Phil Lee

11:00
Case 1.1
a.) Starbucks is in a fragmented industry that has a lot of competitors. However, it is, by far,
the dominant company in the coffee-beverage industry. The majority of rivalries come
from companies focused on different industries, such as Dunkin Donuts and McDonalds
with McCafe. This market is also relatively easy to enter. Coffee is a simple commodity
that is not complex in the making. However, it is hard to be successful in this industry.
Although Starbucks dominates the coffee market, there is a huge threat of substitutes
from the beverage industry. Starbucks is a seller of coffee, but coffee is ultimately a
beverage and the massive players in that industry include Coca-Cola and PepsiCo. In
regards to buyer power, I would say that buyers have to be price takers in the end.
Starbucks heavy emphasis is on the Starbucks experience, which includes a lot of
specialty coffees and a clean, trendy atmosphere. These specialty coffees aren’t usually
available elsewhere, so Starbucks can set prices however they like, within a reasonable
price range. However, in regards to suppliers, Starbucks is the price taker. Starbucks’
products are made with specific and less common coffee beans. In order to fulfill its
strategy for the Starbucks Experience and quality, the company has to buy from certain
suppliers. This allows the suppliers the power to set the price however they like because
Starbucks has to choose them. Starbucks has done a great job circumventing this though
by setting up and signing fixed price contracts with the coffee bean suppliers.
b.) Starbucks main strategy revolves around creating value through the Starbucks
Experience, quality, and regal status. The goal is to make each store the third place
people stop by, the other two being work and home. Starbucks seeks to be the leading
retailer and brand of coffee by selling the finest quality coffee and by providing superior
customer service and a clean, well-maintained environment. This introduces the risks of
another company producing higher quality coffee, or cheaper coffee that is acceptable by
the general populous. In addition, Starbucks needs to maintain supplier relations in order
to produce the best quality coffee.
c.) Cash is the most liquid asset on the book and represents actually money that a company
has on hand. Cash equivalents include items like money markets that are readily available
for liquidation. It is the second most liquid asset and can easily be converted into cash if
necessary.
d.) Investments can be broken down into two different categories, short-term or long-term,
depending on when the investment matures. Short-term investments typically mature
within a year while long-term investments mature in a time period greater than a year.
They have different returns and risk associated with them.
e.) Accounts receivables are reported net of allowance because it is foolish to assume that a
company will collect all of its receivables. The allowance for uncollectible accounts is
typically based on historical data and is relatively accurate to what bad debt expense will
be. Accounts receivables would increase if a company lowers their credit policies while
making the policies stricter and more conservative would decrease accounts receivable.
These events also have a positive correlation with doubtful accounts. Accounts receivable
would also increase if a company increases its credit terms. This would also increase the
risk of bad debt expense though.
f.) Accumulated depreciation is the total amount of depreciation associated with PP&E over
multiple years. Depreciation expense is what has been depreciated in the current year.
g.) Deferred taxes appear as an asset when future taxable income exceeds the future book
income. They are created with taxes are carried forward or paid before they are to be
recognized.
h.) Unrealized gains and losses are not included in net income because no physical
transaction has been made. These items are not recognized until they are realized in an
economic transaction were the related assets are sold or liabilities settled.
i.) Company-operated stores have all income associated with the stores going to the
company. This includes product sales and such. Licensed stores are operated by outside
owners who pay a royalty fee to the franchisor, Starbucks in this case, which is typically
a percentage of sales. This allows Starbucks to focus on company stores and running the
corporate business, instead of managing all stores. Foodservice and related-products
include bakery items, food products, coffee-related accessories and equipment, and CDs.
These products were introduced after Starbucks started its decline in order to increase
revenue and attract customers.
j.) Cost of sales are expenses such as coffee beans and other materials that go into making a
Starbucks drinks. Most of the time cost of sales, or cost of goods sold, includes direct
materials, direct labor, and manufacturing overhead. Starbucks expenses would be more
focused on the first two. Occupancy costs include any kind of rent, property-related
expenses, and depreciation/amortization expenses. Store operating expenses typically
involve selling and administrative costs. These costs are associated with running the
company, such as marketing and advertising employee payrolls. They have nothing to do
with creating the product, in this case coffee.
k.) Equity investees revolved around joint ventures and affiliated companies. In this instance,
the partnerships that Starbucks formed with PepsiCo and Unilever would be reported as
income from equity investees. This is income that is cohesively earned and split between
the associated companies.
l.) The main contributor to the difference between net income and cash flow from operations
is due to depreciation and amortization. This line item is an expense that has no effect of
cash. Stock-based compensation has the same qualities as it has no effect of cash.
m.) Net income includes the expense for depreciation and amortization expense. However,
this expense does not affect actual cash flow and is therefore added back to net income
with calculating cash flow from operating activities.
n.) An increase in inventory appears as a subtraction when computing cash flow when a
company has an increase in inventory which symbolizes that cash has been tied up in a
working capital account. When either inventory or accounts receivables increase as a
whole, more cash is being replaced with an asset.
o.) A decrease in accounts payable appears as a subtraction from cash flows because
liabilities are typically a source of funds. Accounts payable decrease when they are paid
off, which signifies a decrease in cash.
p.) Operating activity items are accounts that are associated with selling goods and providing
services. Short-term investing activities are items that not directly related to a company’s
operations. A security has nothing to do with selling coffee or improving the Starbucks
experience. It is just a way to earn more cash through and nonbusiness-related way.
q.) Accounts payable and other current liabilities are directly related to the business
operations of the company. They are part of a group of accounts known as working
capital accounts. Financing activities deals with accounts that raise and pay back capital.
These accounts revolve on the flow of cash between a firm and its owners and creditors.
r.) Retained earnings is equal to beginning retained earnings plus net income less dividends.
The increase in retained earnings signifies that Starbucks has made a significant profit
less dividends between the years 2012 and 2011. This shows that Starbucks has increased
the amount of earnings they can use to reinvest in the business or use to decrease
liabilities.
s.) Property, plant, and equipment had an overall increase of $304 million between 2011 and
2012. As shown on the statement of cash flows, Starbucks purchased $856 million in
PP&E. However, this increase is offset by depreciation which is shown by the increase in
accumulated depreciation for the amount of $436 million. Together, the purchase in
PP&E less the increase in accumulated depreciation net together to show the increase of
$304 million in PP&E from 2011 to 2012.
t.) Although there was an increase in cash and cash equivalents between 2011 and 2012,
there is a bigger increase in the amount of inventory held and property, plant and
equipment. The increases in inventory and PP&E are large takes up a significant portion
of total assets which is why there is a decrease in the percentage of cash and cash
equivalents to total assets.
u.) The most likely explanation for the decrease in total liabilities to total liabilities and
equity percentage is that Starbucks is relying more on self-financing. Instead of using
debt and other liabilities to fund its operations, Starbucks is relying heavily on retained
earnings. Starbucks has done well enough between the years 2009 and 2012 that it can
fund its own growth and operations through its own equity. In comparison, Starbucks
current liabilities have barely increased and has paid off some of its long-term liabilities.
v.) In 2009, Howard Schultz came back as CEO to reinvigorate Starbucks by retiring
multiple companies and opening new product lines for a different source of income. The
drop in licensing percentage between 2009 and 2010 is courtesy of the company retiring
over 500 stores worldwide. The decrease in the percentage of company-operated retail
revenues is due to Starbucks retiring company-owned stores and licensing out a lot more,
as shown in the increase in the licensing percentage of revenue over the 4 years. In
addition, the food services and other line item reflects the massive increase in total
revenue because of the introduction of Starbucks to this new market.
w.) The most important reason for the increase in percentage of net earnings to total revenues
is due to hiring back Howard Schultz. Schultz regained control of Starbucks and
reinforced the company’s emphasis on the Starbucks experience in order to regain its
earnings. The overall increase in revenue contributed the most to the increased gap
between revenue and expenses, and net earnings by association. Schultz created a new
market for Starbucks to play in, the food market, which allowed the company to
centralize its focus by increasing the amount of licensed stores and decreasing the
number of company-operated stores.