Thomas Gilliam 9/05/2012 FIN 448 Professor Robinson Starbucks Case Industry and Strategy Analysis a.

Apply Porter’s five forces framework to the specialty coffee retail industry. 1. Rivalry among Existing Firms: Starbucks faces intense direct competition with coffee beverage retailers such as McDonald’s McCafe shops, Krispy Kreme, Dunkin’ Donuts, and Tim Hortons. Although one of the largest coffee beverage retailers in the industry, Starbucks is faced with other competitors expanding their selection of premium coffee drinks. Starbucks leans on the idea that their particular company offers a unique service of quality coffee called the Starbucks Experience to render away from their competitors. Even with such brand loyalty, rivalry among existing firms is moderate/high. 2. Threat of New Entrants: Starbucks brand loyalty and number of locations nationally and internationally set high barriers of new entrants. To further expand these barriers, Starbucks entered into a licensing agreement to distribute Starbucks whole bean and ground coffee throughout the United States in approximately 39,000 grocery and warehouse club stores. However, potential threats do exist from growing chains of retail coffee shops including Panera Bread, Diedrich Coffee, and Caribou Coffee Company. These companies could expand the development of premium coffee drinks like those of Starbucks. With Starbucks global brand quality and the quality of the Starbucks Experience, threat of new entrants is fairly low. 3. Threat of Substitutes: A wide variety of substitutes appear in the coffee retail industry. Consumers who are on-the-go prefer a cheap and quick product rather than the Starbucks Experience. Convenience stores associated with many gas stations offer cheaper substitutes to a premium coffee. Many alternatives exist in the beverage industry such as energy drinks, soda, and even water. Even though none of these substitutes will offer the Starbucks Experience, the threat of substitutes is moderate/high. 4. Buyer Power: Starbucks does not sell just coffee, they sell the Starbucks Experience. The Starbucks Experience offers premium coffee drinks with higher quality and the experience of enjoying the coffee. This allows Starbucks to be less price sensitive because customers are willing to pay more for the experience and atmosphere. In the coffee retail industry, buyer power is relatively low because there are very few suppliers. 5. Supplier Power: Starbucks purchases higher-quality coffee beans from around the world that sell at a premium to commodity coffees. Starbucks purchases its coffee beans under fixed-price purchase contracts with various suppliers, with purchase prices reset annually. It sounds as if there are not many other alternative suppliers who offer such premium coffee beans. Since Starbucks purchases their coffee beans around the world, supplier power is relatively high considering the fixed price purchase contracts.

Accrual based companies use an allowance for uncollectible accounts because all transactions must be recognized as incurred even though cash has not been collected. Starbucks creates value for its customers by offering a luxurious setting which include Internet through the store’s Wi-Fi network. Cash Equivalents are considered a money market instrument and a maturity date so close that interest rates are unlikely to fluctuate. . f. Accounts receivable are reported net of allowance for uncollectible account. A firm may reduce the allowance for uncollectible accounts if they expect to receive the cash in a timely manner. To further distinguish themselves from competitors. Some investment securities such as long-term bonds appear on the balance sheet as noncurrent assets because the firm intends to hold on to the asset for more than a year. d. Starbucks has managed to expand locations into several other countries. Cash Equivalents are in equal value to cash.b. and importing the idea of the French and Italian café into the busy North American lifestyle. With interest rates unlikely to fluctuate. Balance Sheet c. Cash is considered the cash a company has on hand and is considered the most liquid asset. Why do investments appear on the balance sheet under both current and noncurrent assets? Investment securities such as money market funds are considered a current asset because the firm will sell the asset within one year. Also identify the events or transactions that cause the allowance account to increase and decrease. Starbucks entered into a licensing agreement to market and distribute Starbucks whole bean and ground coffee to approximately 39. this will result in deferred income taxes giving rise to an asset. If revenues are recognized in tax reporting earlier than expenses in financial reporting. How does the account Accumulated Depreciation on the balance sheet differ from Depreciation Expense on the income statement? Accumulated Depreciation accounts for the value of the asset from the time the asset was acquired. Describe how Cash differs from Cash Equivalents. The allowance account may increase if the firm does not expect to collect the cash in the current period.000 grocery stores and warehouse club stores. g. Why? Identify the events or transactions that cause accounts receivable to increase and decrease. Deferred income taxes appear as a current asset on the balance sheet. e. Depreciation Expense is the current expense of the asset for the current period. specialty coffees. Under what circumstances will deferred income taxes give rise to an asset? Firms recognize revenues and expenses during the period by tax reporting and financial reporting. How would you characterize the strategy of Starbucks? How does Starbucks create value for its customers? What critical risk and success factors must Starbucks manage? Starbucks strategy of the Starbucks Experience provides a unique coffee selection of higher quality in a setting that cannot be matched by its competitors.

Income from Equity Investees comes from investing in a company or companies with the firm’s stockholders’ equity. describe the nature of this type of income. Income Statement i. and advertising costs.S. Not until the securities are bought or sold can the realized gains or losses appear in net income. Using the narrative information provided in this case. dollars because the exchange rate is also always fluctuating. and maintenance expense.S. Accumulated Other Comprehensive Income includes unrealized gains and losses from marketable securities and investments in securities as well as unrealized gains and losses from translating the financial statements of foreign subsidiaries into U. Why are these gains and losses not included in net income on the income statement? When. will these gains and losses appear in net income? Accumulated Other Comprehensive Income includes unrealized gains and losses from marketable securities and investments in securities because the current book value may fluctuate over time to the future market value. if ever. . (2) Occupancy Costs: Includes rent expense.h. Starbucks reports Income from Equity Investees in its income statement. and paper and plastic products. licensing. Revenues produced by company-operated stores is mainly from the sales of their premium coffee selection and the Starbucks Experience. Not until the asset is being exchanged into U. Inc. (2) Occupancy Costs. Revenues from licensing companies could be a set percentage of revenues stated in the contract with the licensee. j. wages expense. This can arrive from a partnership. Starbucks reports three principal sources of revenues: company-operated stores. and foodservice and other consumer products. The source of Starbuck’s Income from Equity Investees could be the income derived from the earnings through this partnership. dollars will you be able to know the actual gain or loss to record in net income.S. What types of expenses does Starbucks likely include in (1) Cost of Sales. describe the nature of each of these three sources of revenue. dairy products. Using the narrative information provided in this case. (3) Store Operating Expenses: Internet for store’s Wi-Fi network. k. dollars. Revenues from foodservice and other consumer products could be the sale of whole bean and ground coffee to grocery stores and warehouse club stores. and (3) Store Operating Expenses? (1) Cost of Sales: Supplies expense such as green coffee beans. insurance expense. Starbucks formed partnerships to produce and distribute bottled Frappuccino and Doubleshot drinks with PepsiCo and premium ice creams with Dreyer’s Grand Ice Cream. This account also includes unrealized gains and losses from translating the financial statements of foreign subsidiaries into U.

Starbucks includes short-term investments in current assets on the balance sheet. p. the sale of premium coffee drinks produce revenue rather than the coffee machines. The expense is computed from operating activities because the depreciation expense is accounting for an operating asset. the capital expenditure would be considered an investing activity. n. This causes Starbucks Inventory account to be an expense. Explain why changes in investment securities are investing activities while changes in most other current assets are operating activities. For example. rather than an expense. . Why does Starbucks show a decrease in accounts payable as a subtraction when computing cash flow from operations? The decrease in account payable when computing cash flow from operations can be explained by Starbucks not having any operating assets with a maturity of over a year. Starbucks includes changes in Short-Term Borrowings as a financing activity on the statement of cash flows. Net income is the result of revenues after the cost of sales and operating activities. Why does net income differ from the amount of cash flow from operating activities? Cash flow from operating activities represents only one source of net income (loss) on the statement of cash flows. Purchases and sales of investment securities are classified as investing activities.Statement of Cash Flows l. If an asset was being purchased in the current period. Others include cash flow from financing activities and investing activities. q. Explain why changes in Short-Term Borrowings are a financing activity when most other changes in current liabilities are operating activities. Why does Starbucks add the amount of depreciation and amortization expense to net income when computing cash flow from operating activities? The amount of depreciation and amortization expense reduces net income. Why does Starbucks show an increase in inventory as a subtraction when computing cash flow from operations? Starbucks increase in inventory is shown as a subtraction because their particular company does not produce as much revenue from inventory. m. yet it reports purchases and sales of investment securities as investing activities on the statement of cash flows. Changes in most other current assets such as accounts receivable and inventories are due to the sale of goods or services while marketable securities are not. Short-Term Borrowings is a loan or borrowing of cash which is classified as a financing activity. o. Changes in other current liabilities such as accounts payable are considered operating activities due to the purchase of goods or services while loans are not.

sold 2008 Property. From 2007 to 2008. Creating new channels.717. Explain.5 (102.3 (204. Property. Plant. gross 2007 Net additions to Property. Plant. The difference could be the property taxes taken out of the depreciable asset.416.9 Depreciation Expense would be added to total accumulated depreciation. expanding to new countries. other assets. 2008 $5.5) $2. gross 2008 Accumulated Depreciation. Plant. & Equipment.3 $2. .1 549.5) $2. u. The dollar amount shown for property and equipment net of accumulated depreciation increased between the end of fiscal 2007 and the end of fiscal 2008. and loans caused the proportion of total liabilities to overpower the proportion of stockholders’ equity. Although the balance sheet does in fact state Property.8) $5. and Equipment net of accumulated depreciation has risen. and other intangibles. All of these percentage increases can fluctuate the percentage amount of Property.4 The $102.5 (573. Plant. the proportion of total liabilities increased while the proportion of shareholders’ equity declined. What are the likely explanations for these changes? The years 2005 to 2008 were a range of explosive expansion for Starbucks.189. The proportion of total liabilities increased due to the short-term borrowings and accounts payable accounts having substantial increases in this time of expansion. Plant. equity and other investments. 2008 Property. yet the percentage of total assets comprising these assets declined.6 984.306. Plant. all percentages of long-term assets have increased including long-term investments. & Equipment. Another explanation could be the company satisfying their shareholders by disbursing dividends. The balance sheet may be deceiving at times like these. and Equipment net of accumulated depreciation use from the amount relative to total long-term assets. s. & Equip. From 2005 through 2008. Interpreting Financial Statement Relations t. Retained Earnings. the percentages of other long-term assets can explain these inverse numbers. & Equipment.5 million difference could be a result of Starbucks buying back stock of their own company. 2007 Net Income. 2008 Treasury Stock Retained Earnings 2008 $2.760.402. This is also a good example why it is useful to look at percentages rather than numbers which can be misleading. 2007 Depreciation Expense 2008 Property taxes Accumulated Depreciation.4 315.Relations between Financial Statements r.

Identify the most important reasons for this change. Plant and equipment along with accumulated depreciation increased which could have changed the percentage of net income as total revenues to decrease. Another major component is the major business location expansion during fiscal year 2008.000 grocery and warehouse club stores. How has the revenue mix of Starbucks changed from 2005 to 2008? Relate these changes to Starbucks’ business strategy. Starbucks whole bean and ground coffees were available throughout the United States in approximately 39. Revenues were being produced by 681 net new company-owned stores and 988 new licensed stores. A major component of Starbucks’ revenue mix is the licensing agreement. and in China. By the end of fiscal 2008. Starbucks owned and operated stored in Canada. w. Net income as a percentage of total revenues increased from 7.v.0 percent in fiscal 2008. .8 percent in fiscal 2005 to 3. United Kingdom. Another change of incoming revenue was Starbucks’ business strategy of global penetration. This change could be a result from the increasing change of total assets. By the end of fiscal 2008.