Starbucks Corporation

Starbucks Corporation - Financial and Strategic Analysis Review

Publication Date: 03-Aug-2012 Reference Code: GDRT33172FSA

Company Snapshot
Key Information
Starbucks Corporation, Key Information Web Address www.starbucks.com Financial year-end October Number of Employees 149,000 NASD SBUX
Source : GlobalData

Company Overview
Starbucks Corporation (Starbucks) is a world-renowned specialty coffee maker. It roasts and retails whole bean coffee. It offers several blends of coffee, handcrafted beverages, merchandise, and food items. Starbucks also offers a range of consumer products in coffee and tea, readymade drinks, and Starbucks ice cream. The company markets its products under its flagship Starbucks brand and other brands such as Tazo Tea, Seattles Best Coffee, Starbucks VIA, Torrefazione Italia Coffee, and Evolution Fresh. Starbucks, through its company-owned and licensed stores, has operations in Asia-Pacific, the Middle East, Africa, Europe and North America.
33.41 17.19 28.41 12.53 14.77 0.01 Expanding Operating Margin Global Retail Footprint Opportunities Inorganic Growth Opportunities Business Expansion 43.78 1.62 5.89 769.70
Source : GlobalData

Key Ratios
Starbucks Corporation, Key Ratios P/E EV/EBITDA Return on Equity (%) Debt/Equity Operating profit margin (%) Dividend Yield

SWOT Analysis
Starbucks Corporation, SWOT Analysis Strengths Weaknesses Overdependence on the US Market

Note: Above ratios are based on share price as of 01-Aug-2012 Source : GlobalData

Threats Legal Proceedings Intense Competition Supply of High Quality Arabica Coffee Beans

Share Data
Starbucks Corporation, Share Data Price (USD) as on 01-Aug-2012 EPS (USD) Book value per share (USD) Shares Outstanding (in million)
Source : GlobalData

Emerging Market Entry: India

Financial Performance
The company reported revenues of (U.S. Dollars) USD 11,700.40 million during the fiscal year ended October 2011, an increase of 9.27% over 2010. The operating profit of the company was USD 1,728.50 million during the fiscal year 2011, an increase of 21.78% over 2010. The net profit of the company was USD 1,245.70 million during the fiscal year 2011, an increase of 31.74% over 2010.

Performance Chart
Starbucks Corporation, Performance Chart (2007 - 2011)

Source : GlobalData

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Starbucks Corporation Starbucks Corporation - SWOT Analysis

SWOT Analysis - Overview Starbucks Corporation (Starbucks) is a roaster, marketer and retailer of specialty coffee. Global retail footprint and expanding operating margin are its key strengths, even as, overdependence on the US market remains a major area of concern. Entry into emerging markets like India, business expansion through setting up new stores across various geographies and acquisition of related companies could present ample growth opportunities to Starbucks. However, supply of high quality Arabica coffee beans, intense competition, and legal proceedings could have an adverse impact over the business, operating results and financial condition of the company. Starbucks Corporation - Strengths Strength - Expanding Operating Margin Starbucks reported strong rise in its operating margin in 2011 as compared to the previous year. It reported operating margin of 14.8% in 2011 as compared to 13.3% in 2010. The U.S., International, and CPG segments reported operating margin of 19.4%, 13.3%, and 31.7% during 2011. The company reported operating income of $1.7 billion, an increase of 22% over the previous year. This was mainly driven by leveraging efficiencies and tightly managing operating costs. For instance operating costs as a % of sales reduced from 86.7% in 2010 to 85.2% in 2011. This operating margin was above the S&P 500 companies average* of 7.26%. A higher than S&P 500 companies average* operating margin indicates efficient cost management or a strong pricing strategy by the company. Overall, such rise in operating margin under tight consumer spending reflects Starbucks management's high focus on improving its profitability. Strength - Global Retail Footprint The company has marked strong market presence across the world which has allowed it report strong revenues during the fiscal year ended 2011. As at October 2, 2011, Starbucks operated a total of 17,003 stores across 55 countries comprising of 9,031 company-operated stores and 7,972 licensed stores. It expanded its global footprint by opening 144 international stores and 142 company-operated stores during the fiscal year ended 2011. The company holds more than 500 stores in the US, Canada, the UK, and Japan markets; more than 250 stores in China, South Korea, and Mexico; and has less than 250 stores across all other countries, indicating opportunities for further growth. As at January 1, 2012, the company had 9,085 company-operated stores and 8,159 licensed stores. For 2012, Starbucks plans to open 800 net new stores and remodel 1,700 existing stores in the US, indicating its interest to grow its business and market shares over the next few years. Starbucks Corporation - Weaknesses Weakness - Overdependence on the US Market Starbucks sells its products through retail channels in the Asia Pacific, Europe, Middle East and African regions. Even though it has operations worldwide, the contribution of revenues from the international segment is very less. A significant amount of Starbucks sales are generated from the US region. The companys operations are principally located in the US. During the fiscal year ended 2011, Starbucks generated about 69% of its total sales from the US segment, while its International segment accounted for just 22.4%. The US economy is recovering very slowly and any such macro-economic factors slowing its revenue generation or decline in its business and financial performance from the US segment could have an adverse effect over its operating cash flows. Such low cash flows could limit the availability of funds for Starbucks international business expansion and generating returns for its shareholders. Starbucks Corporation - Opportunities Opportunity - Inorganic Growth Opportunities In line with its business strategy, Starbucks pursues inorganic growth opportunities through acquiring related businesses across is area of operations. In November 2011, the company acquired Evolution Fresh, Inc. for $30m in cash. This has marked Starbucks entry into the $1.6 billion super-premium juice segment as well as represents its intentions to fully enter the $50 billion Health and Wellness sector. In March 2012, the company opened its first Evolution Fresh store in Bellevue, Washington, positioning it as a leader in the cold-crafted juice category. This acquisition is expected to offer Starbucks opportunities to innovate new products, enter new categories, and expand its distribution channels. Opportunity - Business Expansion Starbucks has been constantly investing in expanding its global presence by opening retail stores across the world. In February 2012, the company and its licensed partner SSP opened Norways first Starbucks coffeehouse at Oslo Airport. This relationship with SSP aligns with Starbucks to open stores where customers expect them to be and meets the growing demand for high quality coffee and service in the travel channel. In January 2012, Starbucks along with its joint-venture partner Corporacin de Franquicias Americanas (CFA) announced that it would open its first Starbucks store in San Jose, Costa Rica in May 2012. In December 2011, Starbucks and Alshaya Morocco S.A.S opened their first two stores in

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Starbucks Corporation

Morocco, at the Morocco Mall. A third store is planned to open in March on the Boulevard dAnfa. Such continued effort in setting up new Starbucks stores would enhance its global footprint and its possibilities to generate higher earnings. Opportunity - Emerging Market Entry: India Starbucks has made an initiative in entering into India. In January 2012, Starbucks and Tata Global Beverages Limited have entered into an agreement to establish a 50/50 joint venture company, TATA Starbucks Limited, which will own and operate Starbucks cafs which will be branded as Starbucks Coffee A Tata Alliance. Initially, the retail stores will be developed in Delhi and Mumbai in calendar 2012. In another souring and roasting agreement between Starbucks and Tata Coffee Limited, TCL will roast coffee to supply TATA Starbucks Limited, and to export to Starbucks. This joint venture is expected to expand the range of offerings such as high quality Arabica coffee, handcrafted beverages, locally relevant food, and legendary service for Indian consumers. Overall, this joint venture is expected to present opportunities to innovate in the retail space and bring new beverage experience to Indian consumers. Sharing common values of responsible business ethics and a commitment to community, Starbucks and Tata, would gain trust and respect of their customers and partners, growing further in their businesses. Starbucks Corporation - Threats Threat - Legal Proceedings Starbucks notified Kraft Foods Global, Inc. (Kraft) that it will discontinue its distribution arrangement with Kraft on March 1, 2011 due to material breaches by Kraft of its obligations under the Supply and License Agreement dated March 29, 2004. In December 2011, Kraft announced to sought for a preliminary injunction in the U.S. District Court for the Southern District of New York against Starbucks Coffee Company for violating terms of the roast and ground coffee agreement. This is to stop Starbucks from proceeding as if the agreement has been terminated, when, in fact, the contract is still in force. Outcome of this litigation is still pending. Any uncertain outcome of these cases could affect the companys operating performance in upcoming years. Threat - Intense Competition The company's competitors for coffee beverage sales include quick-service restaurants and specialty coffee shops. Its current market is highly competitive and with the entrance of more new players, the level of competition is expected to further intensify in the near future, which may result in price reductions. Starbucks competes with various manufacturers and distributors of coffee products, having substantially greater financial, marketing and distribution resources. The companys other competitors include specialty coffees sold through supermarkets, specialty retailers and a growing number of specialty coffee stores under the whole bean coffee segment. Besides, Starbucks whole bean coffees and its coffee beverages compete indirectly against all other coffees in the market. Starbucks Specialty operations face significant competition from established wholesale and mail order suppliers. The company's major competitors include Caribou Coffee Company, Inc., Green Mountain Coffee Roasters, Inc., McDonald's Corporation, PepsiCo, Inc., The Procter & Gamble Company, Kraft Foods Inc., and Nestle USA, Inc. If the company is not able to maintain the product quality and consumer loyalty, this intense competition could reduce the sales volume of the company, thereby hampering its market position. Threat - Supply of High Quality Arabica Coffee Beans The companys business depends on the availability of high quality Arabica coffee beans. Starbucks roasts Arabica coffee beans from various regions to produce different types and blends of coffee. The political and economic situation in many of those regions, including Africa, Indonesia, and Central and South America, could become unstable, which in turn might affect the companys ability to buy coffee from those parts. If Arabica coffee beans from a particular market become unavailable or become too costly, then the company may be forced to withdraw particular coffee types and blends or replace coffee beans from other regions. Frequent substitutions and changes in coffee product lines could lead to cost increases, customer alienation and fluctuations in the gross margins. Thus, the political wavering in coffee growing regions could result in a decrease in the availability of high-quality Arabica coffee beans needed for the continued operation and growth of Starbucks business.

NOTE: * Sector average represents top companies within the specified sector The above strategic analysis is based on in-house research and reflects the publishers opinion only

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