strabucks SWOT analysis

Starbucks Corporation

Starbucks Corporation- Financial and Strategic Analysis Review

Reference Code: GDRT33172FSA

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Starbucks Corporation - Financial and Strategic Analysis Review Publication Date: 03-Aug-2012


Company Snapshot Key InformationStarbucks Corporation, Key InformationWeb Address www.starbucks.comFinancial year-end OctoberNumber of Employees 149,000NASD SBUXSource : GlobalData

Key RatiosStarbucks Corporation, Key Ratios

P/E 33.41

EV/EBITDA 17.19

Return on Equity (%) 28.41

Debt/Equity 12.53

Operating profit margin (%) 14.77

Dividend Yield 0.01

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

Source : GlobalData

Share DataStarbucks Corporation, Share Data

Price (USD) as on 01-Aug-2012 43.78

EPS (USD) 1.62

Book value per share (USD) 5.89

Shares Outstanding (in million) 769.70

Source : GlobalData

Performance ChartStarbucks Corporation, Performance Chart (2007 - 2011)

Source : GlobalData

Company Overview Starbucks Corporation (Starbucks) is a world-renownedspecialty coffee maker. It roasts and retails whole beancoffee. It offers several blends of coffee, handcraftedbeverages, merchandise, and food items. Starbucks alsooffers a range of consumer products in coffee and tea,readymade drinks, and Starbucks ice cream. The companymarkets its products under its flagship Starbucks brandand other brands such as Tazo Tea, Seattle’s Best Coffee,Starbucks VIA, Torrefazione Italia Coffee, and EvolutionFresh. Starbucks, through its company-owned andlicensed stores, has operations in Asia-Pacific, the MiddleEast, Africa, Europe and North America.

SWOT Analysis Starbucks Corporation, SWOT Analysis

Strengths Weaknesses Expanding Operating Margin

Global Retail Footprint

Overdependence on the USMarket

Opportunities Threats Inorganic GrowthOpportunities

Business Expansion

Emerging Market Entry: India

Legal Proceedings

Intense Competition

Supply of High Quality ArabicaCoffee Beans

Source : GlobalData

Financial Performance The company reported revenues of (U.S. Dollars) USD11,700.40 million during the fiscal year ended October2011, an increase of 9.27% over 2010. The operatingprofit of the company was USD 1,728.50 million duringthe fiscal year 2011, an increase of 21.78% over 2010.The net profit of the company was USD 1,245.70 millionduring the fiscal year 2011, an increase of 31.74% over2010.




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Starbucks Corporation - SWOT Analysis SWOT Analysis - OverviewStarbucks Corporation (Starbucks) is a roaster, marketer and retailer of specialty coffee. Global retail footprint andexpanding operating margin are its key strengths, even as, overdependence on the US market remains a major area ofconcern. Entry into emerging markets like India, business expansion through setting up new stores across variousgeographies and acquisition of related companies could present ample growth opportunities to Starbucks. However, supplyof high quality Arabica coffee beans, intense competition, and legal proceedings could have an adverse impact over thebusiness, operating results and financial condition of the company. Starbucks Corporation - StrengthsStrength - Expanding Operating MarginStarbucks reported strong rise in its operating margin in 2011 as compared to the previous year. It reported operatingmargin of 14.8% in 2011 as compared to 13.3% in 2010. The U.S., International, and CPG segments reported operatingmargin of 19.4%, 13.3%, and 31.7% during 2011. The company reported operating income of $1.7 billion, an increase of22% over the previous year. This was mainly driven by leveraging efficiencies and tightly managing operating costs. Forinstance operating costs as a % of sales reduced from 86.7% in 2010 to 85.2% in 2011. This operating margin was abovethe S&P 500 companies average* of 7.26%. A higher than S&P 500 companies average* operating margin indicatesefficient cost management or a strong pricing strategy by the company. Overall, such rise in operating margin under tightconsumer spending reflects Starbucks management's high focus on improving its profitability. Strength - Global Retail FootprintThe company has marked strong market presence across the world which has allowed it report strong revenues during thefiscal year ended 2011. As at October 2, 2011, Starbucks operated a total of 17,003 stores across 55 countries comprisingof 9,031 company-operated stores and 7,972 licensed stores. It expanded its global footprint by opening 144 internationalstores and 142 company-operated stores during the fiscal year ended 2011. The company holds more than 500 stores inthe US, Canada, the UK, and Japan markets; more than 250 stores in China, South Korea, and Mexico; and has less than250 stores across all other countries, indicating opportunities for further growth. As at January 1, 2012, the company had9,085 company-operated stores and 8,159 licensed stores. For 2012, Starbucks plans to open 800 net new stores andremodel 1,700 existing stores in the US, indicating its interest to grow its business and market shares over the next fewyears. Starbucks Corporation - WeaknessesWeakness - Overdependence on the US Market Starbucks sells its products through retail channels in the Asia Pacific, Europe, Middle East and African regions. Eventhough it has operations worldwide, the contribution of revenues from the international segment is very less. A significantamount of Starbucks sales are generated from the US region. The company’s 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 itsInternational segment accounted for just 22.4%. The US economy is recovering very slowly and any such macro-economicfactors slowing its revenue generation or decline in its business and financial performance from the US segment could havean 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 - OpportunitiesOpportunity - Inorganic Growth OpportunitiesIn line with its business strategy, Starbucks pursues inorganic growth opportunities through acquiring related businessesacross is area of operations. In November 2011, the company acquired Evolution Fresh, Inc. for $30m in cash. This hasmarked Starbucks entry into the $1.6 billion super-premium juice segment as well as represents its intentions to fully enterthe $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 Starbucksopportunities to innovate new products, enter new categories, and expand its distribution channels. Opportunity - Business ExpansionStarbucks has been constantly investing in expanding its global presence by opening retail stores across the world. InFebruary 2012, the company and its licensed partner SSP opened Norway’s 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 growingdemand for high quality coffee and service in the travel channel. In January 2012, Starbucks along with its joint-venturepartner Corporación 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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Morocco, at the Morocco Mall. A third store is planned to open in March on the Boulevard d’Anfa. Such continued effort insetting up new Starbucks stores would enhance its global footprint and its possibilities to generate higher earnings. Opportunity - Emerging Market Entry: IndiaStarbucks has made an initiative in entering into India. In January 2012, Starbucks and Tata Global Beverages Limitedhave entered into an agreement to establish a 50/50 joint venture company, TATA Starbucks Limited, which will own andoperate Starbucks cafés which will be branded as Starbucks Coffee “A Tata Alliance.” Initially, the retail stores will bedeveloped in Delhi and Mumbai in calendar 2012. In another souring and roasting agreement between Starbucks and TataCoffee Limited, TCL will roast coffee to supply TATA Starbucks Limited, and to export to Starbucks. This joint venture isexpected to expand the range of offerings such as high quality Arabica coffee, handcrafted beverages, locally relevantfood, and legendary service for Indian consumers. Overall, this joint venture is expected to present opportunities toinnovate in the retail space and bring new beverage experience to Indian consumers. Sharing common values ofresponsible business ethics and a commitment to community, Starbucks and Tata, would gain trust and respect of theircustomers and partners, growing further in their businesses. Starbucks Corporation - ThreatsThreat - Legal ProceedingsStarbucks 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 Districtof New York against Starbucks Coffee Company for violating terms of the roast and ground coffee agreement. This is tostop 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 company’s operatingperformance in upcoming years. Threat - Intense CompetitionThe company's competitors for coffee beverage sales include quick-service restaurants and specialty coffee shops. Itscurrent market is highly competitive and with the entrance of more new players, the level of competition is expected tofurther intensify in the near future, which may result in price reductions. Starbucks competes with various manufacturersand distributors of coffee products, having substantially greater financial, marketing and distribution resources. Thecompany’s other competitors include specialty coffees sold through supermarkets, specialty retailers and a growing numberof specialty coffee stores under the whole bean coffee segment. Besides, Starbucks whole bean coffees and its coffeebeverages compete indirectly against all other coffees in the market. Starbucks Specialty operations face significantcompetition from established wholesale and mail order suppliers. The company's major competitors include Caribou CoffeeCompany, Inc., Green Mountain Coffee Roasters, Inc., McDonald's Corporation, PepsiCo, Inc., The Procter & GambleCompany, Kraft Foods Inc., and Nestle USA, Inc. If the company is not able to maintain the product quality and consumerloyalty, this intense competition could reduce the sales volume of the company, thereby hampering its market position. Threat - Supply of High Quality Arabica Coffee BeansThe company’s business depends on the availability of high quality Arabica coffee beans. Starbucks roasts Arabica coffeebeans from various regions to produce different types and blends of coffee. The political and economic situation in many ofthose regions, including Africa, Indonesia, and Central and South America, could become unstable, which in turn mightaffect the company’s ability to buy coffee from those parts. If Arabica coffee beans from a particular market becomeunavailable or become too costly, then the company may be forced to withdraw particular coffee types and blends orreplace coffee beans from other regions. Frequent substitutions and changes in coffee product lines could lead to costincreases, customer alienation and fluctuations in the gross margins. Thus, the political wavering in coffee growing regionscould result in a decrease in the availability of high-quality Arabica coffee beans needed for the continued operation andgrowth of Starbucks’ business. NOTE:* Sector average represents top companies within the specified sectorThe above strategic analysis is based on in-house research and reflects the publishers opinion only

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