How Starbucks Corporation Makes Most of Its Money

Starbucks (NASDAQ:SBUX) has transformed the coffee-drinking experience in the United

States, essentially Americanizing a cafe concept born in Italy and turning it into a global
phenomenon.

The chain has become one of the biggest brands in the world, with 26,736 stores across 75
countries. In the U.S., Starbucks took coffeehouses and made them mainstream. It evolved a
concept associated with ratty old couches and an offbeat clientele and made it something for
everyone, with sleek furniture, Wi-Fi, and comfortable space to work or socialize.

Founder and chairman Howard Schultz built Starbucks with the goal of creating a third place
for people in addition to work and home. He succeeded in doing that, and that's how it makes
most of its money.

While Starbucks has become a brand that can be found in grocery stores, convenience chains,
and pretty much everywhere beverages are sold, it still makes most of its money from
operating its stores. In fact, revenue for company-owned stores are more than four times
revenue from licensed stores, consumer packaged goods (CPG), and various other sources.

Net Revenue (in Millions) Q3 2017 Q3 2016

Company-operated stores $4,509.00 $4,181.60

Licensed stores $588.30 $527.20

CPG, foodservice, and other $564.20 $529.20

The third quarter was a record for the company in terms of revenue, but it can be seen from
the chart above that stores continue to drive its business.
On July 26, 2018, Starbucks released Q3 fiscal 2018 earnings. The company reported that
consolidated net revenues reached $6.3 billion, an 11% increase from the same quarter of the
previous year. Active Starbucks Rewards membership in the U.S. increased 14% year-over-
year to 15.1 Million.

Starbucks Geographical Division

The company divides its operations primarily geographically, into the following divisions:

 The Americas
 Europe, the Middle East, and Africa (EMEA)
 China/Asia-Pacific
 Channel Development (corporate-speak for “everything other than retail stores”)

The Channel Development includes the packaged ground coffee you get at the supermarket
and the single-serving Frappucino bottles at the convenience store.

Franchise Strategy
Starbucks has a very, very limited number of franchisees in the United Kingdom and South
Africa, and it does not accept franchise submissions in North America. But that doesn’t mean
that every one of those stores is company-owned in the strictest sense. Notably, 79% percent
of its revenues come from company-operated stores, meaning that thousands of stores operate
under licensing agreements. The airport kiosk, the bookless corner of your neighborhood
Barnes & Noble (BKS), the stand-up service counter at the entrance to Safeway – all of those
locations help Starbucks pervade the minds of its customers, and make it inescapable.

In 2012, Starbucks acquired the specialty tea store, Teavana, for $620 million. On July 28,
2017, however, Starbucks announced that it would close all 379 Teavana locations due to
poor sales and little chance of improvement.

The licensed stores are familiar on Starbucks’ home continent, if not dominant. These
comprise 42% of the company’s total of 15,607 North American stores. But in the rest of the
world, licensed stores are in the majority – including 55% of the company’s 6,443 stores in
China/Asia Pacific and 80% of stores elsewhere. Add it all up, and company-owned stores
predominate by only the slimmest of margins, 50.6% to 49.4%.
Dollar for Dollar
The company's own stores accounted for 79% of its total FY17 revenues of $22.4 billion.
Starbucks company stores encourage loitering, which might seem counterintuitive. But
company store customers end up buying a lot of coffee on their extended visits – more than
the people who line up at the licensed stores with the intention of drinking a quick coffee and
getting out. Licensed stores’ operating margins are higher than those of conventional stores.

Also, the relative numbers have something to do with the licensed stores being located in
North America, where the sedentary act of buying coffee and then settling in for a long and
relaxed linger is well-established. Coffee drinkers in the rest of the world, at least outside of
Vienna, have yet to adopt that behavior en masse.

The company also owns other brands that the uninitiated might think compete with Starbucks
– such as Seattle’s Best and Teavana, among others. At the retail level, the dominant majority
of Starbucks’ revenue comes from drink sales. Beverages account for 73% of the sales mix.
Pastries, sandwiches and other food account for a historically consistent 20% of sales, with
the remainder almost evenly split between packaged coffee/tea and “other” – e.g., espresso
machines and mugs.
Starbucks Competitors

Starbucks Corporations is a coffee company founded in the USA in the year 1971 and
operates worldwide. As at 2016, Starbucks was operating in more than 23,500 locations
worldwide with an average of 240,000 employees. Its assets stood at $12.5 billion dollars
with a net operating income of $2.80 billion dollars. As a representative of ‘second wave
coffee,’ Starbucks is known for its distinguished quality coffee, top notch customer
service and best-tasting coffee made from espresso machines.

Some of its widely known products include Caffe Latte, espresso, Teavana tea products, fresh
juices like Frappuccino and snacks including chips and crackers not to mention bottled coffee
drinks, appetizers, wines and ice cream. Being a coffee producer, the following are the top 11
Starbucks competitors;

Direct Starbucks Competitors

1) Costa Coffee

This is the second largest coffeehouse in the world after Starbucks and the largest in the UK.
Founded in 1971 in the UK, Costa coffee has expanded to over 3000 stores in over 30
countries. In the UK alone, it operates over 2000 restaurants. Mid this year, Costa coffee
moved its coffee roaster to Essex. An investment that costs a close to 40 million pounds.
This, in turn, increased the roasting capacity to 44,000 tons of coffee beans from the initial
11,000 tons in a year.

As at the end of 2016, Costa Coffee’s net income was approximate £153 million with
revenues exceeding £1.167 billion. This company reaches to its customers through its
advertising slogan ‘a coffee for every mile’ whose aim is to have as many coffee shops as
possible. Costa Coffee is also probably the only Starbucks Competitors on this list which
exclusively deals and promotes its coffee. All other brands have a combination of different
products to offer.
2) McDonalds McCafe

McCafe is strongly coming up as one of the Starbucks Competitors which is gaining market
share. This is because of the backing it has with the huge number of McDonald’s stores
across the globe. This coffee house not only specializes in coffee but food and other
beverages as well. It was formed in Australia in the year 1993 and is a true reflection of
espresso coffees. In the year 2015, McCafe was among the top three coffee sellers with over
$1.4 billion from slightly over 4,500 outlets. However, this is set to increase after McCafe
upgraded its equipment to ensure consistency in the taste of its coffee.Currently, it’s ranked
the largest in New Zealand and Australia.

3) Dunkin Donuts

Dunkin is a donut company as well as a coffee house based in Massachusetts USA. Founded
in 1950, it has expanded to become one of the largest baked food and coffee chain in the
world. It operates in more than 35 countries with over 11,500 restaurants. In the year 2010, its
sales were estimated to be 6 billion dollars and an estimated revenue stream of around
US$828.9 Million as per the 2016 data. In terms of production, Dunkins produces 8% donuts,
65% drinks and 27% of other food items. Its presence in 35 countries itself tells the success
story of the company.

4) Café Coffee Day

Café Coffee Day is another global company and largest Arabica beans producer and Exporter
in Asia. Started in 1996 CCD is now a world brand with its initial investment capital
estimated to be over160 million dollars. As at mid-2015, Café Coffee Day had over 1,500
outlets across 28 India states. The company is well known for vertically cutting down on
costs; this is from owning Arabica coffee plantations, making furniture for its outlets and also
making coffee machines. Even though it started in Asia, it has expanded to some countries in
Africa, Czech Republic, and Nepal.

Its initial marketing strategy was the change of original Logo with the new Logo showcasing
the chain as a ‘place to hold talks’ leading to total revamp of interiors and addition of
lounges.
Indirect Starbucks Competitors

5) Independent Fast food chains & Bakeries

Coffee is not only sold in large chains but it is also sold in local bakeries and small coffee
centers. In fact, travel sites are generally full of coffee shops you should experience in a place
that you visit. These coffee shops are famous for their personalized service and the friendly
staff whom you know very well. As a result, the 100’s of coffee shops around the corner are
the most widespread Starbucks Competitors and a true competitor for the coffee chain.
Starbucks has itself strived hard to become the coffee shop around the corner. But across the
world, there are many many coffee shops which become an unorganized Starbucks
Competitors.

6) McDonalds

Starbucks does not serve only Coffee but it also has small pizza’s and other eatables to
accompany the coffee. When we take the coffee out of the equation, Starbucks is literally a
fast food place as well. As a result, McDonalds can be considered a strong Starbucks
Competitor. McDonald’s is an American Fast foods store chain that was founded in the year
1940. As one of the largest hamburger restaurant chains in the world, it operates 3700 outlets
in over 100 countries.

To respond to different consumer tastes and preferences, McDonald’s also sells chicken
products, cheeseburgers, wraps, milkshakes, desserts, salads, fish, soft drinks, smoothies and
a variety of breakfast items. Its marketing strategies include franchising and change of logo.
McDonald’s also receives additional revenues from royalties, rent, and fees paid by
franchisees. Even though it started as a hamburger stand, its marketing techniques have
propelled it to the global map.

According to the 2012 report published by BBC, McDonald’s is the 2nd largest private
employer after Walmart with almost 2 million employees of which 1.5 million are employed
by franchises.
7) Kentucky Fried Chicken (KFC)

KFC is the world largest restaurant chain that specializes in fried chicken. Its headquarters in
Kentucky USA oversee operations of 20,000 branches worldwide in more than 120 countries.
Founded in 1952, KFC managed to popularize and market fast food chicken though
franchising and advertising. Advertising was done on televisions with the initial advertising
budget estimated to be around 4 million Dollars. In the late 1960s, KFC hired a national
advertising agent by the name ‘Leo Burnett’. In the mid-1970s, the Leo Burnett campaign
dubbed ‘get a bucket of chicken’ made KFC one of the most popular fast food chains in the
USA.

Currently, its food menu has expanded to include french-fries, salads, side dishes, coleslaws
and soft drinks among others.

Indirect Starbucks Competitors in Tea Segment

These are mostly preferred tea brands that provide an alternative to Coffee. Naturally, they
are indirect Starbucks Competitors.

8) Tazo

Tazo Company produces herbal tea. Based in Portland, It initially started as a fieldwork and
later purchased by Starbucks who rebranded it to its current global status. Tazo Tea sells
because of its unique taste, aroma and medicinal qualities. According to 2010 data, Tazo
revenues were estimated to be $1.3 billion. Currently, it operates in more than 46 countries
with over 17,000 stores operating under Starbucks.

9) Twinings

Twining is owned by the British Food Association. Its brand of tea has
gained international recognition due to its concentration, flavors, and Aroma. Since its
inception in the year 1706, it still maintains its market value and popularity. Twining tea
contains a lot of caffeine that acts a stimulant thereby helping one to be an active whole day
long. In 2017, owing to enormous consumption, it was voted among the top ten best tea
brands in the world. With over 198 unique tea blends, it has an annual turnover of 8.5 billion
dollars and employees around 43,000 employees.

10) Tetley

Tetley is one of the largest UK tea company. In the whole world, it’s the second largest tea
manufacturer. With specialization and expertise, Tetley produces over 65 different tea flavors
all over the world. In 2014 alone, it was estimated to have around 6.6 million consumers in
the UK alone. In the year 2006, for marketing reasons and to achieve dominance, Tetley
brand was purchased by Tata group at $1.4 billion dollars and rebranded to Tata tea which is
currently the second largest tea manufacturer in the world after Unilever.

After rebranding, it’s operating profits increased by 60% to around $61 million. It also
introduced fruit tea variants and high margin green tea. Tetley’s annual production stands at
60,000tonns and is valued at around $22 billion.

11) Dilmah

Dilmah Tea Company was founded in 1974 in Sri Lanka where tea was famously referred to
us Silone Tea.It late expanded to Indonesia, Turkey and 90 other countries. Dilmah Tea is
now a global brand thanks to the advertising and endorsement on the team jerseys’ by the Sri
Lanka national Cricket team. According to reports from Data-monitor, Ceylon tea which is
Dilmah’s parent company that was incorporated in 1981 is the 6th largest in the world with an
estimated revenue of $7.92 billion and net income of $1.04 billion.

Some of its brands include green tea, flavored tea, masala chai, Ceylon tea, herbal infusions,
iced tea et cetera.

12) The Republic of Tea

The Republic of tea is produced from the readily available organic products. It is usually
packed in loose tea bags and comes in different flavors and colors i.e. white tea and red tea.
The colors are as a result of red and white wine initially produced by the Republican
company before it got into tea production in the year 1992. As an initial wine manufacture,
rebranding and advertising have made it gain global accreditation with estimated revenues of
around $20 million annually. Its bestsellers include hot applecider, pumpkin spice black tea,
ginger peach and comfort and joy black tea among others