datamonitor starbucks swot analysis 2011

Starbucks Corporation

Company Profile

Publication Date: 29 Sep 2011

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Starbucks Corporation

TABLE OF CONTENTS

Company Overview..............................................................................................4

Key Facts...............................................................................................................4

SWOT Analysis.....................................................................................................5


Starbucks CorporationTABLE OF CONTENTS

COMPANY OVERVIEW

Starbucks Corporation (Starbucks or "the company’’) is a premier roaster and retailer of specialtycoffee.The company operates in the US, Asia Pacific, the Europe Middle East Africa (EMEA) region,and Latin America. Starbucks is headquartered in Seattle, Washington and employs 137,000 people.

The company recorded revenues of $10,707.4 million during the financial year ended September2010* (FY2010), an increase of 9.5% over FY2009.The operating profit of the company was $1,419.4million in FY2010 compared to an operating profit of $562 million in FY2009. The net profit was$945.6 million in FY2010 compared to a net profit of $390.8 million in FY2009.

*Starbucks’s financial year ends on the Sunday closest to September 30. The financial year endedOctober 3, 2010 was a 53-week period whereas the financial year ended September 27, 2009 wasa 52-week period.

KEY FACTS

Starbucks CorporationHead Office2401 Utah Avenue SouthSeattleWashington 98134USA

1 206 447 1575Phone

Fax

http://www.starbucks.com/Web Address

10,707.4Revenue / turnover(USD Mn)

SeptemberFinancial Year End

137,000Employees

SBUXNASDAQ NationalMarket Ticker


Starbucks CorporationCompany Overview

SWOT ANALYSIS

Starbucks Corporation (Starbucks or ‘’the company’’) is a premier roaster and retailer of specialtycoffee. It operates in more than 50 countries through its company-owned stores as well as licensedretail stores. Starbucks's wide geographical reach increases its bargaining leverage and also enhancesits brand equity.The company’s continued expansion in existing markets as well as new and emergingcountries is indicative of its plans to establish a global retail footprint and reduce its dependency onfew markets. However, the company’s profitability could be adversely affected by rising coffee prices.

WeaknessesStrengths

Product recalls adversely affect brandimage

Wide geographic presence strengthenedby continued expansionStrengthening presence in other distributionchannelsResearch and development capabilitiesleveraged to strengthen product portfolio

ThreatsOpportunities

Rising commodity prices can adverselyaffect Starbucks's profit margins

Growing presence in key Asian marketsInvestments to improve customer interface

Rising labor cost in the USExpanding presence in the growingsingle-serve coffee market in the US Slowdown in the US economy

Strengths

Wide geographic presence strengthened by continued expansion

Starbucks has a wide geographic presence with operations extending to more than 50 countries.Its international markets include Argentina, Australia, Austria, Brazil, Bulgaria, Canada, China, CzechRepublic, France, Germany, Greece, Hong Kong, Indonesia, Ireland, Japan, Malaysia, Mexico,Middle East, New Zealand, Peru, Poland, Portugal, Romania, Russia, Singapore, South Korea,Spain, Switzerland, Taiwan, Thailand, Turkey and the UK. The company operates in these marketsthrough its own stores as well as licensed retail stores. At the end of FY2010, Starbucks had 6,707company-operated retail stores in the US and 2,126 in international markets (Canada 799, the UK601, China 220, Germany 142, Thailand 133 and other countries 231). Revenues from thesecompany-operated retail stores accounted for 84% of total net revenues in FY2010.

The company partners with established local players for access to retail space to operate licensedretail stores. Starbucks receives royalties and license fees under these arrangements. At the end


Starbucks CorporationSWOT Analysis

of FY2010, the company had 4,424 licensed stores in the US market, and 3,601 licensed stores inthe international markets (Asia Pacific 2,141, Europe/Middle East/Africa 840, Canada 274, Mexico283 and Rest of Americas 63). The royalty and license fee revenues from the US and internationallicensed retail stores accounted for 50% of revenues from specialty operations (Specialty operationscontributed 16% to the total revenues of the company) in FY2010.

Starbucks has been pursuing opportunities to expand its company-owned retail stores. In August2010, it assumed 100% ownership and operating control of Starbucks Brazil through the acquisitionof Cafes Sereia do Brasil Participacoes. Consequently, the business in Brazil was converted into acompany-operated business enabling Starbucks to focus on the strengthening its presence in Brazil,the largest consumer market in South America.

The company is also working towards expanding its market presence by partnering with localcompanies in existing markets as well as new and emerging countries. In August 2010, Starbucksentered into a strategic area development agreement with Corporacion de Franquicias Americanas,one of Central America’s largest multi-brand franchise operators, to open licensed Starbucks storesthroughout Central America. The first store was open in San Salvador, El Salvador in November2010. Another store was opened in Guatemala in March 2011. Starbucks is also aiming atstrengthening its foothold in the Asian markets.The company has recently announced plans to enterthe India market in alliance with Tata Coffee. Both companies will jointly explore the developmentof Starbucks retail stores in associated retail outlets and hotels. Starbucks is also aggressivelypenetrating the Chinese market. The company expects to operate over 1,500 stores by 2015.

Starbucks's wide geographical reach increases its bargaining leverage and also enhances thecompany’s brand equity. The company’s continuous efforts towards expanding its internationalpresence are indicative of its plans to establish a global retail footprint and reduce its dependencyon few markets.

Strengthening presence in other distribution channels

Starbucks has been undertaking initiatives towards developing its brands through a number ofchannels besides the company-operated retail store environment. Starbucks is expanding itsdistribution network to include as many channels to reach customers where they work, travel, shopand dine. The company enters into tie-ups with third parties in various forms, including licensingarrangements, foodservice accounts and others. Starbucks licenses the rights to produce and marketStarbucks and Seattle’s Best Coffee branded products through several partnerships both domesticallyand internationally. For instance, it is a 50% equity investor in the North American Coffee Partnership,a joint venture with Pepsi-Cola Company, which is engaged in manufacturing and marketingready-to-drink beverages, including bottled Frappuccino beverages, Starbucks DoubleShot, andSeattle’s Best Coffee espresso beverages in the US and Canada markets. Starbucks also haslicensing agreement with a partnership formed by Unilever and Pepsi-Cola Company for themanufacturing, marketing and distribution of Starbucks super-premium Tazo Tea beverages in theUS. Additionally, Starbucks sells packaged coffee and tea internationally directly to warehouse clubstores such as Costco Wholesale.The company also sells whole bean and ground coffees, includingthe Starbucks and Seattle’s Best Coffee brands, as well as a selection of premium Tazo teas,



Starbucks VIA Ready Brew and other related products, to institutional foodservice companies thatservice business and industry, education, healthcare, office coffee distributors, hotels, restaurants,airlines and other retailers. It also sells Seattle’s Best Coffee through arrangements with nationalaccounts.

Starbucks has been expanding its distribution network through strategic agreements with variousbusiness partners. The company entered into an agreement with Courtesy Products (a leadingprovider of in-room coffee service in hotels in the US) in 2011, to offer Starbucks ground coffees inapproximately 500,000 luxury and premium hotel rooms across the US. In the same year, Starbucksentered into a strategic partnership with Green Mountain Coffee Roasters for manufacturing,marketing, distributing and sale of Starbucks and Tazo Tea branded K-Cup portion pack for use inGMCR’s Keurig Single-Cup brewing system. Starbucks and GMCR plan to make Starbucks K-Cupportion packs available through food, drug, mass, club, specialty and department store retailersthroughout the US and Canada beginning in the fall of 2011.

Seattle's Best Coffee, a division of Starbucks, has been expanding its distribution channels. Thedivision currently markets its products through diversified distribution channels, including cafes andkiosks, college campuses, restaurants, hotels, airlines, cruise ships, bookstores, grocery stores andmovie theatres. It continues to explore new distribution avenues. In 2010, Seattle's Best Coffeesigned an agreement with Burger King to offer Seattle's Best Coffee at nearly 7,250 Burger King’srestaurants across the US market. In the same year, Seattle's Best Coffee entered into an agreementwith AMC Theatres to offer its products at 300 AMC Theatres throughout the US. Furthermore,Seattle's Best Coffee entered into an agreement with Delta Air Lines in February 2011, to offerSeattle's Best Coffee to customers onboard all Delta Air Lines domestic and international flights aswell as Delta connecting flights beginning March 1, 2011. Through these distribution arrangements,Starbucks has increased its distribution points to 40,000 in 2011 from just 3,000 in 2009.

These strategic agreements allow Starbucks to break through its traditional route and market itsproducts through new channels of distribution. They also increase the addressable market and addnew avenues for revenue generation.

Research and development capabilities leveraged to strengthen product portfolio

Starbucks’s strong research and development (R&D) capabilities enable it to innovate products atregular intervals and offer an extensive range of coffee products to its customers. The company hasa strong R&D team which is responsible for the technical development of food and beverage productsand new equipment. Starbucks invests substantial amount of resources on technical research anddevelopment activities, including customary product testing and product and process improvements.The company’s R&D expenditure totaled $9 million, $7 million and $7 million during FY2010, FY2009,and FY2008, respectively.

Starbucks’s strong R&D capabilities enable it to focus on relevant product innovation, expansionand leveraging of its existing products and sales channels. The company has launched severalproducts in recent times. Starbucks launched Starbucks VIA Ready Brew, a 100% natural roastedcoffee made without preservatives, in February 2009. Starbucks VIA Ready Brew was developed



based on a proprietary, patent-pending technology to preserve the coffee’s taste, quality andfreshness. The product achieved phenomenal success and was launched in international markets,including Canada, the UK, Japan and the Philippines. The company introduced new variants underthe Starbucks VIA Ready Brew line of products, including Starbucks VIA Decaf, Starbucks VIA ReadyBrew Decaffeinated Italian Roast, Starbucks VIA Coffee Essence, Starbucks VIA Iced Coffee,Starbucks VIA Coffee Essence Iced Coffee and Starbucks VIA Flavored Coffees. As of August 2010,Starbucks VIA Ready Brew was distributed through more than 37,000 points of distribution in theUS including Starbucks stores; food, drug and mass merchandiser stores; foodservice accounts;and through e-commerce. Starbucks VIA Ready Brew was named the “Most Innovative New Productof the Year” by Allegra Strategies in the UK, and the “Best New Consumer Product” by ProgressiveGrocer magazine in the US. Within ten months of its launch, Starbucks VIA Ready Brew touchedthe $100 million mark in global sales. Starbucks VIA Ready Brew coffee contributed approximately$22 million to CPG’s net revenue in FY2010.

The company R&D capabilities have helped it build an extensive product portfolio offering severalvarieties to meet the tastes of different customers. Starbucks’s stores offer a wide choice of regularand decaffeinated coffee beverages, a broad selection of Italian-style espresso beverages, coldblended beverages, iced shaken refreshment beverages, a selection of premium teas, and distinctivelypackaged roasted whole bean coffees. Seattle’s Best Coffee offers more than 30 whole bean andground coffees (including flavored, organic and Fair Trade Certified coffees), espresso beverages,signature hand-crafted JavaKula blended beverages, OvenSong bakery food and sandwiches, andselect merchandise. In 2010, Seattle’s Best Coffee entered into the $1.4 billion ready-to-drink USmarket with the launch of its new range of iced canned lattes.

Thus, by leveraging its R&D capabilities, Starbucks has been able to regularly revitalize its productportfolio and increase its market share in the premium single-cup coffee and ready-to-drink beveragesmarkets. The introduction of new products at regular intervals helps Starbucks to maintain itscompetitiveness in the industry.

Weaknesses

Product recalls adversely affect brand image

Starbucks has been registering increasing instances of product recalls lately. In January 2010, thecompany recalled 11,000 and 1,200 units of glass water bottles supplied in the US and Canada,respectively. The recall was initiated after it was found that the bottle could shatter while removingor inserting its stopper, posing a laceration hazard to consumers. Previously, in FY2009, the USConsumer Product Safety Commission ordered recall of 530,000 units of Starbucks Barista BladeGrinders and Seattle's Best Coffee Blade Grinders. The recall was prompted as the company’sgrinders could fail to turn off or could turn on unexpectedly, posing a laceration hazard to consumers.Previously, Starbucks has also recalled few of its products containing peanut butter from its storesfollowing an outbreak of salmonella in the US. Product recalls affect the value of the Starbucks brandand could result in a decline in demand for its products.



Opportunities

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 (gross domestic product growth of 10.3% in fiscalyear 2010 and 9.2% in fiscal year 2009) coupled with the rise of the middle income group and theirincreasing disposable income have contributed to the increase in demand for various consumergoods in the country. More than 160 cities in China have population greater than one million.Furthermore, the middle class population in China is expected to double by 2025. These factors areexpected to lend support to the growing demand for consumer products offered by Starbucks. Inorder to tap this growing market, Starbucks has already embarked on aggressive expansion plansin the country. It plans to open more than 1,000 new stores in China by 2015, increasing its storecount to 1,500. China is expected to represent 32% of the company’s total international unit openingsduring FY2011 to FY2015. Starbucks has been registering strong comparable store sales in China.In the first quarter of FY2011, the company has registered comparable store sales of more than 20%in China; and the China business also generated highest unit-level margins (more than 22%) forStarbucks in the world.

The company recently announced plans to enter the Indian market. India primarily consists of teadrinkers. However, the changing demographic and the country’s rising middle class population arecontributing significantly to the rise in coffee consumption. According to the Tea Board and CoffeeBoard of India, Indians consumed around 700,000 tonnes of tea in 2010 compared to 75,000 tonnesof coffee. This is indicative of the market potential for coffee in the country. To capture this growthtrend, Starbucks is entering the Indian market. In January 2011, Starbucks and Tata Coffee signeda non-binding memorandum of understanding on collaborating for sourcing and roasting of high-qualitygreen coffee beans in Tata Coffee's facility at Coorg, India. Tata Coffee, one of the leading coffeeproducers in India, owns the Eight O’Clock Coffee Co. in the US. Besides sourcing coffee beansfrom south India and roasting them locally, Tata Coffee and Starbucks will jointly explore thedevelopment of Starbucks retail stores in associated retail outlets and hotels. Starbucks also plansto form alliances with other local players in the future to open Starbucks stores in India.

Therefore, by leveraging its strong brand name and business alliances with local players, Starbuckscan expand the company’s presence in fast growing Asian markets and lend stability to its toplinegrowth.

Investments to improve customer interface

Starbucks has been investing substantial amount of its resources towards enhancing its customerexperience. For instance, in January 2011, Starbucks launched its mobile payment application atall of its 6,800 company owned stores and 1000 stores operated by Target in the US market. Thisapplication allows customers to pay for their in¬-store purchases through select smartphones. TheStarbucks Card Mobile App displays a barcode that can be used just like a Starbucks Card to makea purchase.To pay, customers need to hold the mobile device in front of a scanner on the countertop



and scan the Starbucks Card Mobile App’s on-screen barcode to make a purchase. The applicationalso allows customers to track rewards and reload balance using PayPal. The program was testedat select stores in 2009. After extensive testing, it was found to be an efficient and quick way toprocess payments at the company’s stores. More than 3 million customers have used Starbucksmobile payment application since its launch. According to Starbucks, there is a demand for such atype of payment service. Over one third of its customers use a smartphone and one in five use aStarbucks card at checkout.

Further in October 2010, Starbucks in partnership with Yahoo launched Starbucks Digital Network(SDN) at its stores in the US. Through SDN, the company offers a package of free web content atits stores. Initially, the web content offered included six channels: news and sports, entertainment,wellness, business and careers, My Neighborhood, and Starbucks. Other content partners includedare Bookish Reading Club, Foursquare, Good, LinkedIn, New Word City, and The Weather Channel.Customers at the company’s stores can access SDN on their smartphones, laptops and tablets.SDN received an overwhelming response with nearly 8 million visitors in the first two months of itslaunch.

Thus, by investing in such applications, Starbucks can boost loyalty among customers who seekspeed, ease and convenience.

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 experts, the growth of the coffee market in the US in 2010 was primarilydriven by sales of single-cup coffee which totaled nearly $2 billion. Though the single-serve coffeecomes at a higher cost, its popularity is on the rise. According to experts, it may appeal to peoplebetween the age group of 18 to 24 years setting up their first homes and older consumers with limitedliving space because of the convenience and variety it offers.

Starbucks entered the single-cup 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. As of August 2010, Starbucks VIA Ready Brew was distributed through morethan 37,000 points of distribution in the US including Starbucks stores; food, drug and massmerchandiser stores; foodservice accounts; and through e-commerce.

The company has been pursuing opportunities to penetrate into the single-serves coffee market inthe US. In February 2011, the company entered into an agreement with Courtesy Products to offerStarbucks ground coffees for use in the latter’s patented C1 in-room and on-demand brewed coffeesystems. Courtesy Products is one of the leading providers of in-room coffee service to hotels in theUS. Under the agreement, Starbucks ground coffees would be made available in approximately500,000 luxury and premium hotel rooms across the US that are being served by Courtesy Products.

In March 2011, Starbucks entered into a strategic alliance with Green Mountain Coffee Roasters formanufacturing, marketing, distributing and sale of Starbucks and Tazo Tea branded K-Cup portion



pack for use in GMCR’s 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’s K-Cup portion packs would be made available at food, drug, mass, club, specialty anddepartment store retailers in the US and Canada. The companies plan to expand Starbucks K-Cupportion pack and Keurig Single-Cup Brewing system distribution to Starbucks stores and to makeStarbucks K-Cup portion packs available through GMCR's consumer-direct websites:www.greenmountaincoffee.com and www.keurig.com, and Starbucks consumer-direct website:www.starbucks.com, beginning in 2012. GMCR is one of the leading providers of specialty coffeeand single-serve brewing systems in the country. The company’s association with GMCR wouldfurther increase its addressable market.

Therefore, through strategic alliances with GMCR and Courtesy Products, Starbucks can tap thegrowing demand for single-serve coffee in the US and broaden its customer base.

Threats

Rising coffee prices can adversely affect Starbucks’s profit margins

Coffee prices have climbed steeply in the past few years. The shortage in the supply of coffee inthe wake of growing global demand caused the price hikes. The demand for coffee has especiallyincreased in the developing nations. Additionally, speculation with respect to poor early coffee cropsin South America and Central America and an expected increase in shipping costs as a result of theGulf oil disaster, led to high coffee prices in 2010.The shortage in supply of the Arabica coffee plantvarietal, which is mostly used by specialty coffee retailers such as Starbucks, Caribou Coffee andPeet’s Coffee also led to the rise in prices. In 2010, the price of Colombian Mild Arabicas in the NewYork market was $2.23 per pound (lb) compared to $1.45 per lb in 2008, representing an increaseof 53.8%. During the same period, the price of Other Mild Arabicas and Brazilian Natural Arabicasincreased by 40.5% and 19%, respectively, in the New York market.

With demand outstripping supply, the coffee prices are expected to remain high during 2011. Thecost of coffee accounts for 17% of Starbucks’s overall cost of goods sold and 7% of total revenue.Although Starbucks is one of the leading players in the coffee industry with significant bargainingpower, continued rise in the coffee prices could impact the company’s profitability.

Rising labor cost in the US

Over the past few years, labor costs have risen significantly in the US.Tight labor markets, increasedovertime, government mandated increases in minimum wages and a higher proportion of full-timeemployees are resulting in an increase in labor costs for employers. This could adversely affectStarbucks’s cost structure. The federal minimum wage rate in the US was increased to $6.55 anhour in July 2008 and to $7.25 an hour later in July 2009. More than 35 million working people inthe US are paid only the minimum wage, and therefore, the minimum wage rate has a strong impact.Additionally, many states and municipalities in the country have minimum wage rate higher than the



federal minimum wage rate due to higher cost of living. Starbucks presently employs 137,000 people.Thus, increasing labor costs could increase the company’s overall costs and adversely affect itsmargins.

Slowdown in the US economy

The US economy has been growing at a slow pace after the financial crisis it suffered in 2008.Consumption expenditure which forms approximately 70% of the country’s Gross domestic Product(GDP), grew by only 1.7% in 2010 over 2009. Further, in February 2011, the personal consumptionexpenditure grew by 0.7% over the previous month. The growth in the personal consumption rateremained sluggish as customers continued to save more.The average personal savings rate increasedto 5.8% in 2010 compared to 4.3% in 2009. Additionally, personal saving as a percentage ofdisposable personal income was 5.8% in February 2011, compared to 6.1% in the previous month.

The unemployment rate which remained at 9.4% towards the end of 2010 is also one of the reasonsfor customers keeping their spending at low levels. Though the unemployment rate reduced to 9%in January 2011 and to 8.9% in February 2011, it still is significantly high and is expected to remainsteady at around 8% in 2011. High unemployment rate adversely affects consumer spending as theconsumers feel insecure about the future income prospects. Thus, slow economic growth in the UScan pressurize Starbucks’s top line growth and profit margins.



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