CPA117_GSL_ Pre-Seen Exam Information

8/14/2019 CPA117_GSL_ Pre-Seen Exam Information

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Exam cases: Pacific Brands Myer Ltd Starbucks

Pre-seen exam informationSemester 2 2013

CPA Program professional level

Global Strategy and Leadership CPA Australia Ltd 2013


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Global Strategy and Leadership Page 2of 19

Case Scenario 1Pacific Brands

Pacific Brands: Rebuilding the brand

Pacific Brands is an ASX listed Australian business with headquarters in Melbourne and operations throughoutAustralia as well as in New Zealand, the United Kingdom, Malaysia, China and Indonesia. The Company employs

over 5000 employees worldwide.

The company originally commenced manufacturing Dunlop bicycle tyres in 1893. Since that time, the company hasgrown into the business that it is today through a variety of different strategies. In 2009, the company took the decisionto refocus the business on brands and move away from manufacturing, resulting in some controversy.

The following is an extract from the article titled Rebuilding the brand that appeared in the AFR Boss Magazine

(March 2011) and describes how Sue Morphet, the CEO of Pacific Brands from January 2008 to September 2012,

used different strategies to change and transform the company in order to generate growth.

Pacific Brands chief Sue Morphet has probably learnt more on the job in her three years running Pacific Brands thanmany CEOs glean in a decade. Just over two years ago, the clothing and textile manufacturer she heads became notoriousfor closing down 10 local factories and cutting about 1800 jobs (1200 were made redundant in manufacturing) as thecompany shifted production to China.

The vitriol was prolonged and intense. Morphet, barely in her job a year then, was at the epicentre: personally criticised foreverything from her salary to an uncaring attitude. Since then, Morphet has refused most interview requests. Never a fan of thelimelight, her priority, she says, has been implementing a three-year restructuring strategy: cost-cutting; reorganising capitalmanagement and debt refinancing; simplifying logistics and operations; sourcing production offshore and developingcapabilities required as a brand marketer.

Those clipped phrases dont do justice to the urgency the imperative had in 2009. In the midst of the financial crisis,Pacific Brands was a complex business with more than 900 labels, 350-odd brands and about 8000 staff; it was teeteringon the edge of collapse. Beyond that, it also bore a weighty legacy from its corporate history and private equity ownership.Carrying more than $800 million in debt and a market capitalisation that had sunk to $100 millionwith a big chunk of thatdebt due for refinancing the following yearPacific Brands was receiving the stiff attentions of its bankers. Something had

to give.

Like many local manufacturers, it had been shifting work offshore for years, but it was the last big Australian producer stillmaking clothing in any capacityincluding singlets, T-shirts and underwear at factories in Unanderra, Cessnock, Nunawadingand Coolaroo. In a charged political environment, Morphet agrees, the companys predicament became emblematic of majorstructural upheaval in Australias economy and manufacturing sector, plus the impact of globalisation. It was an industry

that had become redundant, not necessarily just our factories.

It would be a shame to define Morphet by what happened in that period, Pacific Brands chairman James MacKenzie says.In reality, that is a decision that should have been taken years ago. What she had the guts to do was come in anddemonstrate that it had to be done. She knew what she was doing was right and it took her a while to convince the boardit was right. She stuck to her guns.

The managing director of Integrity Asset Management, Paul Fiani, who bought into the company in May 2009 and is now amajor shareholder, says Morphet should be given credit for doing what no one else would do. Sue received a very hard timefor [moving manufacturing, which] was grossly unfair, as the company was on a path to inevitable failure if it kept trying tosell goods that cost it more to make than all its competitors, Fiani says. In my view, this initiative alone saved the company.


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There remain market concerns about the strategy and its ability to generate medium-term growth. Merrill Lynch analystDavid Errington has been bearish from the start. In a February 2009 note to clients, he questioned whether Pacific Brandswas in control of its destiny and criticised the sell-off of so many brands. He argues its transformation plan is destroying value.Errington was alarmed that sales in cornerstone brand Bonds fell for the first time in his memory in the second half of the20092010 financial year, and the trend continued in the first half of this financial year. He says the majority of cost savingsmade over the year were due to cuts in advertising and marketing. To us, PacBrands is focused on the top five or six brands,which make up about 30 per cent or 40 per cent of total sales, and the remainder is totally neglected, he says. We strongly

believe that is a major strategic error to cull brands [that] aggressively.

But Morphet argues the company now has a strong base: Im quite excited about Pacific Brands opportunities for the nextthree years, albeit the whole market has hurdles to climb. A lot of the work weve been doing for the last 12 months will startto show in the next six to 12 months. Morphet says: When a company has to make change, then it has to deal with that andmake the change. [It] mustnt delay We actually have to get on and do the job The trade-off, that we may well have

paid had we been frightened of the scrutiny, would have been significantly worse for our company.

[Morphet] is a great believer in one of the tenets of strong leadershiphaving a clear vision of what success looks like.The nature of the companys diverse groups requires her to trust her operational managers to get on with it while sheconcentrates on stakeholders. The companys rebuild includes a relatively new team at the top. The most recent appointmentis high-profile former David Jones executive Colette Garnsey, who starts in May as general manager of underwear andhosiery. She joins former Telstra senior executive Holly Kramer, who runs the homewares division, and CFO David Bortolussi(formerly a strategist with Fosters Group), along with long-time Bonds head Kate Hann and hosiery boss Ross Taylor.

Chairman James MacKenzie says: [Sue] is determined; she inspires the people around her. You just look at the people shehas recruited.

Source:C. Fox (2011), Rebuilding the brand,AFR Boss Magazine, vol. 12, March, pp. 1418.

End of Case Scenario 1 case facts.


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Case Scenario 2Myer Ltd

This case scenario is an extract from a 2008 newspaper article about Myer Ltd, an Australian department store that was

considering opening its first overseas store, with Dubai the chosen location.

Myer eventually decided not to proceed with this venture. Your task is to analyse the case at the early stages of its planning.

Myer Ltd seeks offshore growth opportunities

Myer Ltd (Myer) is listed on the Australian Securities Exchange. It is Australias largest department store and operates 65department stores across Australia. The company has operated exclusively in the Australian department store industry to date.It has grown domestically in the past few years through the closure of underperforming stores and opening several new stores.However, the Australian department store industry is in decline and Myer has begun considering its strategic options for futuregrowth, once market saturation is reached in the Australian market.

Myer has recently announced it would open its first overseas store in Dubai, with plans to open another four across theUnited Arab Emirates (UAE). Myer Dubai will open in the new Ibn Battuta Mall in partnership with Nakheel Retail, an armof the Dubai World group of companies. Nakheel Retail recently bought the New York department store Barneys, with plansto use the brand as an anchor-tenant in its new malls, and several British department stores, including Debenhams andHarvey Nichols, have opened in Dubais malls.

Myer Chief Executive, Bernie Brookes, said Dubai was the obvious choice for the first international store because the city wasrecognised as the shopping hub of the region and was one of the most densely shopped cities in the world. He said it was aturning point for the company and would establish Myer as an international-class department store. Three of the 10 largestshopping malls in the world are in Dubai, and retail is expected to surge by 12 per cent through until 2011 in the UAE, but atan even faster rate in Dubai, Mr Brookes said. Importantly, this will be the first of a number of stores over the next few yearsas property is sourced and completed. We are looking at further store expansion within Dubai and beyond into the broaderGulf region, the Middle East and Eastern Europe.

Myer Dubai would stock a full range of designers and lines. Myers director of apparel, Judy Coomber, said the biggestchallenge in the expansion would be managing product range. Given the different climates between Australia and the UAE,we will need to provide a product range to cater for the northern hemisphere. We will be setting up a separate buying teamto manage the entire business, Ms Coomber said. We will be discussing this exciting opportunity with all of our currentAustralian designers and suppliers with a view to launching their products in our stores in the UAE. This will give many

of them a chance to expand and grow in one of the fastest growing markets and biggest retail economies in the world.

Source:A. Smith (2008), Myer spreads its wings (extract), Sydney Morning Herald, BusinessDay, 21 July (accessed July 2013).

End of Case Scenario 2 case facts.


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Business strategy

Starbucks mission is to inspire and nurture the human spiritone person, one cup and one neighbourhood at a time. Thebrand was built with a number of key attributesthe customer should be greeted within five seconds, there would be eyecontact, the customers name would be remembered, and visiting the store was a place to relax, socialise, read, surf the internetand be seen. Advertising and promotion were not to be the primary communication vehicles. Starbucks philosophy is basedon the understanding that a positive emotional experience will generate word of mouth and lead to customer loyalty. Starbucksalso values ethics and good business practices, and is acknowledged as a leader in this field, being voted one of 2012s mostethical businesses byEthispheremagazine (2013) for the sixth year running.Ethisphererecognises global companies that not

only promote ethical business standards and practices internally, but also exceed legal compliance minimums and shape futureindustry standards by introducing best practices today.

Starbucks now offers a broad portfolio of products ranging from fresh juice bars to pastries and fresh coffee served across arange of channels from coffee shops as well as pre-packaged varieties for home consumption. Starbucks generates the vastmajority of its profits from selling ready-made coffees, and as such this analysis will focus predominantly on the caf andcoffee shop industry.

Caf and coffee shop industry overview

Value chain

The simplified coffee industry value chain shown in Figure 1 shows the standard stages for the overall industry. This simplifiedvalue chain is applicable to all forms of coffee, from instant coffee, beans and ground coffee sold in supermarkets and groceryshops, through to that brewed in coffee shops.

Figure 1: Value chain for the caf and coffee shop industry

Key trends and challenges in the caf and coffee shop industry

Over the past five years, the industry has benefited from social trends such as busier lifestyles, heavier workloads and longerworking hours. These factors have boosted demand for ready-made food and have presented opportunities for cafs servingsnacks and light meals, as time-poor consumers look to cut down cooking time and make better use of their free time.

Additionally, public concern about health and nutrition has increased over the past decade, leading to increased scrutiny of theamount of fat, sugar and salt in foods. This shifting focus encourages industry players to alter their product mix to cater toconsumer preferences.

Average global per capita consumption of coffee in pounds (weight) has experienced a slight decrease over the last 30 years,but is projected to remain relatively stable until around 2016 (IBISWorld 2011).

Global industry profitability has come under pressure from a variety of sources, including rising coffee prices. The world priceof coffee has risen sharply in the past few years due to growing demand and supply shortages. Stable consumption of coffee

in the US and growing demand in Europe, the Middle East and Africa (EMEA), China and the AsiaPacific (CAP) have puta strain on the worlds coffee exporters. Also, consumption has shifted towards more expensive, premium blends of coffeewhich has caused the average price of coffee to rise. Adverse weather in some of the worlds primary growing areas has also

placed a strain on supply.

In addition to rising coffee prices, key retailers in the industry have experienced the rising cost in wages, electricity andinsurance. Figure 2 illustrates the key cost components for the US industry. As the global market has matured, the demandand expectation for high-quality coffee has fuelled competition and wage growth for cafs as they opt to employ highlyskilled and expensive baristas to cater for consumer tastes.


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Figure 2: Revenue by cost factor of coffee and snack shops industry in the US in 2011

Source:IBISWorld (2011), Coffee & snack shops in the US, Market Research Report, 72221b, February.

Competitive landscape

It is difficult to provide an analysis of the competitive landscape on a global scale as each market is of a different size and hasfactors specific to its geography. As such, this analysis looks at three countries and the competitive landscape of eachthe US,China and Australia.

United States

The coffee shop market in the US is mature, but still growing, with estimated revenue of approximately USD 10 billionin 2012. The industry is highly concentrated with the top 50 organisations generating 70 per cent of total industry sales(First Research 2011).Consumers spend an average of USD 2.45 for an espresso-based drink or USD 1.38 for a cup of

brewed coffee. The majority of Americans (65%) drink coffee at breakfast, 30 per cent report drinking coffee in betweenmeals, while 5 per cent say they drink it with meals other than breakfast (Harvard School of Public Health 2012).

Industry volatility is highly contingent on factors affecting income levels, such as taxes and unemployment levels. In most ofthe developed world, there was a decline in disposable income and discretionary spending during the GFC and coffee, as anon-essential product, was one of the first and hardest hit products. As shown in Figure 3, revenue from the coffee and snackshops industry in the US has risen consistently, except during 2009 when revenues fell.

Figure 3: Revenue of the coffee and snack shops industry in the US (in million USD)

Source:IBISWorld (2013a), Coffee & snack shops in the US, Market Research Report, NAICS 72221b, July (accessed August 2013).


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Approximately 85 per cent of coffee drinkers make their own coffee at home, with modern consumers having access to a widerange of ways to brew quality coffee and espresso drinks in their own home. In the US, sales of coffee machines are forecast toexpand by an additional six million units annually by 2017, predominantly driven by coffee in pod format (i.e. pre-packagedground coffee beans in their own filter2), which is set to overtake traditional filter coffee models (Euromonitor International2013). The expansion in the home-brew market has potential to impact the revenues of coffee shops as fewer consumers buy

coffee in shops (First Research 2011) in favour of making their own beverages.

As already noted, the US coffee and snack shop industry3is worth approximately USD 29 billion in revenue. The specialty

coffee market is intensely competitive, in terms of product quality, service, convenience and price, and Starbucks faces

significant competition in each of its channels and markets. Starbucks is the dominant player, followed by Dunkin Donutsand other smaller competitors (including McDonalds and Panera Bread) as shown in Table 1. These major chains also cater tothe takeaway coffee market. Dunkin Donuts operates 10 500 stores across 31 countries and McCaf products are sold throughall of McDonalds 34 000-plus locations around the globe. Both Dunkin Donuts and McCaf retail their beverages at a lowercost than Starbucks. However, they predominantly offer the coffee as a takeaway product, as opposed to Starbucks, where the

focus is on the customer experience, and enjoying time spent in the coffee shop.

Table 1: Overview of US caf and coffee shop chain industry

Name Market share Overview

Starbucks 32.6% Starbucks is a roaster, marketer and retailer of coffee. Starbucks has been a publiclylisted company since 1992, having grown from a single store in Seattle in 1971 to over

17 000 stores in 2012. Starbucks employs around 160 000 globally across 61 countries(Starbucks 2012).

Over time, Starbucks has continued to grow its product range, and has also continuallyexpanded into new geographic markets.

Dunkin Donuts 16.1% The first Dunkin Donuts was opened in 1950 in Quincy, Massachusetts. Today,there are over 10 500 Dunkin Donuts stores located in 50 countries worldwide,with sales of USD 6 billion in 2011. Seven thousand stores are located in the US andthe company is run predominantly as a franchise business model. It is known for itsdoughnuts and coffee. Over the years, Dunkin Donuts has introduced new productssuch as bagels, muffins and breakfast sandwiches. In order to compete with thespecialty coffeehouses, Dunkin Donuts has expanded its coffee offerings to includeflavoured coffees, lattes, coolattas (frozen drinks), flavoured hot chocolate and teas.

Sales growth for 2010 and 2011 was 2.3 per cent and 2.8 per cent respectively.

McDonalds * McDonalds is becoming an emerging competitor in the industry in the US since itfirst upgraded its coffee in 2006. McDonalds has a larger customer demographic thanStarbucks as McDonalds with its well-established menu offerings caters to familieswith children, teenagers, adults, and senior citizens. While customers are stopping fora quick breakfast, lunch or dinner, they may also get a specialty coffee to go.

Panera Bread * Panera Bread was founded by Louis Kane and Ron Shaich in 1981. It was originallynamed Au Bon Pain Co., Inc., and later changed its name to Panera Bread Company in1998. Today, there are more than 1600 Panera Bread bakery-cafs in the US. Paneras

product line consists of baked goods, artisan and specialty breads, custom-roastedcoffee and espresso drinks, soups, salads, made-to-order sandwiches and gourmet

pizzas. Paneras ambiance of casual dining is the closest competitor to Starbucks.Like Starbucks and Caribou Coffee, Panera Bread offers free wi-fi to its customers.Paneras pricing is designed so customers perceive good value with high quality foodat reasonable prices. Sales for 2011 were estimated at USD 1.82 billion.

* Note:Comparative market share data is not available for the same product lines as Starbucks and Dunkin Donuts, due to the diversityof products at McDonalds and Panera Bread.

Source:Adapted from IBISWorld (2011), Coffee & snack shops in the US, Market Research Report 72221b, February; Dunkin Donuts(2011),Dunkin Brands Prospectus, Dunkin Brands Group IPO Documents, 11 July (accessed August 2013); Panera Bread (2012), 2012 Annual Report to Stockholders, 18 April(accessed August 2013).

2 Wikipedia (2013), Coffee pods and capsules (accessed August 2013).3 Note:For the purpose of this case study it is assumed that the caf and coffee shop and coffee and snack shop industries are the same.
http://www.sec.gov/Archives/edgar/data/1357204/%20000119312511185357/ds1a.htm%3e%20(accessed%20Augusthttp://www.sec.gov/Archives/edgar/data/1357204/%20000119312511185357/ds1a.htm%3e%20(accessed%20Augusthttp://www.panerabread.com/pdf/ar-2012.pdfhttp://www.panerabread.com/pdf/ar-2012.pdfhttp://www.sec.gov/Archives/edgar/data/1357204/%20000119312511185357/ds1a.htm%3e%20(accessed%20Augusthttp://www.sec.gov/Archives/edgar/data/1357204/%20000119312511185357/ds1a.htm%3e%20(accessed%20August


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China

The Chinese coffee market has grown at the rate of 15 per cent annually in recent years and is expected to expand fromits current size of USD 11.27 billion to USD 160.94 billion over the course of the next 10 years. The countries of Europeand North America have average per capita coffee consumption in excess of 400 cups annually. Japans per capita coffeeconsumption is roughly 200 cups annually. In contrast, in the predominantly tea-drinking nation, Chinese per capita coffeeconsumption is less than five cups per year. The growth in the Chinese market is illustrated in Figure 4, which showsthat consumption of both instant and fresh coffee grew steadily between 2000 and 2007. Since 2007, coffee consumptionhas continued to grow, but at a lower rate of CAGR compared to the 2000 to 2007 period. This declining rate of CAGR

growth is driven by a large reduction in the consumption growth of instant coffee. The rate of CAGR post 2007 has alsodeclined slightly for fresh coffee consumption as the market moves along the industry life cycle. From 2000 to 2012 the

number of coffee shops in China rose to over 14 000, with the pattern of growth closely following that of consumption.

Figure 4: Compound annual growth rate*20002012

* CAGRCompound annual growth rate (the year-on-year growth rate of an investment).

Source:Euromonitor International, cited in International Coffee Organisation and Rabobank (2013), Coffee 2013: Ready for take-off,ICO and Rabobank, 5 March, p. 7 (accessed August 2013).

Starbucks is the largest competitor in the Chinese market, with McDonalds ranking second in total coffee sold (EuromonitorInternational 2013). Other competitors include Costa Coffee, South Korean-owned bakery chains Paris Baguette and Tous Les

Jours, and Hong Kongs Pacific Coffee. Pacific Coffee has approximately 55 outlets, mostly concentrated in Shanghai, Beijing,Shenzhen and Guangzhou. Britains Costa Coffee has positioned itself as a more premium product to Starbucks, and has moreluxurious shop environments, including more sofas and plush seats.

Starbucks plans to expand to 1500 stores in China by 2015. Costa Coffee has stated that it will have 2500 cafs in China by2018. Even McDonalds has entered the market, opening small coffee outlets on street corners across the country. All of thesedevelopments have been driven by a surging demand for coffee in China, as noted above (OBrien 2013).

For most of the last decade, Nestl and Starbucks have occupied very different realms in the structure of Chinas coffeeconsumption. Nestl produces Nescaf, which controls 75 per cent of the instant coffee market in China (Li 2011). Instantcoffee comprises between 80 and 90 per cent of all coffee consumption, according to Li (2011). Starbucks, meanwhile, has

been focused on expanding its footprint in the Chinese market through the opening of new stores. Unlike Nescaf, which ischeap and can be found in most Chinese grocery stores, Starbucks has traditionally offered more expensive products soldexclusively through its stores. In short, Nescaf has been a ubiquitous brandavailable to the massesand Starbucks has

been a lifestyle brandtargeted at upper-middle-class, white-collar workers.
http://www.ico.org/event_pdfs/seminar-consumption/rabobank-e.pdfhttp://www.ico.org/event_pdfs/seminar-consumption/rabobank-e.pdf


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Australia

The industry4has a low level of market share concentration and is highly fragmented and includes a large number of single-

establishment, owner-operated cafs. IBISWorld (2013) estimates that the four largest industry players account for less than15 per cent of industry revenue and this is not expected to change over the next five years. The key competitors in Australiaare Gloria Jeans Coffees, the Coffee Club and Michels Patisserie (refer to Table 2). However, these businesses have limitedmarket power and are basically powerless to influence the industry in terms of price or product trends. The strong independentcoffee culture in Australia, which places an emphasis on quality instead of quantity, has restricted the influence and growth of

chain stores. Starbucks is considered to be the fifth largest competitor in Australia.

Table 2: Overview of the Australian caf and coffee shop market

Name Market share Overview

Gloria Jeans Coffees 4.5% Australia-based global caf chain which started in the US in 1979. It first enteredAustralia in 1995. The global company operates over 1000 cafs around theworld, including 460 in Australia. Gloria Jeans operates both company-ownedand franchised stores in Australia. It was estimated that revenue in 201213 wasAUD 246 million, including revenue for company and franchised stores.

The Coffee Club 4.5% The Coffee Club is a franchised chain that began in Brisbane in 1989. Thecompany has since grown to over 300 outlets throughout Australia, New Zealand,Thailand, New Caledonia, China and Egypt, with 200 of these stores in Australia.

About 10 per cent of stores are company-owned, with the rest being franchised.The Coffee Club has been the fastest growing coffee chain from 20082013.Total franchise revenue was estimated at AUD 242 million in 201213.

Michels Patisserie 4.3% Michels Patisserie sells coffee, cakes and savouries. The company was acquiredby Retail Food Group Holdings in 2007 and has over 340 stores across Australia,most of which are franchised. Total revenue was estimated at AUD 221 millionin 201213.

Hudsons Coffee Less than1.0%

Hudsons is an Australian-owned franchise company that commenced operationsin Melbourne in 1998. By 2005, the company had operations in 65 locations,mainly in the Melbourne CBD and other capital cities. Company revenue wasestimated at AUD 32 million in 201213.

Starbucks Coffee Less than1.0%

Starbucks entered the Australian market in 2000 and opened 81 stores nationwide.In the first three years, the companys revenue grew by 18 per cent. However,in 2008 the company closed 61 underperforming sites in Sydney, Melbourneand Brisbane. Only 22 coffee shops continue trading in metropolitan areasand the company has since moved towards opening smaller stores in majorshopping centres.

Source:Adapted from IBISWorld (2013b), Cafes and coffee shops in Australia, Market Research Report ANZSIC H4511b, June, pp. 234 (accessed August 2013).

Starbucks today

Starbucks global performance

Despite Starbucks expanding global presence as mentioned in the industry overview, revenue from the Americas stillrepresents 75 per cent of total revenue, followed by Europe, the Middle East and Africa (EMEA) with 9 per cent, and Chinaand the AsiaPacific region (CAP) at 5 per cent. The remaining 11 per cent of revenue relates to non-geographic specificchannel development of products sold through retailers and grocery stores (Starbucks 2012). Starbucks operates across fourcore business divisions: company-owned stores, licensed stores, retailers (e.g. supermarkets) and online. Company-operatedstores are the largest source of revenue for Starbucks, representing 79 per cent of net revenues in 2012. Licensed stores accountfor 9 per cent of total revenue through product sales and royalty and licence fee revenues. Licensees provide access to desirableretail space, and are generally prominent retailers with in-depth market knowledge and access (Starbucks 2012). Table 3 shows

the number of stores by type from 2008 through to 2012.

4 Defined here as cafs and coffee shops in Australia.
http://www.ibisworld.com.au/industry/default.aspx?indid=2015http://www.ibisworld.com.au/industry/default.aspx?indid=2015


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Table 3: Company-operated and licensed store summary

As of and for the fiscal year ended

Sep 30,

2012

(52 Wks)

Oct 2,

2011

(52 Wks)

Oct 3,

2010

(53 Wks)

Sep 27,

2009

(52 Wks)

Sep 28,

2008

(52 Wks)

Stores open at year end:

Americas

Company-operated stores 7 857 7 623 7 580 7 613 8 030

Licensed stores 5 046 4 776 5 044 4 933 4 832

EMEA

Company-operated stores 882 872 847 911 891

Licensed stores 987 886 807 707 609

China/AsiaPacific

Company-operated stores 666 512 439 409 385

Licensed stores 2 628 2 334 2 141 2 062 1 933

Total 18 066 17 003 16 858 16 635 16 680

Source:Starbucks (2012),Fiscal 2012 Annual Report, p. 24 (accessed August 2013).

Although many of the Starbucks stores are currently company operated, the company has recently shown a preference to openmore licensed stores. Licensed stores usually have margins three or four times higher than those of company-operated stores,so a greater proportion of licensed stores will have a tendency to increase overall margins (Trefis 2013).

As shown in Table 4, total net revenues increased 14 per cent to USD 13.3 billion in the fiscal year 2012, primarily due to a7 per cent increase in its global comparable store sales, 50 per cent growth in channel development and 20 per cent growth inlicensed store sales.


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Table 4: Operations results as of 30 September 2012*

As of and for the fiscal year ended

Sep 30,

2012

(52 Wks)

Oct 2,

2011

(52 Wks)

Oct 3,

2010

(53 Wks)

Sep 27,

2009

(52 Wks)

Sep 28,

2008

(52 Wks)

Results of operations

Net revenues

Company-operated stores $10 534.5 $9 632.4 $8 963.5 $8 180.1 $8 771.9

Licensed stores 1 210.3 1 007.5 875.2 795.0 779.0

CPG, foodservice and other 1 554.7 1 060.5 868.7 799.5 832.1

Total net revenues $13 299.5 $11 700.4 $10 707.4 $9774.6 $10 383.0

Operating income $1 997.4 $1 728.5 $1 419.4 $562.0 $503.9

Net earnings includingnon-controlling interests

1 384.7 1 248.0 948.3 391.5 311.7

Net earnings (loss) attributable tonon-controlling interests

0.9 2.3 2.7 0.7 (3.8)

Net earnings attributable toStarbucks

1 383.8 1 245.7 945.6 390.8 315.5

EPSdiluted 1.79 1.62 1.24 0.52 0.43

Cash dividends declared per share 0.72 0.56 0.36

Net cash provided by operatingactivities

1 750.3 1 612.4 1 704.9 1 389.0 1 258.7

Capital expenditures (additions toproperty, plant and equipment)

856.2 531.9 440.7 445.6 984.5

Balance sheet

Total assets $8 219.2 $7 360.4 $6 385.9 $5 576.8 $5 672.6

Short-term borrowings 713.0

Long-term debt (including currentportion)

549.6 549.5 549.4 549.5 550.3

Shareholders equity 5 109.0 4 384.9 3 674.7 3 045.7 2 490.9

* Note:All dollar values are in USD millions. CPG is consumer packaged goods. EPS is earnings per share.



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Starbucks value chain

Starbucks uses a highly specialised value chain in order to provide its special brews to customers around the world. Starbuckssources high-quality coffee beans from coffee-growing areas of Latin America, Africa, Arabia and the AsiaPacific region.While over 60 countries grow coffee, Starbucks only purchases from a select group of 25, with the majority sourced fromgrowers in Guatemala, Colombia and Indonesia. Starbucks is the only company in the industry that sources its own high-quality green coffee beans, paying a premium price for both the quality and ethical sourcing of the beans.

The coffee beans are shipped to one of five company-roasting facilities in the US, as well as a recently opened facility in

Indiaa product of Tata Starbucks Ltd. Tata Starbucks Ltd, a 50:50 joint venture between Starbucks Coffee Company andTata Global Beverages Ltd, was formed in January 2012. Tata Global Beverages is a global beverage business and the worldssecond largest tea company. Tata Coffee is a subsidiary of Tata Global Beverages, and is Asias largest coffee plantationcompany and the third largest exporter of instant coffee in India. As part of the roasting process, Starbucks produces itsmany iconic blends of coffees.

At the retail end of the value chain, Starbucks has introduced a number of innovations to improve customer service, including:a Starbucks smartphone app that offers product information and order processing; an enhanced point-of-sale system thatdramatically reduces the speed of processing transactions; and a loyalty program.

Growth strategy

Starbucks is currently focused on diversified growth through stores, products, brands, channels and geographies (Starbucks2012). Thirteen hundred new stores are expected to open in the coming years with a focus on China and the AsiaPacific

markets. Figure 5 shows the store expansion of Starbucks over time within the US and other geographic markets.

Figure 5: Store expansion


In 2009, Starbucks decreased its number of stores in the US and other locations. The company had planned to open 900 newstores outside of the US in 2009 but instead announced 300 store closures in the US since 2008 (Cain Miller 2009). At thattime, Schultz wrote an email to all staff outlining the challenges confronting the business in terms of a breadth and magnitudeunlike anything he had ever seen before. They saw traffic in their US stores slow, and strong competitors entered the market.Of greatest concern to Schultz was that, while in the past Starbucks had always been forward-thinking and agile in its decision-making and execution, the company had allowed its success to make it complacent (Starbucks 2009). Since 2009, Starbuckshas focused on domestic cost-cutting in the USclosing underperforming stores and generating savings from improvementsin efficiency and supply-chain distribution. At the same time, the company has been steadily expanding around the world,especially in China.

As well as organic growth, Starbucks success has been the product of a number of strategic acquisitions (including

Seattles Best, Torrefazione Italia, Teavana Holdings, Evolution Fresh and La Boulange), as well as a strategic alliancewith Green Mountain Coffee Roasters (GMCR). These will be discussed further under product and channel development.
http://www.nytimes.com/2009/01/29/business/29sbux.html?_r=0http://www.nytimes.com/2009/01/29/business/29sbux.html?_r=0


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Product development

Starbucks has a long history in developing its product range to cater for consumer demand and the changing industrylandscape. Beverages sold through its company-owned and licensed stores remain the major source of income, generating75 per cent of total revenues. However, same-store growth through this channel is difficult as it is a largely established market.The other channels represent an avenue for growth, and below are some examples and initiatives by which Starbucks isattempting to leverage this potential.

Starbucks is continuing to focus on product innovation to drive expansion through a variety of new products including iced

teas and flavours. Starbucks employs over 70 people to focus on product innovation, while at the same time it focuses oncollaboration across the organisation.

Starbucks stores offer a choice of: regular and decaffeinated coffee beverages; a broad selection of Italian-style espressobeverages; cold blended beverages; a selection of premium Tazo brand teas; packaged roasted whole-bean and ground coffees;Starbucks VIA Ready Brew (instant beverage) soluble coffees

5; Starbucks coffee and Tazo Tea K-Cup portion packs (pods);

juices and bottled water. Starbucks stores also offer an assortment of fresh food items including pastries, prepared breakfastand lunch sandwiches, oatmeal and salads. Starbucks has recently begun displaying the nutritional content of its food onits packaging.

Each Starbucks store varies the mix of beverage-making equipment and accessories that it sells depending upon the size of thestore and its location. To complement the in-store experience, US company-operated Starbucks stores also provide customerswith free access to wireless internet.

Aside from the core coffee business, Starbucks has also expanded into the tea industry. Starbucks has been selling its Tazo Tearange through Starbucks stores, grocery stores and online, and recently opened the first Tazo Tea store in Seattles UniversityVillage. In 2012, Starbucks acquired Teavana Holdings for USD 620 million, to support the future expansion of the tea storeconcept, highlighting managements intentions to tap into what they believe to be a USD 40 billion market (Trefis 2013).

In addition, Starbucks acquired Bay Bread LLC, the parent company of the La Boulange chain of bakery restaurants for USD100 million in June 2012. The baked goods from La Boulange will replace previous food products. With the acquisition of LaBoulange, Starbucks says it hopes to popularise the French bakery experience in the US, the same way it brought theexperience of the Italian espresso bar to the masses.

To cater to changing consumer preferences and tap into the USD 50 billion health and wellness category, Starbucks acquiredEvolution Fresh for USD 30 million in November 2011 (Cannold 2011). Starbucks expanded distribution of the product to

New York City and Boston in 2012, increasing its availability to 4000 locations nationwide. Using a similar distribution

channel mix as Starbucks original beverages, the coffee chain plans to offer bottled, cold-pressed juices in approximately8000 locations by the end of 2013.

Channel development

Starbucks channel development segment consists primarily of packaged coffee and tea such as VIA Ready Brew and K-Cuppacks, which are then sold in grocery and retail stores, as well as through Starbucks-owned stores. Revenues for this segmentgrew 50 per cent to USD 1.3 billion in 2012, and Starbucks believes they could both represent billion-dollar businesses.The segment already has more than 100 000 distribution points across 20 countries, and management expects the segment

to double the international footprint by 2015.

Starbucks extended its agreement with GMCR in May 2013 to continue to produce its K-Cup range to be compatible withGMCR-owned Keurig machines. In a press release (Starbucks 2013b), Howard Schultz said sales of Starbucks coffee K-Cup

packs rose more than 75 per cent in March compared to the prior year and grew nine times faster than the overall coffeecategory during 2012 and has become a category that now accounts for more than 25 per cent of total coffee sales in theretail channel.

While Starbucks will remain the exclusive licensed super-premium coffee brand on the Keurig K-Cup and Vue platforms,under the new agreement, the company will add Seattles Best Coffee, Torrefazione Italia coffee, Teavana Teas, andStarbucks Cocoa to the brands offered on Keurig.

Starbucks acquired the Seattles Best coffee chain stores in 2003 for USD 73 million, which for many years occupiedthe lower end of the coffee market, with a similar product mix to that of Starbucks. However, Starbucks has established aclear position for Seattles Best as a mid-tier market operator, offering a narrow product assortment with a simple set ofcoffee blends.

5 Starbucks (2013a),Starbucks VIA instant coffee (accessed August 2013).
http://www.starbucks.com/coffee/viahttp://www.starbucks.com/coffee/via


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As part of the acquisition strategy, Starbucks purchased Torrefazione Italia LLC, which offers high-end coffee beans soldexclusively through grocery stores. Starbucks completed the purchase of the company in 2003 and had closed down all of its

physical stores by 2005.

Starbucks is planning to direct its coffee-shop customers to supermarkets and to bring supermarket shoppers into the coffeeshops through its Starbucks rewards program. However, coffee shops will remain the core of the companys business.This strategy is focused on doing more with what it currently has:

We will reward customers who buy Starbucks products in the grocery store with opportunities to get

rewards in our stores and vice versa Thats a sea change in our ability to integrate these two channelsof distribution (Schultz quoted in Jargon 2010).

Geographical expansion

Starbucks has achieved strong global expansion, growing to a presence in 61 countries since opening its first internationalstore in Tokyo in 1996. In order to expand in new geographies, Starbucks has a history of selecting and using a locally basedcompany to gain access to the new market and operating environment. This is achieved either through acquisition or, in somecases, a strategic alliance. These alliances, combined with Starbucks track record of selecting appropriate sites to support

business, has proved a winning formula, with enormous growth achieved in most geographies entered.

Starbucks is planning to be aggressive with its expansion in 2013 as it looks to open new restaurants in the US, China, Mexico,Costa Rica, India and the Nordic region. In total, the company will add1300 new stores in 2013, up from 1057 in 2012.The Americas and China/AsiaPacific will account for about 600 each. Starbucks global store count is expected to increaseto more than 20 000 by 2015, from 18 000 in 2013.

In the US, not all of the proposed 600 set-ups will be traditional Starbucks coffee stores, and it is expected that a number ofTeavana and Evolution juice bars will be part of the new additions.

The company is focused on China as a key market as it looks to grow the store count to 1500 in the region by the end of 2015.Starbucks entered China in 1998, and is currently its largest growth market. Starbucks China offers pastries and drinks that aresmaller to suit local tastes, and a green tea Frappuccino has been introduced. In the first fiscal quarter of 2013 the China/AsiaPacific segment alone achieved sales of USD 214.3 million, an increase of 28 per cent over the previous year with store growthin the region rising 11 per cent, contributing to the 6 per cent same store growth worldwide (Trefis 2013).

One of the major exceptions to Starbucks geographic success was Australia. The coffee industry in Australia is estimated atAUD 3 billion a year (2012), with AUD 1 billion of that consisting of takeaway cups. It was already mature when Starbucks

opened its first store in Sydney in 2000. The retail market is tough, with intense rivalry and returns of just 4 per cent per annumnet profit. In mid-2008, Starbucks management announced that it would close 61 of its 84 Australian stores. The closurestook place swiftlywithin one month. Losses were enormous, including 685 jobs and AUD 143 million (AAP 2008). Just 23

Australian stores were left operating in prime locations.

In the case of Australia, Starbucks did not adjust its product to local conditions. McDonalds, however, varies its menudepending on local culture and local tastes. In India, it sells the McCurry Pan. In Japan, the Ebi Filet-O is availableashrimp burger. In Turkey, McDonalds offers kebabs. It is important to understand the regional markets, and try to understandthe peculiarities of local culture. Also unlike McDonalds, which opened one or two stores in a slowly, slowly approach,to stimulate demand and create a sense of scarcity, Starbucks saturated the Australian market with 87 stores. As a result,Starbucks was viewed as a mass brand, as opposed to the specialty image it desired.

In addition, Starbucks may have overestimated the value proposition of its service, as well as the customer-perceived value

of its services. First, given the availability of high-quality coffee and world-class baristas in the major cities, many customersfailed to understand why Starbucks charged more for its products. The second issue was that service suffered as the number ofstores grew at a fast pace and began employing younger, less-experienced staff. In the US, Starbucks had focused considerablyon staff training and development, something it was not able to achieve as effectively in the Australian market. The third issuewas failing to adjust its product to suit Australians coffee tastes, which lean more towards Europe. This led to the fourth issue,a perception by the Australian market that the brand, due to its rapid expansion over just a few years, was forcing itself ontoan unwilling public.

Starbucks did not advertise in the mass media (part of its core philosophy in the US) and, as a result, failed to effectivelycommunicate its brand to the market. Finally, the Australian Starbucks business model was simply unsustainable, given thecost of rental space in Australia, with the company choosing to own its stores, rather than using a franchise model, which

added to financial pressures.
http://www.trefis.com/stock/sbux/articles/156891/starbucks-is-ready-to-brew-up-more-growth-with-u-s-expansion-plans/2012-12-06http://www.trefis.com/stock/sbux/articles/156891/starbucks-is-ready-to-brew-up-more-growth-with-u-s-expansion-plans/2012-12-06


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Similarly, the issues Starbucks faced with its American consumers, especially during 2008, were that they had built areputation for innovation, leading the way in transforming the coffee shop industry and experience, and had created acustomer expectation that this trend would continue. Every organisation that takes the lead in any market through innovationin product or experience will have to continue to change, adapt and evolve. However, Starbucks believed more meantinstant coffee, or that it means the convenience of having a Starbucks in the supermarket or at a bookstore, neither of which

provided the Starbucks experience, on which much of its success was based.

However, since 2009, Starbucks has been able to recover its share price strongly, achieving an increase of almost six timesover the past four years. These results can be attributed to Starbucks focus on its strategy of driving geographical and

product expansion.

End of Extended Case Study case facts.


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