Starbucks Corporation

Starbucks Corporation - Financial and Strategic Analysis Review

Publication Date: 27-Mar-2013 Reference Code: GDRT33172FSA

Company Snapshot
Key Information
Starbucks Corporation, Key Information Web Address www.starbucks.com Financial year-end September Number of Employees 160,000 NASD SBUX
Source : GlobalData

Company Overview
Starbucks Corporation (Starbucks) is a world-renowned specialty coffee maker. It roasts, markets and retails specialty coffee. It offers several blends of coffee, handcrafted beverages, merchandise, and food items. Starbucks also offers a range of consumer products in coffee and tea, readymade drinks, and Starbucks ice cream. The company markets its products under its flagship Starbucks brand and other brands such as Tazo Tea, Seattles Best Coffee, Starbucks VIA, Torrefazione Italia Coffee, and Evolution Fresh. Starbucks, through its company-owned and licensed stores, operates across the Asia-Pacific, the Middle East, Africa, Europe and the Americas.
31.67 15.78 27.09 10.76 15.02.00 0.01 Global Retail Footprint

Key Ratios
Starbucks Corporation, Key Ratios P/E EV/EBITDA Return on Equity (%) Debt/Equity Operating profit margin (%) Dividend Yield
Note: Above ratios are based on share price as of 25-Mar-2013 Source : GlobalData

SWOT Analysis
Starbucks Corporation, SWOT Analysis Strengths Weaknesses Expanding Operating Margin Overdependence on the US Market

Opportunities Inorganic Growth Opportunities 56.69 1.79 6.82

Source : GlobalData

Threats Intense Competition Legal Proceedings

Share Data
Starbucks Corporation, Share Data Price (USD) as on 25-Mar-2013 EPS (USD) Book value per share (USD) Shares Outstanding (in million)
Source : GlobalData

Business Expansion Higher Commodity Costs Emerging Market Entry: India

773

Financial Performance
Performance Chart
Starbucks Corporation, Performance Chart (2008 - 2012)

The company reported revenues of (U.S. Dollars) USD 13,299.50 million during the fiscal year ended September 2012, an increase of 13.67% over 2011. The operating profit of the company was USD 1,997.40 million during the fiscal year 2012, an increase of 15.56% over 2011. The net profit of the company was USD 1,383.80 million during the fiscal year 2012, an increase of 11.09% over 2011.

Source : GlobalData

Starbucks Corporation- Financial and Strategic Analysis Review

Reference Code: GDRT33172FSA Page 1

Starbucks Corporation Starbucks Corporation - SWOT Analysis

SWOT Analysis - Overview Starbucks Corporation (Starbucks) is a roaster, marketer and retailer of specialty coffee. Global retail footprint and expanding operating margin are its key strengths, even as, overdependence on the US market remains a major area of concern. Entry into emerging markets like India, business expansion through setting up new stores across various geographies and acquisition of related companies could present ample growth opportunities to Starbucks. However, higher commodity costs, intense competition, and legal proceedings could have an adverse impact over the business, operating results and financial condition of the company. Starbucks Corporation - Strengths Strength - Expanding Operating Margin Starbucks reported operating income of $2 billion in 2012 as compared to $1.7 billion in 2011. This resulted in improvement in the companys operating margin from 14.8% in 2011 to 15% in 2012. This expansion in operating margin was driven by increased sales leverage and the absence of charges in fiscal 2012 related to the Seattle's Best Coffee store closures in Border's bookstores. Sales leverage improved as total net revenues increased 14% to $13.3 billion driven by global comparable store sales growth of 7% and a 50% increase in Channel Development revenue. Increase in sales helped Starbucks mitigate the impact of higher commodity costs, mostly coffee. Improved operating margin indicates efficient cost management or a strong pricing strategy by the company. Overall, such rise in operating margin under tight consumer spending reflects Starbucks's focus on improving its profitability. Strength - Global Retail Footprint The company roasts, markets and retails specialty coffee across 60 countries worldwide. As of September 30, 2012, Starbucks operated a total of 18,006 stores across 60 countries comprising of 9,405 company-operated stores and 8,661 licensed stores. It expanded its global footprint by opening 398 company-operated stores and 844 licensed stores during 2012. As of September 30, 2012, Starbucks operated 7,857 company-operated stores in the Americas, 882 in EMEA, and 666 in CAP. It also opened 351, 139, and 354 licenses stores in the Americas, EMEA, and CAP, respectively. For 2013, Starbucks plans to open new stores and remodel existing stores in the US, indicating its interest to grow its business and market shares over the next few years. Starbucks Corporation - Weaknesses Weakness - Overdependence on the US Market Starbucks sells its products through retail channels in the Americas, the Asia Pacific, Europe, Middle East and African regions. Even though it has operations worldwide, the contribution of revenues from its international operations is very less. During 2012, Starbucks generated about 76.5% of its total sales from the US and 23.5% from other countries. This indicates high dependence of Starbucks on the US market in generating its revenue. Any decline in revenue from the US market could result in reduced cash flows for funding its international business expansion plans and for returning cash to shareholders. Starbucks Corporation - Opportunities Opportunity - Inorganic Growth Opportunities In line with its business strategy, Starbucks pursues inorganic growth opportunities through acquiring related businesses across is area of operations. In November 2012, Starbucks agreed to acquire Teavana Holdings, Inc. (Teavana), a specialty retailer offering more than 100 varieties of premium loose-leaf teas, authentic artisanal teawares and other tea-related merchandise, for $620m in cash. This potential acquisition would complement its Tazo business giving Starbucks a two-tiered market position for tea. With the combination of the Teavana and Tazo brands Starbucks plans to define a new elevated platform of tea experience and education and expanding tea product portfolio. In July 2012, Starbucks acquired 100% interest in Bay Bread, LLC and its La Boulange bakery brand (collectively La Boulange), to elevate its core food offerings and build a premium, artisanal bakery brand. In November 2011, the company acquired Evolution Fresh, Inc. for $30m in cash. This has marked Starbucks entry into the $1.6 billion super-premium juice segment as well as represents its intentions to fully enter the $50 billion Health and Wellness sector. In March 2012, the company opened first Evolution Fresh store in Bellevue, Washington, positioning it as a leader in the cold-crafted juice category. Such business acquisitions are expected to offer Starbucks opportunities to innovate new products, enter new categories, and expand its product portfolio and distribution channels. Opportunity - Business Expansion Starbucks has been constantly investing in expanding its global presence by opening retail stores across the world. During 2012, the company opened its 700th store in China as it continues to execute against its significant growth plans in the CAP region; Evolution Fresh opened new retail locations in downtown Seattle and San Francisco; and announced a

Starbucks Corporation- Financial and Strategic Analysis Review

Reference Code: GDRT33172FSA Page 2

Starbucks Corporation

partnership with Umoe Restaurant Group to open stores in Scandinavia in 2013. In February 2012, the company and its licensed partner SSP opened Norways 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 growing demand for high quality coffee and service in the travel channel. Such continued effort in setting up new Starbucks stores would enhance its global footprint and its possibilities to generate higher earnings. Opportunity - Emerging Market Entry: India Starbucks initiated its entry into India. In January 2012, Starbucks and Tata Global Beverages Limited have entered into an agreement to establish a 50/50 joint venture company, TATA Starbucks Limited, which will own and operate Starbucks cafes which will be branded as Starbucks Coffee A Tata Alliance. Initially, the retail stores will be developed in Delhi and Mumbai in calendar 2012. In October 2012, Tata Starbucks Limited opened the doors to the first Starbucks store in India. In another souring and roasting agreement between Starbucks and Tata Coffee Limited (TCL), TCL will roast coffee to supply TATA Starbucks Limited, and to export to Starbucks. This joint venture is expected to expand the range of offerings such as high quality Arabica coffee, handcrafted beverages, locally relevant food, and legendary service for Indian consumers. Overall, this joint venture is expected to present opportunities to innovate in the retail space and bring new beverage experience to Indian consumers. Sharing common values of responsible business ethics and a commitment to community, Starbucks and Tata, are expected to gain trust and respect of their customers and partners, growing further in their businesses. Starbucks Corporation - Threats Threat - Intense Competition The company's competitors for coffee beverage sales include quick-service restaurants and specialty coffee shops. Its current market is highly competitive and with the entrance of more new players, the level of competition is expected to further intensify in the near future, which may result in price reductions. Starbucks competes with various manufacturers and distributors of coffee products, having substantially greater financial, marketing and distribution resources. The companys other competitors include specialty coffees sold through supermarkets, specialty retailers and a growing number of specialty coffee stores under the whole bean coffee segment. Besides, Starbucks whole bean coffees and its coffee beverages compete indirectly against all other coffees in the market. Starbucks Specialty operations face significant competition from established wholesale and mail order suppliers. The company's major competitors include Caribou Coffee Company, Inc., McDonald's Corporation, PepsiCo, Inc., The Procter & Gamble Company, Kraft Foods Inc., and Nestle USA, Inc. If the company is not able to maintain the product quality and consumer loyalty, this intense competition could reduce the sales volume of the company, thereby hampering its market position. Threat - Legal Proceedings Starbucks 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 District of New York against Starbucks Coffee Company for violating terms of the roast and ground coffee agreement. This is to stop Starbucks from proceeding as if the agreement has been terminated, when, in fact, the contract is still in force. In April 2012, Starbucks and Kraft exchanged expert reports regarding alleged damages on their affirmative claims. Starbucks claimed damages of up to $62.9m from the loss of sales resulting from Kraft's failure to use commercially reasonable efforts to market Starbucks coffee, plus attorney fees. Kraft's expert opined that the fair market value of the agreement was $1.9 billion. After applying a 35% premium and 9% interest, Kraft claimed damages of up to $2.9 billion, plus attorney fees. Starbucks presented evidence of material breaches on Kraft's part and sought nominal damages from Kraft for those breaches. Kraft presented evidence denying it had breached the parties' agreement and sought damages of $2.9 billion plus attorney fees. The decision from the arbitrator is expected in the first half of fiscal 2013. Any uncertain outcome of such litigation could affect the companys operating performance in upcoming years. Threat - Higher Commodity Costs The main ingredient in Starbucks products is coffee. Coffee price has been increasing at a higher pace over the years. According to the International Coffee Organization, Coffee price increased from 147.24 cents/pound in 2010 to 210.39 cents/pound in 2011. Higher commodity costs, mainly coffee, negatively impacted Starbucks operating income by approximately $214m, equivalent to approximately 160 basis points of impact on operating margin. Moreover, monthly average coffee price reached 188.90 cents/pound in January 2012, 159.07 cents/pound in July 2012, and 147.12 cents/pound, indicating huge fluctuation. Higher and fluctuating commodity costs could have an adverse effect over Starbucks business, operating results and financial condition.

NOTE:

Starbucks Corporation- Financial and Strategic Analysis Review

Reference Code: GDRT33172FSA Page 3

Starbucks Corporation
* Sector average represents top companies within the specified sector The above strategic analysis is based on in-house research and reflects the publishers opinion only

Starbucks Corporation- Financial and Strategic Analysis Review

Reference Code: GDRT33172FSA Page 4