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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 mail-
order 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 don’t 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 September 1998 September 1999
Current Assets $316.61 $337.28 $386.50
Current Liabilities $139.03 $179.47 $251.59
Current Ratio 2.28 1.88 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 September 1998 September 1999


Gross Profit $939.13 $730.21 $939.13
Sales $966.95 $1,308.70 $1,680.14
Gross Profit Margin 97% 56% 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

September 1997 September 1998 September 1999


Sales $966.95 $1,308.70 $1,680.14
Total Assets $850.67 $992.75 $1,252.51
Turnover 1.14 1.32 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 high-
quality 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
Kingdom’s 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, Maxim’s 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