educate consumers about coffee quality Continued forming alliances with companies (Marriott, Maxims in Hong Kong) Environmental leadership

 Opened more stores internationally than in U.S Joint venture with Kozmo.com Various recognitions (1 of the best 100 co. to work for in Fortune , Corporate Leadership, etc.) Become established in Middle East and Asia

Future
Names president for European operations
Mark McKeon will be responsible for strategic entry & growth into Europe.

Plans to open at least 400 stores during 2000 Enhancing information systems

Questions