Gloria Jean’s

Gloria Jean’s Coffee is devoted to offering the world’s highest quality coffee worldwide.
Australian owned and locally operated, the Gloria Jean’s Coffees now serving with over 1,000
coffee houses in 39 countries. It is a brand synonymous with coffee quality and leading franchise
systems.
It is a combination of passion, commitment and dedication to deliver the highest quality coffee to
our guests that unites our global team in the same Vision – to be the most loved and respected
coffee company in the world.
Vision
To be the most loved and respected coffee company worldwide.

Mission
Gloria Jean’s Coffees is committed to build a unified family, consistently serving the highest
quality coffee and providing an outstanding and personalized service in a vibrant store atmosphere.

Journey/History:
The Gloria Jean's Coffees started its journey in the USA in 1979 when Gloria Jean and Ed Kvetko
opened a specialty gourmet coffee outlet in a small town just north of Chicago. With appreciation
for quality coffee growing, it wasn’t long before Gloria Jean’s Coffees outlets started to appear
around the USA.
More than 16 years later, Nabi Saleh, an Australian businessman and coffee expert, experienced
the brand while in the USA and with his business partner, Peter Irvine, brought Gloria Jean’s
Coffees across the globe to Australia. .
In 2004, they returned to the USA and purchased the international branding and roasting rights for
all countries outside of the USA. Four years later, the story has come full circle. In early 2009
Gloria Jean’s Coffees International affiliate company, Praise International North America Inc,
completed negotiations to buy Gloria Jean’s Coffees U.S. retail and franchise operations from its
current U.S. owner comprising of 102 coffee houses in 24 states.
Today Gloria Jean’s Coffees is located in numerous countries around the world and continues to
find a place in the hearts of coffee lovers everywhere.
 2004- returned
to the USA and
purchased the Today-
1979-started its international opearting 1,000
journey in the branding and coffee houses in
USA roasting rights 39 countries

1995- entered 2009-franchise

Australia operations in
102 coffee
houses in 24
states

Gloria Jean's Group – Enterprise Summary

Product Line
 Hot Drinks Cold drinks
CAPPUCCINO SIGNATURE ICED COFFEE
CAFFÉ LATTE ICED LATTE
FLAT WHITE ICED MOCHA
CAFFÉ AMERICANO VERY VANILLA CHILLER
ESPRESSO ORIGINAL ICED CHOCOLATE
MACCHIATO VOLTAGE
PICCOLO LATTE FRUIT CHILLER

Consumer Segmentation and Targeting

The customer portfolio analysis concentrates on the value potential of each customer or group
of customers known as segments. Its objective is to assess the customers that the firm wants to
market their product. Gloria Jean’s is currently using the differentiation – focus strategy which
aims to differentiate within a several target market segments.

Segment Marketing
Gloria Jean’s primarily serves beverages and light meals which mean its customers come to
eat snacks, drink beverage and have a good time while doing so. No one comes to Gloria Jeans
to shop for clothes or to buy shoes so it can be agreed that most of the market segments of
Gloria Jeans have homogeneous preferences. Keeping that in mind the following consumer
segments are selected.

Geographical Area
Dhaka, Khulna, Rajshahi, Barisal, Chittagong, Rangpur
It is highly unlikely that the people from other division are going to come to just have coffee
in Gloria Jeans. So it is most likely that people of Dhaka region shall be served by Gloria Jeans.
Competitor Analysis
Gloria Jeans is entering the market as the market challenger and it is competing with various
establishments already operating in the Gulshan area. The pricing strategies and the marketing
strategies will be explained in details in later parts of the report. However it should be noted that
there is quite a few close competitors and numerous distant competitors. Some of the distant
competitors such as Café Mango are well established local brands and has a large base of loyal
customers.

Product Strategy

GJC in its Dhaka operation doesn’t not follow the similar product strategies that are being
followed by other franchise partners all over the world. In Bangladesh, the company emerges as
the full-line company for the time being like the way it does in Australia. It includes more items
or perform Line filling gradually over time in its Hot Drinks and Chillers Line.
[Source: www.gloriajeanscoffes.com]

Sales Forecasting

Conservatively, they are forecasting an average of 300 customers per day with average guest
check expenditure for all items of BDT 328. This figure was arrived at by surveying the
customer traffic at the nearest competing coffeehouses which have a range of 150 - 500
customers per day and an average customer expenditure of BDT 328. They have estimated their
customer expenditure to be slightly higher (2.5%) due to the premium price they charge for some
of their items. Total cost of sales is approximately 25%.

They expect growth to occur across all categories at about 10% annually as the business becomes
more established and well-known, reaching 400+ customers per day within a year and more than
500+ within three years. These estimates are likely conservative. However, it is possible and they
could attain a 1,000-per-day customer count within three years.

Important Assumptions
Sales growth will be a minimum of 15% annually, margins excellent, profits at approximately
20% - 25%, cash flow adequate.
Marketing Expenses will remain below 5% of sales.
Coffee drinks will continue to be considered an "affordable luxury."
15% minimum sales growth rate over the next three years as GJC becomes leader.

Break-even Analysis
A break-even analysis table has been completed on the basis of average costs/prices. With fixed
costs of BDT 2,112,000 and BDT 360 an average sale. we need approximately BDT 2,800,000
per month.

Monthly Revenue Break- BDT

even 2,753,760

Assumptions:

Average Percent Variable 23%

Cost

Estimated Monthly Fixed BDT

Cost 2,112,720

Purchasing Power Parity ( PPP ) for Gloria Jeans : Gloria Jean's Coffees is
a franchised specialty coffeehouse company that has opened more than 1,000 coffee houses across
39 markets worldwide, including over 460 in Australia. In 2014 Gloria Jeans was purchased by
the Retail Food Group for $163.5 million. Economic definition of demand suggests that you have
to have ability plus willingness to call it demand for a product or service. As for the ability part,
Gross National Income (GNI) converted to international dollars using purchasing power parity
rates is a reasonable measure of real purchasing power of a population.
Bangladesh’s PPP GNI per capital has steadily increased. In 2009, the number reached 1,580 in
current international dollar with 5-year Compound Annual Growth Rate (CAGR) at about 9%.
Polarization has been a part of our economy for a long time and in 2014, the number was 3330.
Our numbers have risen which indicates a positive expansion in the economy. Besides, there are
numbers beyond statistics also.

Exposure to International risks: There are a number of risk factors in respect to investing in
Retail Food Group Limited (RFG). Several of these risk areas may be heightened due to the
proposed acquisition of Gloria Jean's Group. RFG has taken all caution in identifying and
hereinafter advising what some of those risk factors may be. The risk profile is not to be considered
an exhaustive list, however identifies risks that RFG management do consider to be material at the
time of disclosure. There may be other risk factors which are not immediately evident that may
become so in the future.

Operational Risks
Consumer Relevance RFG’s retail food systems operate in a dynamic and ever changing
marketplace. RFG continually runs programs that seek to ensure brand relevance remains top of
mind to its consumers. However, should RFG take a misstep in their evaluations, there is always
the risk that one or more of its brands may lose relevance and equity.

Competition: RFG’s brands operate in a highly competitive marketplace. RFG can control what
its brands do; however, has no control over what its competitors may bring to the marketplace
from time to time.

Growth Profile: Outlet proliferation is always a fundamental goal in each of RFG’s brand
systems. There are a number of potential risks attached to outlet proliferation. These can
encompass unacceptable rent offerings, new shopping Centre opportunities not being forthcoming,
lack of new site availability and franchisee recruitment.

Information Technology: Given RFG’s continued expansion since its 2006 ASX listing,
information technology has become more and more critical in its ability to oversee and manage its
ever expanding network. Should these IT systems not be kept up to date, secure and safe, system
failures could have a significant negative impact on RFG’s control of its business.

Operating Costs: Operating costs of the RFG business are considered to be at the lower end of
business risks. Should RFG not maintain that risk profile and cost control discipline, there would
be an adverse material effect on RFG profitability.

Supply Chain Procurement: RFG internally manages its supply chain procurement. Significant
increases in costs and/or shortages in respect to availability could cause material adverse effects
for both RFG and its franchisees’ profitability.

HR/Personnel Reliance: The RFG business relies on a number of key people within its
organization. RFG’s profitability and growth may be limited should any of these key personnel
leave in circumstances where suitably qualified replacements cannot be found.

Integration Risks: The acquisition of Gloria Jean's Group contemplates the successful integration
of a number of business units. Namely, retail franchised outlets, Maranatha roasting facility, North
American franchise outlet performance, North American roasting business, and significant
international master franchise territories. Each of these different areas of the business need to be
integrated successfully, seamlessly and with synergies identified. Failure to facilitate the
integration process in an orderly and advantageous manner would compromise integration benefits
identified.

Acquisition: Accounting In accounting for the acquisition in the pro-forma combined balance
sheet, RFG has performed a preliminary fair value assessment of all the assets, liabilities and
contingent liabilities. RFG will undertake a fair value assessment of all the asset, liabilities, and
contingent liabilities post acquisition, which may give rise to materially different fair value
allocation to that end for purposes of the pro-forma financial information set out in the
presentation, resulting in a reallocation of the fair value of assets.
Foreign Country Instability: The Gloria Jean’s Group including the Gloria Jean's Brand System
operates in some 40 foreign countries. Some of these countries either suffer political and social
instability or are in regions that suffer same. Political or social unrest in any of the countries that
Gloria Jean’s Group operates in would be expected to have a negative impact on the Gloria Jean’s
Group business in those countries, and therefore the modeled income stream for RFG.

Exchange Rates: A significant portion of Gloria Jean’s Group EBIT is derived from 40 different
international regions. Adverse exchange rate movements in these currencies may impact the future
performance of the business.

Interest Rates: While RFG takes reasonable steps to protect it, rising interest rates may adversely
impact RFG’s financial performance.

Legislative and Franchise: Changes: All businesses are at risk of legislative changes that may be
imposed upon a business sector. RFG has a further risk profile in respect to potential Franchising
Code of Conduct changes. RFG operates predominantly in the Australian franchise marketplace,
a country which is considered to have the most stringent and rapidly changing franchising
regulation in the world. That said, the acquisition will heighten RFG’s risk to both legislative and
franchising changes in other countries.

Future Plans of Gloria Jeans: Gloria Jean’s Future plans for 2016-2017 is that it has been
undertaking a strategic review as it celebrates its 20th year in Australia in 2016, and it's timely that
the brand refocuses to ensure its relevance in the market and in turn exceed the guests' expectations
now and in the future. Gloria Jean's Coffees aims to be innovative to delight consumers and execute
consistency in order to grow. By identifying the challenges facing them, they say that they have
the opportunity to not just overcome them, but to push the brand ahead of the market. Their
overarching priority is always attracting more guests towards the brand and improving the
profitability of their valued franchise partners. Gloria Jean’s key priorities which underpin their
spirit and character are their brand positioning, culture and continuing to deliver the valued guests
with the best possible experience. These have been the priorities of Gloria Jeans in 2016 and will
carry across into 2017 as they focus on maintaining their market leading position.

Gloria Jean’s SWOT Analysis:

Strengths: It has a strong brand recognition and brand positioning. It has over 1000 stores
worldwide. Its management is excellent and provides continuous innovation to the employees.
They also differentiate their products.

Weakness: Still there is a lack of up-to-date brewing machines. They have less variety of products
than their competitors. They follow strict franchisee criteria. Sometimes they choose bad
associates who are not good for their business. They do not provide customer incentives and they
also target and follow the Niche market.

Opportunities: They have the potential and scope to target and reach the high coffee consumption
countries as they have high spending power. They have their product uniqueness, so they can test
on countries with a very different culture. They can also raise their standards by building
partnership with high consumption coffee countries. All they have to do is to update their brewing
machines, widen their target market and carefully choose their partners.

Threats: They might have a high threat of New Entrants. Coffee prices may keep rising.
Competitors might find ways to put prices of coffees below their pricing strategy. Government
restrictions may also result in high threats in some circumstances.

Gloria Jean's Group – Geographic Representation

Terms & Funding
 Starbucks

Starbucks Corporation is an American coffee company and coffeehouse chain. Starbucks was
founded in Seattle, Washington in 1971. As of November 2016, it operates 23,768 locations
worldwide, including 13,107 (+170) in the United States, 2,204 (+86) in China, 1,418 (-12) in
Canada, 1,160 (+2) in Japan and 872 in South Korea (bumping United Kingdom from 5th place)
(Differences reflect growth since Jan 8, 2016).

Starbucks is considered the main representative of "second wave coffee", initially distinguishing
itself from other coffee-serving venues in the US by taste, quality, and customer experience while
popularizing darkly roasted coffee. Since the 2000s, third wave coffee makers have targeted
quality-minded coffee drinkers with hand-made coffee based on lighter roasts, while Starbucks
nowadays uses automated espresso machines for efficiency and safety reasons.
Starbucks Competitive Advantage:
Starbucks' marketing strategy involved positioning its Starbucks outlets as a place where
consumers can spend time other than their home or work. This was done by making each of its
stores as comfortable and relaxing as possible. The coffee giant achieved these using creature
comforts, such as comfortable furniture and relaxing music. Over the past several years, Starbucks
also included offerings such as wireless internet, handicapped access, complimentary books, and
common areas for collaboration. While Starbucks stores are positioned as locations where
customers can spend time in a comfortable setting, their product lines are positioned at the higher
end in regards to prices and quality.

Franchising Starbucks:

Starbucks does not franchise to individuals. However, in situations in which a master

concessionaire or other company controls or can provide improved access to desirable retail space
(such as an airport), the Company may consider licensing its operations to such a company.
Starbucks Franchise Costs for opening one Starbucks licensed store is roughly $315,000 (in 2007).

Starbucks has 10,000 stores worldwide, some 4,400 of them are licensed shops. It’s nearly
impossible to open Starbucks store as franchise in US or Canada, but in other countries, there is
always a possibility.

Franchising is a way to help stores to grow, but the coffee retailer prefers licensing to keep more
control over stores and product quality. Licensees don’t own stores, as franchisees do; they
basically rent the Starbucks brand by paying a licensing fee.

Expansion to new markets and products:

 The first Starbucks location outside North America opened in Tokyo, Japan, in 1996.
Starbucks entered the U.K. market in 1998 with the $83 million. USD acquisition of the
 then 56-outlet, UK-based Seattle Coffee Company, re-branding all the stores as Starbucks.
In September 2002, Starbucks opened its first store in Latin America, at Mexico City.
 In 1999, Starbucks experimented with eateries in the San Francisco Bay area through a
restaurant chain called Circadia.] These restaurants were soon "outed" as Starbucks
establishments and converted to Starbucks cafes.
 In October 2002, Starbucks established a coffee trading company in Lausanne, Switzerland
to handle purchases of green coffee.
 In April 2003, Starbucks completed the purchase of Seattle's Best Coffee and Torrefazione
Italia from AFC Enterprises for $72m. In September 2006, rival Diedrich Coffee
announced that it would sell most of its company-owned retail stores to Starbucks.
 In August 2003, Starbucks opened its first store in South America in Lima, Peru.
 In 2007, the company opened its first store in Russia, ten years after first registering a
trademark there.
 In March 2008, they purchased the manufacturer of the Clover Brewing System. They
began testing the "fresh-pressed" coffee system at several Starbucks locations in Seattle,
California, New York, and Boston.

Graph showing the growth in the number of Starbucks stores between 1971 and 2011

 On February 1, 2013, Starbucks opened its first store in Ho Chi Minh City, Vietnam and
this was followed by an announcement in late August 2013 that the retailer will be opening
its inaugural store in Colombia.
 In August 2014, Starbucks opened their first store in Williamsburg, Brooklyn. This location
will be one of 30 Starbucks stores that will serve beer and wine.
  In August 2015, Starbucks announced that it will enter Cambodia, its 16th market in the
China/Asia Pacific region. The first location will open in the capital city of Phnom Penh
by the end of 2015.[51]
 In February 2016, Starbucks announced that it will enter Italy, its 24th market in Europe.
The first location will open in Milan by 2017.

As of June 9, 2016, Starbucks is present in 72 countries and territories:

Africa North Oceania South Asia Europe

America America

Egypt Aruba Australia Argentina Azerbaijan Austria

Morocco Bahamas New Zealand Bolivia Bahrain Belgium

South Africa Canada Brazil Brunei[89] Bulgaria

Costa Rica Chile Cambodia Cyprus

El Salvador Colombia China Czech

Republic
Guatemala Peru Hong Kong
Denmark
Mexico Macau
Finland
Panama India
France
Trinidad and Indonesia
Tobago Germany
Japan
United States Greece
Jordan
Puerto Rico Hungary
Kazakhstan
Ireland
 Kuwait Luxembourg

Lebanon Monaco

Malaysia Netherlands

Oman Norway

Philippines Poland

Qatar Portugal

Saudi Arabia Romania

Singapore Russia

South Korea Slovakia

Sri Lanka Spain

Sweden

Automated locations:

Starbucks has automated systems in some areas. These machines have 280 possible drink
combinations to choose from. They have touchscreens and customers can play games while they
wait for their order.

Competition:

Starbucks main competitors are quick-service restaurants and specialty coffee shops. The
company believes that its customers choose among retailers primarily on the basis of product
service, service, price, and convenience. Starbucks, in recent times, has experienced drastic direct
competition from large US competitors from quick-service restaurants. These restaurants have
significantly greater marketing and operating resources. Starbucks is also faced with well-
established competitors in the International markets.

Starbucks whole bean coffees compete directly against specialty coffees sold through
supermarkets, specialty retailers and a growing number of specialty coffee stores. Starbucks
Specialty Operations face significant competition from established wholesale and mail order
suppliers, some of whom have greater financial and marketing resources. Starbucks faces intense
competition from both restaurants and other specialty retailers for prime retail locations and
qualified personnel to operate both new and existing stores.

The types of food choices, pricing and restaurant ambiance create the diversity among competitors.
Some competitors offer a full menu while others offer a bakery-café menu. Pricing varies among
competitors as well. Starbucks pricing is considered to be higher than average.

Starbucks relies a great deal on information technology systems in the operations of its supply
chain, point-of-sale processing, and many other business transactions. The management of these
transactions greatly affects the production, distribution, and sale of its products.

Starbucks utilized its Human Resources to its full capacity. Employees are required to follow
Starbucks comprehensive store operating procedures and attend training classes. Starbucks
realizes that its growth depends considerably on the knowledge, skills, and abilities of key
executives and other employees and its ability to recruit and retain those employees.

Government policy exists to manage entry into an industry with licensing requirements
regulations. Opening a coffee shop or restaurant will require obtaining certain licenses, i.e.,
business licenses, and tax id’s, among other possible licenses.

Despite all the barriers or obstacles associated with entry, the most significant barrier to entry is
catching a niche market. Name brand franchises have ultimately captured most of the market share
because of their own personal niche.
More than 77 percent of all adults over 18 — or 161 million people — drink coffee on a daily or
occasional basis, the study reported. According to the 2007 National Coffee Drinking Trends
Report, 18- to-24-year olds have contributed to the increases in coffee consumption in the past
year (daily, weekly, and annual consumption).

The buyers hold enough power to influence company pricing. The industry depends upon
consumer spending on specialty eatery products; a lack of demand will ultimately force a firm to
change its product line and to lower prices.

Starbucks competitors in the coffee beverage sales include 7-Eleven, Dunkin Donuts, BIGGBY
Coffee, Caribou Coffee, McDonald's, Panera Bread, and Einstein Bagels. Competitors such as
McDonald's and Dunkin Donuts not only have extensive menus, but also the financial resources
and position to leverage their strengths to threaten Starbucks profitability.

Market Structure:

Starbucks, despite their inflated prices have been able to create a sense of brand loyalty with and
array of loyal followers. Coffee is a fairly homogeneous item which Starbucks has been able to
market their standards of portraying a luxurious lifestyle. Starbucks operates in a monopolistically
competitive market structure in which they have been able to maintain a control over their inflated
prices. They have been able to create a standard for their coffee and in which they require their
customer base to be exaggerated prices for a cup of their various brews. With usage of the
Starbucks logo, quality, and various trademarks, they differentiate their coffees from their
competitors. Starbucks prides itself on being completely different from any other coffee house and
its competitors, which is a reason why Starbucks has become so successful.

Starbucks is not the only coffee shop on the market, others like Dunkin’ Donuts, McDonald’s, and
Panera Bread have an identical item with similar tastes and effect as the Starbucks brew, yet they
have been able to charge a premium for their blends by luring in customers with the aroma of an
inflated lifestyle. There are other homogenous coffee shops in the market, but their loyal
customers believe that the superior quality, taste, and aroma cannot be found from any other coffee
brewing entity. At one point, their customers were more interested in the pretense that holding a
Starbucks cup represented, but due to the current economic conditions, their customers have begun
second thinking how they are affected by the extravagant price of the black gold they have been
sipping.

Monopolistically competitive firms, like Starbucks are driven by mass advertising and the
establishment of brand names and logos. Starbucks ambiance and products are marketed by the
elevated, intellectual connotations. There are many coffee shops on the market that also offer tasty
aromatic coffees, but the advertising and atmosphere of the Starbucks shops draws customers in.
People are spending more on Starbucks brews because of the logo and status attached to them.
Because coffee many times is virtually identical, advertisers and producers narrow in on what the
consumer wants and allow their products to portray those ideals.

Market strategy:

Some of the methods Starbucks has used to expand and maintain their dominant market position,
including buying out competitors' leases, intentionally operating at a loss, and clustering several
locations in a small geographical area (i.e., saturating the market), have been labeled anti-
competitive by critics.

Purchasing Power Parity for Starbucks:

When one country’s inflation rate rises relative to that of another country, decreased exports and
increased imports depress the country’s currency. The theory of Purchasing Power Parity (PPP)
attempts to quantify this inflation - exchange rate relationship. Purchasing power is the value of a
currency expressed in terms of the amount of goods or services that one unit of money can buy.
Purchasing power is important because, all else being equal, inflation decreases the amount of
goods or services you would be able to purchase. In investment terms, purchasing power is the
dollar amount of credit available to a customer to buy additional securities against the
existing marginable securities in the brokerage account.

A representation of purchasing power parity published by The Economist that determines what a
country's exchange rate would need to be in order for a Starbucks tall latte to cost the same as it
does in the United States. Using this index, the purchasing power of each individual national
currency can be reflected in the U.S.-dollar cost of a latte in that country.

If currency markets function with proper efficiency, the price of an identical product, such as a
Starbucks latte, should have an identical U.S.-dollar cost in any country. Therefore, if a latte costs
significantly less in one country than another, this suggests that the country with the cheaper latte
price has an undervalued currency.

Exposure to International Risks:

Strong growth in international markets is cooked into Starbucks' stock price, and indications that
the company might not be able to make good on its growth trajectory would likely be met with
declines. The company is aiming to boost its global store count from roughly 24,000 locations
today to 36,000 locations by 2021, and most of those new stores are set to open outside of America.

At the start of 2016, Starbucks had roughly 2,000 stores in China, and it's aiming to have 5,000
locations in the country by 2021. That sounds pretty good, but China has a tough regulatory market
and conditions could change in ways that would be disruptive to Starbucks' strategy in the region.
If the coffee company runs into food safety issues or tensions with the U.S. take a turn for the
worse, for instance, its brand could be damaged in the country and its ambitious expansion goals
might prove less fruitful than anticipated. China is the biggest part of Starbucks' international push,
but similar dynamics could play out in other key markets including India and Japan, and setbacks
would likely weigh on the company's growth outlook and share price.

We don't know what the future holds for Starbucks, but it's always good to keep an eye on the
challenges that could surface for your investments.

The Starbuck identified the risk factors in their Starbucks corporation form 10-Q for the Quarterly
Period Ended March 30, 2008. The New Risk Factor is the Starbucks may not be successful in
implementing important new strategic initiatives, or even if successfully implemented such
initiatives may not achieve the Starbucks' intended results, either of which may have a material
adverse impact on its business and financial results.

On January 7, 2008, the Starbucks announced that its chairman Howard Schultz would take on the
additional role of president and chief executive officer, replacing Jim Donald who left the
Company. The Company subsequently undertook the development and implementation of several
important strategic initiatives as part of a transformation agenda designed to drive long-term
shareholder value and improve Starbucks results of operations.

International Fisher Effect (IFE):

According to the Fisher effect, nominal risk-free interest rates contain a real rate of return and an
anticipated inflation. If the same real return is required, differentials in interest rates may be due
to differentials in expected inflation. According to PPP, exchange rate movements are caused by
inflation rate differentials.

The International Fisher Effect (IFE) is an exchange-rate model designed by the economist Irving
Fisher in the 1930s. It is based on present and future risk-free nominal interest rates rather than
pure inflation, and it is used to predict and understand present and future spot currency price
movements. For this model to work in its purest form, it is assumed that the risk-free aspects of
capital must be allowed to free flow between nations that comprise a particular currency pair.

The point of the IFE theory is that if Starbucks or Gloria Jean’s periodically tries to capitalize on
higher foreign interest rates, it will achieve a yield that is sometimes above and sometimes below
the domestic yield.

On the average, Starbucks or Gloria Jean’s would achieve a yield similar to that by a corporation
that makes domestic deposits only.

Forecasting:

Firms Forecast Exchange rates for:

  Hedging decisions
 Short-term financing decisions
 Short-term investment decisions
 Capital budgeting decisions
 Long-term financing decisions
 Earnings assessment

Starbucks Hedging decisions:

The majority of the Company’s revenue, expense and capital purchasing activities are transacted
in US dollars. However, because a portion of the Company’s operations consists of activities
outside of the United States, the Company has transactions in other currencies, primarily the
Canadian dollar, British pound sterling, euro, and Japanese yen. As a result, Starbucks may engage
in transactions involving various derivative instruments to hedge revenues, inventory purchases,
assets, and liabilities denominated in foreign currencies.

As of September 28, 2008, the Company had forward foreign exchange contracts that hedge
portions of anticipated international revenue streams and inventory purchases. In addition,
Starbucks had forward foreign exchange contracts that qualify as accounting hedges of its net
investment in Starbucks Japan, as well as the Company’s net investments in its Canada, UK, and
China subsidiaries, to minimize foreign currency exposure.

The Company also had forward foreign exchange contracts that are not designated as hedging
instruments for accounting purposes (free standing derivatives), but which largely offset the
financial impact of translating certain foreign currency denominated payables and receivables.
Increases or decreases in the fair value of these hedges are generally offset by corresponding
decreases or increases in the US dollar value of the Company’s foreign currency denominated
payables and receivables (i.e. “hedged items”) that would occur within the hedging period.
Starbuck’s forecasting:

There are four forecasting techniques: Technical, fundamental, Market based and Mixed
Forecasting. Starbucks should follow the Mixed Forecasting method. A Mixed forecasting refers
to the use of a combination of forecasting techniques. The actual forecast is a weighted average of
the various forecasts developed. So, it can use the Technical forecast method which relies on
historical data for future values. It can also use the Fundamental technique which is based on the
fundamental relationships between economic variables and exchange rates. It can also conduct
Market based forecasting technique which involves developing forecasts from market indicators
and then average out all the techniques which were conducted. This will reduce their risks and
allow them to predict about their earnings assessment.

Starbucks can also forecast Exchange Rate Volatility:

MNCs also forecast exchange rate volatility. This enables them to specify a range (confidence
interval) and develop best-case and worst-case scenarios along with their point estimate forecasts.

 the use of recent exchange rate volatility,

 the use of a historical time series of volatilities (there may be a pattern in how the exchange
rate volatility changes over time), and
 The derivation of the exchange rate’s implied standard deviation from the currency option
pricing model.
Starbucks Corporation Analyst Forecasts Earnings Growth:

Over the next five years, the analysts that follow this company are expecting it to grow earnings
at an average annual rate of 17.79%. This year, analysts are forecasting earnings increase of
11.13% over last year. Analysts expect earnings growth next year of 15.32% over this year's
forecasted earnings.

Demand Forecasting:

Determinants of demand consists of

1) Price,
2) The incomes of consumers,

3) The prices of related goods and services,

4) The tastes of preferences patterns of consumers,

5) The expected price of the product in future periods and

6) The number of consumers in the market.

These variables change the quantity demanded at each price and determine where the demand
curve is located.

Price

With all other things remaining constant, as the price rises, the demand will fall and inversely, as
the price falls, the demand will rise. As the price of Starbucks coffee increases, the demand for
that particular brand of coffee will decrease. In this event, many people may choose not to drink
Starbucks coffee and decide to switch to a less costly alternative such as frequenting a lower cost
coffeehouse, purchasing coffee at a gas station, or perhaps even brewing their coffee at home.
Other alternatives to coffee, such as teas, energy drinks, or any caffeinated beverage may also take
the place of coffee. As the price of Starbucks coffee falls, consumers will demand more of the
coffee because it will be more affordable.

Income

As income increases the demand for a product will increase as well. As income declines, the
demand for the goods will go down as well. In today’s economy, many people have been losing
their jobs or have had their income reduced. As a result, consumers have had to cut back on non-
essential items such as higher end coffees like Starbucks. Many people will no longer be able to
afford the $4-5.00 specialty beverage. When income increases, people have more disposable
income therefore are able to treat them to a specialty beverage.
Substitutes

As the price of the substitute rises, the demand for the product rises. As the price of the
substitutions goes down, the demand for them will increase. Substitutes for Starbucks coffee could
include cheaper coffees, teas, hot cocoa, water, energy drinks, soda, and caffeine pills. If the price
of any of these substitutes should rise, the demand for coffee will rise because consumers will be
unable or unwilling to pay the additional price and switch back to coffee.

Number of consumers

If there are more buyers than there must be more of a market demand. The more consumers, the
more demand. The higher the demand for a good the higher the prices will rise.

State technology

Producers will search for advanced, economical technology so the cost of producing Starbucks
coffee will decrease. The lower the cost in production of the coffee results in a higher supply due
to the cost effectiveness of the production. According to Starbucks 10k report, Starbucks relies
heavily on information technology systems across its operations, including for management of its
supply chain, point-of-sale processing in its stores, and various other processes and transactions.

Expected price of the good

Producers may withhold production of Starbucks coffee in the current period if they expect the
price of coffee to rise. They will be more willing to sell the coffee at a higher price rather than
selling and producing at the lower price.

Number of firms

The higher the number of coffee suppliers in the industry the higher the supply of coffee in the
industry. There will be more coffee to go around for the consumers. If there are more buyers than
there must be more of a market demand. The more consumers, the more the demand. The higher
the demand for a good the higher the prices will rise.
Sales forecasting:

Sales forecasting is the process of estimating what the business’s sales are going to be in the future.
Sales forecasting is an important part of business management. Starbucks cannot manage
inventory, cash flow, or plan for growth without an idea of what future sales are going to be. A
business’s sales revenue from the same month in a previous year, combined with knowledge of
general economic and industry trends, work well for predicting a business’s sales in a particular
future month.

There are various forecasting models that can be used for forecasting sales for Starbucks coffee.
Two methods are qualitative and quantitative.

The qualitative method

Uses subjective judgment based on non-quantifiable information, such as management expertise,

industry cycles, research, development, and labor relations. The qualitative method does not
require a demand history for the product or service.

The quantitative method

Is a research method that relies on interviews, observations, and a small number of questionnaires,
focus groups, subjective reports and case studies. Much of the focus is on collection and analysis
of numerical data and statistics.

Starbucks is subject to a number of significant risks through qualitative and quantitative methods
that might cause the company’s actual results to vary materially from its forecasts, targets, or
projections. The significant risks involved are lower customer traffic or average value transactions.
These negatively impact comparable store sales, net revenues, operating income and earnings per
share. These risks are due to the impact of initiatives by competitors and increased competition
with lack of customer acceptance of price increase to cover costs of new products. Risks are
material interruptions in the company supply chain beyond its control, such as material interruption
of roasted coffee supply due to the casualty loss of any of the Starbuck’s roasting plants or the
failures of third-party suppliers, or any interruptions in service by common carriers that ship goods
within the company’s distribution channels.
Starbuck’s Exposure to Exchange Rate Fluctuations

Exchange rate risk can be broadly defined as the risk that a company’s performance will be affected
by exchange rate movements. Since exchange rate movements can affect a multinational
corporation’s (MNC’s) cash flow, they can affect an MNC’s performance and value. Financial
managers must understand how to measure the exposure of their MNCs to exchange rate
fluctuations so that they can determine whether and how to protect their operations from that
exposure.

Purchasing Power Parity Argument: Exchange rate movements will be matched by price
movements where PPP does not necessarily hold.

The Investor Hedge Argument: Starbucks shareholders can hedge against exchange rate
fluctuations on their own. The investors may not have complete information on corporate
exposure. They may not have the capabilities to correctly insulate their individual exposure too.

Currency Diversification Argument: If Starbucks is well diversified, it should not be affected

by exchange rate movements because of offsetting effects. This is an immature presumption.

Stakeholder Diversification Argument: Well diversified stakeholders will be somewhat

insulated against losses experienced by an MNC due to exchange rate risk. In this case, Starbucks
may be affected in the same way because of exchange rate risk.

Response from Starbucks: Starbucks have attempted to stabilize their earnings with hedging
strategies, which confirms the view that exchange rate risk is relevant.

Facilities:

Starbucks has launched a new Mobile Order & Pay app. This includes a bar code in mobile. This
bar code needs to be scanned by a small scanner at the counter. Customers can pay from their
smartphone by just waving their phone off the scanner.

They started a community website, My Starbucks Idea, designed to collect suggestions and
feedback from customers. Other users comment and vote on suggestions
A loyalty program was introduced from 2008, for registered users of the Starbucks Card offering
perks such as free Wi-Fi Internet access, no charge for soy milk and flavored syrups, and free
refills on brewed drip coffee, iced coffee, or tea. In 2009, Starbucks began beta testing its mobile
app for the Starbucks card, a stored value system in which consumers have access of pre-paid
funds to purchase products at Starbucks. Starbucks released its complete mobile platform in 2011.

Environmental impact:

Grounds for your Garden

 In 1999, Starbucks started "Grounds for your Garden" to make their business
environmentally friendlier. This gives leftover coffee grounds to anyone requesting it for
composting. Customers can request and lobby their local store to begin the practice.
 In 2004, Starbucks began reducing the size of their paper napkins and store garbage bags,
and lightening their solid waste production by 816.5 t (1,800,000 lb). In 2008, Starbucks
was ranked No.15 on the U.S. Environmental Protection Agency's list of Top 25 Green
Power Partners for purchases of renewable energy.

Recycling

Starbucks began using 10% recycled paper in its beverage cups in 2006—the company claimed
that the initiative was the first time that recycled material had been used in a product that came
into direct contact with a food or beverage.

Pricing Strategy:

Starbucks positions itself as a specialty premium coffee retailer and has a strong and well-known
brand image. As Starbucks is a premium coffee brand, its target market has always been middle
and upper class with the disposable income needed to frequent the coffeehouse. One of the main
reasons Starbucks has been so successful is because they focus on quality and experience rather
than price. The Starbucks’ image and experience has been one of the key elements to their success.
Starbucks has succeeded in giving coffee a new cachet and established themselves as a price setter
through product differentiation. Consumers have been willing to pay for what they consider an
elite lifestyle and many believe that the higher the price, the better the quality. Although premium
brand coffee makers have some market power to set prices above the generic value brands,
Starbucks operates under monopolistic completion where there are many small firms that sell
similar products, therefore they do not exert complete market power in the industry.

Starbucks has, up until now, been able to take advantage of premium pricing. Pricing decisions
also serve as a marketing tool and is one of the most compelling attributes of product positioning.
It makes a very clear statement about how a consumer should perceive a product. Starbucks cannot
become the low price leader; it takes away from the brand image and ambience that they are known
for.

When Starbucks became a major competitor, it was because the company’s environment was like
none other and focuses on the benefit of the customer. People considered Starbucks as a “third
place” after home and work. Howard Schultz’s vision was not to build a coffee shop, but instead
build a company that treats people with dignity and respect. He wanted to establish a place where
you can go relax and have a delicious coffee and smother yourself in a comfortable seat that makes
you feel like you’re sitting on your living room couch. Ear pleasuring music will be consuming
your background and make a customer feel as if they are at their home away from home. Or a
place where you can bring your laptop and get some work done if there were any distractions at
home or work. Starbucks is also the type of place where you can meet a friend, stay and talk for
hours, and feel like you’re the only two people in the place.

Customers and employees as well receive an experience for Starbucks, in which Starbucks
constantly strives to pleasure everyone around them. The environment is so inviting, relaxed, and
probably trendier than most people’s living room, and at the same time, quick paced if you need a
coffee to-go. Starbucks has set an environment where the relationship between customers and
employees sets the company apart from other coffee shops. Starbucks sets a different type of trend
than any other coffee house that seems to be contagious to customers and even other companies.

One area of business that Starbucks spends the least amount of their money on is its advertisements
compared to competitors.
Instead of putting millions into image-building campaigns, Starbucks has chosen to spend its
money on employee benefits. Starbucks was one of the first companies to offer part-time
employees equity and health benefits, unlike its competitors in which it’s hard for them to imitate.

Starbucks has also created projects that have given back to the community, created recyclable
products, and has branched off into different brands, which has brought the company to another
level. Starbucks constantly strives to be different and better than everyone else and if they stick
to their core competencies, the company will continue to be successful.

There are four ways that companies can do to improve market share. Make a better product than
that of the competitors, change the price or offer special incentives for buyers, such as discounts
or sales, find new distribution channels to reach more consumers, advertise and promote the
products. Although the price appears to be higher than most of their competitors, the fact that the
coffee contains more caffeine per cup, that one cup may be enough for the entire day. This could
actually save both time and money opposed to having to buy more than one cup.

Starbucks relies on its relationships with coffee producers, outside trading companies, and
exporters for its supply of green coffee. The company is dedicated to selling only the finest whole
bean coffees and coffee beverages therefore it purchases green coffee beans from coffee-producing
regions around the world. Because the supply and price of coffee are subject to significant
unpredictability, the company tends to trade on a negotiated basis at a significant premium above
commodity coffee prices. The amount negotiated depends on the supply and demand at the time
of purchase. Supply and price can also be affected by other factors in the producing countries,
including weather, political and economic conditions. Agreements establishing export quotas or
by restricting coffee supplies have also affected price. Due to unpredictability in the prices, the
company has largely used fixed-price purchase commitments to be sure they have enough of a
supply of quality green coffee and control the price. This contract states the quality, quantity, and
delivery of the coffee.
Conclusion:

Starbucks has had much market power in the gourmet coffee industry. They have attracted
customers by an experience of an upscale French coffee shop with a neighborhood feel. All are
welcome to join the bandwagon as long as they are willing to pay the price for premium. In the
current economic state, their prices have caught up to them causing their demand to decrease.
People do not want to spend their limited income on premium coffees that they can get from any
of their competitors, like Dunkin’ Donuts, McDonalds and Panera Bread

Many outside factors also contribute to Starbucks losing its brand appeal. People have begun to
realize that they have alternatives to purchasing Starbucks coffee and still sample the luxurious
blend by brewing it at home themselves. Customers no longer follow the hype supported by the
Starbucks name and are becoming more price/value oriented. To remain a major player in the
coffee shop market, Starbucks must reinvent themselves with the changing lifestyles, tastes and
react to the alternatives within the market.