Starbucks SWOT Analysis 2013

COMPANY PROFILE

Starbucks Corporation

REFERENCE CODE: E86AFA79-07E1-4115-AA0C-0016416541FEPUBLICATION DATE: 9 Dec 2013www.marketline.comCOPYRIGHT MARKETLINE. THIS CONTENT IS A LICENSED PRODUCT AND IS NOT TO BE PHOTOCOPIED OR DISTRIBUTED.

TABLE OF CONTENTS

Company Overview..............................................................................................3

Key Facts...............................................................................................................3

SWOT Analysis.....................................................................................................4

Starbucks Corporation Page 2 MarketLine

Starbucks CorporationTABLE OF CONTENTS

COMPANY OVERVIEW

Starbucks Corporation (Starbucks or the company) is a premier roaster, marketer and retailer ofspecialty coffee. The company operates in 62 countries across North America, Asia Pacific, theEurope, Middle East and Africa (EMEA), and Latin America. Starbucks is headquartered in Seattle,Washington and employed approximately 182,000 people as of September 29, 2013.

The company recorded revenues of $14,892.2 million in the financial year ended September 2013(FY2013), an increase of 12% over FY2012. The operating loss of the company was $325.4 millionin FY2013, compared to an operating profit of $1,997.4 million in FY2012. The net profit was $8.3million in FY2013, compared to the net profit of $1,383.8 million in FY2012.

KEY FACTS

Starbucks CorporationHead Office2401 Utah Avenue SouthSeattleWashington 98134USA1 206 447 1575Phone

Fax

http://www.starbucks.com/Web Address14,892.2Revenue / turnover

(USD Mn)SeptemberFinancial Year End182,000EmployeesSBUXNASDAQ Global

Select Ticker


Starbucks CorporationCompany Overview

SWOT ANALYSIS

Starbucks is a premier roaster, marketer and retailer of specialty coffee. Through its variousvalue-added services, the company not just sells coffee but also creates a differentiatingcoffee-drinking experience to its in-store customers and meets their unstated needs, which, in turn,helps it in surviving in the highly competitive foodservice retail space. However, increasing competitionmay lead to price wars, which, in turn, could affect the market share of the company.

WeaknessesStrengths

Product recallsBuilding strong customer connect throughvalue-added services Tax evasion and lawsuitsLeveraging technology to build a robustdistribution channel strategyStrong financial position

ThreatsOpportunities

Intense competitionEntry into the health and wellness spaceCompliance costs associated withgovernment regulations

Growing presence in key Asian marketsExpanding presence in the growingsingle-serve coffee market in the USThe growing office coffee marketplace

Strengths

Building strong customer connect through value-added services

Starbucks operates in the highly competitive foodservice retail space that demands consistentdelivery of quality service to either retain existing customers or to attract new ones. Apart from sellingits world-renowned coffee blends in a variety of flavors, the company is focused on providing acoffee-drinking experience to its in-store customers. In the past several years, the company hasbeen focusing on meeting its customers unstated demands by offering various value-added services,such as entertainment on premises.

Starbucks offers free, instant and unlimited Wi-Fi connectivity at all its company-owned stores acrossthe US and Canada. The customers, who come for a drink or a snack, are encouraged to spendmore time inside the store through free access to internet and the Starbucks Digital Networkanews and entertainment web portal offered in association with Yahoo.com. The Starbucks DigitalNetwork also offers free access to subscription editions of various premium news resources, suchas The Wall Street Journal, New York Times, USA Today, The Economist and ESPN Insider. It also


Starbucks CorporationSWOT Analysis

offers exclusive iTunes downloads and e-book downloads for its in-store customers. Apart fromthese in-store experiences, the company also targets customers by up-selling merchandise includingmusic, movies, apparel, books and accessories. To further improve its in-store experience forcustomers, in July 2013, Starbucks selected Google to provide the next generation of its Wi-Fioffering for its customers. Beginning August 2013, the new US company-operated Starbucks storeswill begin to receive up to 10 times faster network and Wi-Fi speeds. Over the next 18 months,Starbucks will convert more than 7,000 US stores to the upgraded store network and Wi-Fi experience.In addition to providing faster Wi-Fi, Starbucks and Google will also work together to co-develop thenext-generation Starbucks Digital Network.

While the companys strategy is to build stronger customer connect, through these initiatives it isalso able to gain a higher footfall as more and more customers walk in for the exclusive in-storeexperiences. Additionally, Starbucks is able to create a unique selling proposition by combining itscustomized coffee blends with in-store experiences that customers look forward to. All these strategiesare aiding the company in building its competitive advantage.

Leveraging technology to build a robust distribution channel strategy

While operating in the vast food service space, Starbucks is required to build a robust distributionstrategy to stay ahead of its competition. In terms of distribution, the company sells through fourchannels: company-operated retail stores, licensed stores, CPG and foodservice operations. In therecent times, the company has been expanding its distribution network to include as many channelsto reach customers where they work, travel, shop and dine.

Besides the traditional distribution channels, the company has been utilizing digital channels suchas internet and mobile applications, to reach its customers. In the beginning of 2011, Starbuckslaunched its mobile payment application at all of its 6,800 company-owned stores and 1,000 storesoperated by Target in the US market. This application allows customers to pay for their in-storepurchases through select smartphones. The Starbucks Card Mobile App displays a barcode thatcan be used just like a Starbucks Card to make a purchase. To pay, customers need to hold themobile device in front of a scanner on the countertop and scan the Starbucks Card Mobile Appson-screen barcode to make a purchase.The application also allows customers to track rewards andreload balance using PayPal. After extensive testing, it was found to be an efficient and quick wayto process payments at the companys stores. According to Starbucks, there is a demand for sucha type of payment service. Over one-third of its customers use a smartphone and one in five usesa Starbucks card at checkout.

In mid-2011, the company launched Starbucks for iPhone, a mobile application that introduces itspopular Starbucks Card eGift feature on a mobile device and also combines the features of its twopopular applications for iPhone and iPod touchmyStarbucks and Starbucks Card Mobile.The newapplication allows customers to access their favorite Starbucks Card features, use the mobile paymentcapability and track their My Starbucks Rewards and custom Starbucks features in a single application.The new application also allows customers to send a mobile gift. On the same lines, Starbucks alsolaunched a mobile application for Android-based smartphones, Starbucks for Android application.The Android application provides consumers access to the fastest way to pay and other features to



manage their Starbucks Card on-the-go. Following the success of these mobile applications, Safeway,the US-based retail supermarket chain, rolled out mobile payment at nearly 1,000 Starbucks inSafeway supermarkets across the US in 2011.

In 2012, the company began accepting Square Wallet, a mobile payment application offered by theAmerican company Square Incorporated. The new service was made available at approximately7,000 Starbucks stores across the US. Starbucks became the first retailer in the US to combine itsown mobile payment technology with a loyalty program, with the launch of Starbucks Card MobileApp in 2011. Currently, the company generates more than three million mobile transactions eachweek in the US, accounting for approximately 10% of total US tender. In addition, the total StarbucksCard transactions, including both physical card and mobile application purchases, constitute morethan 30% of the company's US payments. Starbucks also began integrating the Starbucks Card andMy Starbucks Rewards loyalty program across several of its brands, including Teavana.The registeredcustomers who make purchases with a Starbucks Card or through the Starbucks mobile applicationwill receive various benefits depending on the number of stars they earn. At the end of October2012, the company had 4.5 million active members.

By leveraging technology, the company is not just reaching out to an expanding base of consumers,but also is offering them a more convenient way of making transactions. Furthermore, these strategicinitiatives will allow Starbucks to break through its traditional distribution channels, increase theaddressable market and add new avenues for revenue generation.

Strong financial position

The company has a strong financial position, indicated by its revenue growth. Starbucks has witnesseda steady growth in its revenues over many years.The companys revenues increased at a compoundannual growth rate (CAGR) of 11% from $9,774.6 million in FY2009 to $14,892.2 million in FY2013.The revenues of the company grew by 12% in FY2013 over the previous year. The revenue growthwas mainly attributable to increased revenues from company-operated stores (contributing $1.3billion), driven by a 7% increase in comparable store sales. It was also due to incremental revenuesfrom net new company-operated store openings and licensed stores. The companys operatingresults included a litigation charge as a result of the conclusion of its arbitration with Kraft FoodsGroup which resulted in a pretax charge to operating expenses of $2.8 billion. Excluding this charge,the companys operating profit increased 23.1% in FY2013 over FY2012.

In addition to the revenues of the company, the other financial parameters have been impressive.Cash flow from operations was $2.9 billion in FY2013 compared to $1.8 billion in FY2012.Total cashand cash equivalents increased by more than 100% to $2,575.7 million in FY2013. Thus, strongfinancial performance will provide the company with financial flexibility and also help in expansionactivities.

Weaknesses



Product recalls

Starbucks has been registering increasing instances of product recalls lately. La Boulange Cafe &Bakery voluntarily initiated a product recall of 75 Soft Caramel Jams in 8.4 oz. jars as a precautionarymeasure in November 2013. This product was sold exclusively in 20 La Boulange Cafe & Bakerystores in the San Francisco Bay area.The recall was initiated after it was discovered by the companythat the product was inadvertently mislabeled and filled with Hazelnut Jam (containing undeclaredhazelnut). In February 2013, the company recalled all its products containing wheat grass sourcedfrom Sprouters Northwest, due to the possible contamination with Listeria monocytogenes. Therecall included all varieties of wheatgrass products sold across the companys Seattles EvolutionFresh retail stores, including handcrafted beverages containing wheatgrass. In October 2012, theCanadian Food Inspection Agency issued a warning against consuming Justin's-brand honey peanutbutter, used in Starbucks protein bistro boxes. Starbucks voluntarily recalled the protein bistro boxes,which were feared to contain salmonella, potentially fatal bacteria. In August 2012, StarbucksSeasonal HarvestFruit Blend, another product of the company, was recalled due to concerns overpossible salmonella braenderup contamination.

Earlier, in 2011, the US Department of Agriculture's Food Safety and Inspection Service reportedfinding Listeria bacteria in samples taken from chicken to be used in one of Starbucks' bistro boxline of ready-to-eat meals. Following the report, FSIS and Flying Food Group, suppliers to Starbucks,recalled all Starbucks Chipotle Chicken Wraps and Starbucks Chicken and Hummus boxed mealsproduced during that time. Later, FSIS and Flying Food expanded the recall to include two morecontaminated productsStarbucks Salami and Cheese and Starbucks Chicken Lettuce Wraps. Productrecalls could affect the value of the Starbucks brand and result in a decline in demand for its products.

Tax evasion and lawsuits

Starbucks is involved in several lawsuits. In 2012, Starbucks was alleged to have diverted its profitsearned in the UK to other European nations and avoided taxes for the last three years. Accordingto reports, the company paid only 8.6 million (approximately $13.5 million) in corporation tax sincelaunching in the UK in 1998, despite recording cumulative sales of 3 billion (approximately $4.7billion) during this period. A network of UK-based protest groups established to protest against taxavoidance in the UK targeted the companys coffeehouses in the UK. In December 2012, it stagedprotests across more than 40 Starbucks shops, which disrupted business at these locations. InJanuary 2013, Starbucks committed to pay about 20 million (approximately $31.4 million) in Britishcorporation tax over the next two years.

In the first quarter of FY2011, Starbucks notified Kraft Foods Global (now known as Kraft FoodsGroup, Inc.) the discontinuation of its distribution arrangement due to material breaches by KraftFoods of its obligations under the supply and license agreement between both companies. Throughthe companys arrangement with Kraft Foods, Starbucks sold a selection of Starbucks and Seattle'sBest Coffee branded packaged coffees in grocery and warehouse club stores throughout the US,and to grocery stores in Canada, the UK and other European countries. Kraft Foods managed thedistribution, marketing, advertising and promotion of these products. In December 2010, Kraft Foodscommenced a federal court action against Starbucks seeking injunctive relief to prevent Starbucks



from terminating the distribution arrangement until the parties' dispute is resolved through thearbitration proceeding. The District Court for the Southern District of New York denied Kraft Foods'request for injunctive relief. As a result, Starbucks has been in full control of its packaged coffeebusiness since March 2011.

In April 2012, Starbucks and Kraft Foods exchanged expert reports regarding alleged damages ontheir claims. Starbucks claimed damages of up to $62.9 million from the loss of sales resulting fromKraft Foods' failure to use commercially reasonable efforts to market Starbucks coffee, plus attorneyfees. Kraft Foods claimed damages of up to $2.9 billion, plus attorney fees. The arbitration hearingprocess was carried out during JulyAugust 2012. In November 2013, the arbitrator ordered Starbucksto pay Kraft Foods $2,227.5 million in damages plus prejudgment interest and attorney fees. Thecompany estimated prejudgment interest, which includes an accrual through the estimated paymentdate, and attorney fees to be approximately $556.6 million. As a result, it recorded a litigation chargeof $2,784.1 million in its FY2013 operating results.

Such lawsuits and tax evasion controversies have the potential to severely tarnish the brand imageof the company, which could negatively impact the companys sales in the long term.

Opportunities

Entry into the health and wellness space

Growing concerns over lifestyle-related health issues like obesity, diabetes, hypertension and chronicheart disease are encouraging consumers to make a shift in their food preferences. In the recentpast, consumers have consciously made a preference shift towards healthy, fat-free and no-sugaroptions in processed foods. According to a survey conducted by an industry source in 2012, about50% of all the adults in the US acknowledged the need to make changes to their diet to improvetheir overall health. Also, the same survey revealed that about 33% of US adults showed a stronginterest in functional foods and beverages, while 25% of them are already using a functional foodor beverage at least once a day.

Starbucks entered the US health food market with the opening of its first Evolution Fresh store inWashington in March 2012. Since acquiring the Evolution Fresh brand in 2011, Starbucks expandedthe brands distribution to additional grocery channels. It also announced plans to make the EvolutionFresh juices available in more than 5,000 company-operated stores in the US by the end of 2013.The new juice bar would also sell bottled Evolution Fresh fruit and vegetable juices, smoothies andfood, such as oatmeal, wraps, salads and soups. The menu will also include vegan and vegetarianoptions and much-in-demand super foods like kale and quinoa. In order to create a truly captivatingexperience, the company has designed the store to reflect a new look and feel that reflects the pure,natural ingredients in each beverage. The store also has a unique, patent-pending interactive juicewall that displays educational and entertaining digital illustrations of juices and smoothies beinghandcrafted. The company claims that each beverage is prepared using a Heat-free, High-pressurePasteurization (HHP) process that retains more of the nutrients in the juice, compared with theconventional heat pasteurization used by some rivals in the refrigerated juice category.



Despite being the latest entrant into this high-growth health and nutrition space, the companysunique selling propositions like the HHP process and unique store experiences can help it achievean edge over its competitors. Additionally, the new portfolio of healthy beverages will complementthe existing revenue channels of the company and provide it with additional income sources in future.

Growing presence in key Asian markets

Starbucks has been aggressively expanding its presence in Asia, particularly in China and India.The fast pace economic development in China coupled with the rise of the middle class incomegroup and their increasing disposable income have contributed to the increase in demand for variousconsumer goods in the country. More than 160 cities in China have population greater than onemillion. Furthermore, the middle class population in China is expected to double by 2025. Thesefactors are expected to lend support to the growing demand for consumer products offered byStarbucks. In order to tap into this growing market, Starbucks has already embarked on aggressiveexpansion plans in the country. By the end of FY2013, the company had 906 company-operatedstores (including 614 in China) and a further 2,976 licensed stores (including 403 in China) operatingin the CAP region. Furthermore, the companys total net revenues for FY2013 from the CAP regionincreased 27.1%, primarily driven by increased revenues from the newly-added 240 net newcompany-operated stores and 348 net new licensed store openings during the year. China is currentlythe fastest growing retail store market for Starbucks, outside its home market, the US.The companybelieves that China will become its second largest market by 2014.

Besides China, the company is also focused on the high-potential Indian coffee retail market. TheIndian market primarily consists of tea drinkers. However, the changing demographic and the countrysrising middle class population are contributing significantly to the rise in coffee consumption. Accordingto latest industry reports, there is a largely untapped market potential for coffee in the country. In2012, the company entered into a strategic partnership with Tata Global Beverages Limited of Indiaon a 50/50 joint venture, named TATA Starbucks Limited. Through the joint venture, Tata GlobalBeverages owns and operates Starbucks cafes in various cities across India that are brandedStarbucks Coffee A Tata Alliance. In 2012, Starbucks made its entry into the Indian coffee marketwith the opening of its flagship store in Mumbai. Besides the companys signature offerings, in India,Starbucks is also offering several local recipes, including Indian Espresso Roast and other locallyrelevant flavors.The company also has a separate sourcing and roasting agreement with Tata CoffeeLimited, according to which Tata Coffee Limited roasts coffee to supply TATA Starbucks Limited,and export to Starbucks Coffee Company. Several food chains and close competitors of Starbucksintend to tap into the fast-growing Indian market, while restaurant chains like McDonald's and Yum!Brands already have considerable coverage in India.

Starbucks is also aggressively expanding into other Asian markets. In April 2013, Starbucksannounced plans to open 100 new stores in Indonesia over the next three years and another 100stores in the Philippines over the next four years. In June 2013, Starbucks announced plans to open100 new stores in Malaysia over the next four years. By leveraging its strong brand name andbusiness alliances with local players, Starbucks can expand the companys presence in fast growingAsian markets and lend stability to its topline growth.



Expanding presence in the growing single-serve coffee market in the US

Starbucks has been expanding its CPG business in the fast growing single-serve coffee market inthe US. According to industry estimates, the growth of coffee market in the US in 2012 was primarilydriven by sales of single-serve coffee which totaled nearly $2 billion, an increase of more than 80%from 2011. During 201316, the single-serve market is expected to grow at a CAGR of nearly 30%.

Starbucks entered the single-serve segment in the US with the launch of VIA Ready Brew in 2009.The product was subsequently launched in international markets, including Canada, the UK, Japanand the Philippines. The company also introduced new variants under the Starbucks VIA ReadyBrew product line. The company has been pursuing opportunities to penetrate into the single-servecoffee market in the US. In 2011, Starbucks entered into a strategic alliance with GMCR formanufacturing, marketing, distributing and sale of Starbucks and Tazo Tea branded K-Cup portionpack for use in GMCRs Keurig Single-Cup brewing system. Starbucks is the exclusive, licensedsuper-premium coffee brand to be produced by GMCR for its Keurig single-cup brewing system.Starbucks K-Cup portion packs were made available at food, drug, mass, club, specialty anddepartment store retailers in the US and Canada. Furthermore, in a forward integration initiative,Starbucks introduced the Verismo single-serve brewer machine in 2012. Through its own product,the company stated its intention to carve out a niche that GMCR and Nestle have successfullyoccupied for the past few years in the US market. In FY2012, sales of Starbucks VIA Ready Brewincreased significantly and the company shipped nearly 500 million K-Cup packs, which helped it inattaining approximately 16% of the premium single-cup market. With each of its product lines in thepremium single-serve coffee market, Starbucks aims to target customers with different choices; ViaReady Brew is for those who don't want to buy a coffee machine; K-cups are for those who want abasic brewed coffee; and Verismo for more sophisticated coffee drinkers. Furthermore, in May 2013,Starbucks and GMCR entered into an expanded and long term strategic partnership for themanufacturing, marketing, distribution, and sale of Starbucks and Tazo-branded single serve packsfor use in GMCRs Keurig single serve brewing systems globally. Under the new agreement, Starbuckswill add brands and varietals to the already robust Starbucks K-Cup and Vue pack portfolio of offeringsfor Keurig single cup brewers, ultimately tripling the number of Starbucks products and adding brandsoffered on the Keurig platform. New brands will include Seattles Best Coffee, Torrefazione Italiacoffee, Teavana Teas, and Starbucks Cocoa. The new agreement reinforces Starbucks position asthe exclusive licensed super premium coffee brand on the Keurig K-Cup and Vue platforms, andfurther extends the Keurig systems position as the exclusive low-pressure single cup brewing systemfor fresh-brewed Starbucks coffee, Tazo tea and the other Starbucks brands.

Through strategic alliances and its own product launches, Starbucks could tap into the growingdemand for single-serve coffee in the US and broaden its customer base.

The growing office coffee marketplace

Starbucks has a significant presence in the office coffee marketplace, where it offers a whole arrayof products and solutions to corporate offices, commercial spaces and government buildings.Towardsthe end of 2012, Starbucks started test marketing a new office coffee vending service for the firsttime in Switzerland.The company entered into a partnership with Selecta, Europe's biggest vending



machine company, to provide its espressos, lattes and other products, including teas, for employeesin the office under the test project.

According to a recent market study conducted by an industry source, demand for single-cup brewersin the workplace has been increasing in the past few years. The market study revealed that morethan one-fifth of the employees consume coffee that is individually brewed from pods or k-cups andabout 70% of these are supplied by their employers. Therefore, for most employees who find alimited choice of either mediocre coffee or no coffee, a premium beverage like Seattles Best Coffeerepresents an extra perk. Seattles Best Coffee currently has presence in nearly 50,000 locationsincluding cafes, college campuses, restaurants, hotels, airlines, cruise ships and movie theatres.The company intends to expand its presence further in this space. The company reiterates that abrand like Seattles Best Coffee could win in the workplace because the premium coffee brand isan easy and affordable way for companies to deliver an extra perk to employees.

Threats

Intense competition

The specialty coffee market is intensely competitive. Competition in the global market is based ona number of factors, including product quality, service, convenience and price. The company facessignificant competition in each of its channels and markets. In the US, Starbucks faces directcompetition from large competitors in the quick-service restaurant sector and ready-to-drink coffeebeverage market. For instance, it competes with Dunkin Brands in the US, which has strong presencein the northeastern US. Dunkin Brands generates majority of its revenues from specialty coffee,which commands high margins and has strong demand. Dunkin Brands sells franchises toindependent owners unlike Starbucks which builds and manages its own stores. This helps DunkinBrands to rapidly expand its store presence with minimal capital investment.The companys tea andcoffee products sold through its channel development segment compete directly with specialtycoffees and teas sold through supermarkets, club stores and specialty retailers. The company alsofaces competition from well-established companies like McDonald's in many international markets.McDonald's, which sells specialty coffee through McCafe, has global presence and strong brandrecognition in most countries. This acts as a threat to Starbucks which is yet to build its brand andpresence in these markets. Starbucks also competes with other companies such as Nestle, Peet'sCoffee & Tea, Caribou Coffee Company, Jamba, The J.M. Smucker Company, D.E Master Blenders1753, Krispy Kreme Doughnut Corporation, and Panera Bread Company. Therefore, increasingcompetition may lead to price wars, which, in turn, could affect the market share of the company.

Compliance costs associated with government regulations

Starbucks is subject to the regulations of the US Department of Agriculture, the Food and DrugAdministration and those of the Canadian equivalents. Similar regulations and requirements alsoexist in the other countries in which the company operates. Future developments in the regulationof labeling of foods could require the company to further modify the labeling of its products, whichcould affect product sales. Additionally, new government laws and regulations could be introduced



in the future that could result in additional compliance costs.Thus, the company's inability to complywith requirements could subject it to civil remedies, including fines, injunctions, recalls or seizures,as well as potential criminal sanctions which may impact its business.



Copyright of Starbucks Corporation SWOT Analysis is the property of MarketLine, aDatamonitor business and its content may not be copied or emailed to multiple sites or postedto a listserv without the copyright holder's express written permission. However, users mayprint, download, or email articles for individual use.

Company OverviewKey FactsSWOT Analysis

Documents

Starbucks SWOT Analysis 2013