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Starbucks Case page 69

Part a:

Porter͛s five forces framework applied to Starbucks

Buyer Power: Starbucks is specialty coffee retail store. Cup of coffee is small expenditure for the

consumers. The consumers are less sensitive to small dollar amounts and they carry forward brandloyalty. So, the buyer power is low.

Supplier Power: The principal inputs are coffee beans, dairy products and paper and plastic products.

But all these products are ready available in the market. Starbucks buys coffee from the fixed-price

purchase contracts with various customers around the world. The paper and plastic products are

purchased from the local commodity markets. These paper and plastic resin cost varies according to the

market. Thus, Supplier power is relatively low.

Rivalry Among Existing Firms: The advantage of Starbucks is its brand name. However, many small

companies are evolving with the premium coffee. And Mc Donald͛s has started to expand its Mc Café

shops which serve premium coffee. Thus, rivalry is relatively high.

Threat of New Entrants: The cost of equipment, purchasing coffee beans in the market and other

necessary accessories is economical. Even though, Starbucks is huge company it faces threat of new

entrants. Thus, threat of new entrants is high.

Threat of Substitutes: The main threat to Starbucks is soft drink and alcoholic industry which are readily

available in the market. In order to enter into the market of substitutes, Starbucks had formed

partnerships to produce and distribute bottled Frappuccino and Doubleshot drinks with PepsiCo and

premium ice creams with Dreyer͛s Grand Ice Cream, Inc. Moreover, consumers have brand loyalty and

they cannot change their buying habits. So, the threat of substitutes is moderately low.

The threat of substitutes, buyer power and supplier power is low indicating profit for the store.

But competition is increasing from emerging small and large companies implying less profitability. Fromthe above analysis we see that the profitability is moderately high for specialty coffee retail store.

Part b:

Strategy of Starbucks

Starbucks is specialty coffee retail store, it differentiates itself from others by maintaining brand and

premium commodities.

Secondly, Starbucks develops new products regularly which promote its sales.

Thirdly, Starbucks is expanding globally to grow its sales.

Finally, it has also entered into foodservice market to diversify its risk.

Create value for its customers

Starbucks maintains its premium commodities which gains brand loyalty from the customers.

Critical risk and success factors for Starbucks

Part c:

Cash: It is physical form of money. It includes bank balance and marketable securities.

Cash Equivalents: This is cash which can be converted into liquid cash within three months. Usually

highly safe investments such as treasury bills and money market funds are considered as cash

equivalents.

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Part d:

Debt and Equity securities are classified based on the held-to maturity. The securities which can be

expected within one year of the balance sheet date are placed under current assets(Marketable

Securities) and long term debt and equity securities are placed under noncurrent assets (investment

securities) according to management͛s intent and ability.

Part e:

Accounts receivable is the amount of money expected to be collected in the near future. If some

customers do not pay or not satisfied with the product, the amount ends in bad debt. So, the companies

usually take a percentage of accounts receivable to be uncollectible. This allowed percentage amount is

entered under net of allowance for uncollectible account.

Incomplete

Part f:

Accumulated Depreciation: It is the depreciation amounted for all the years the asset is in service. For

example if an asset value of $500 which will last for 5 years is depreciated by straight line method each

year it is $100. For the year 2, accumulated depreciation will be $200.Depreciation Expense: It is the depreciation amounted for current year the asset is in service. For

example if an asset value of $500 which will last for 5 years is depreciated by straight line method each

year it is $100. For the year 2, accumulated depreciation will be $100.

Part g:

The deferred income taxes appear on current asset when it will reduce the income tax expense for that

particular period. It happens when the company faces losses on the carry forward income. Since this

amount is not expected in future it is under current assets.

For example, if the company has to pay income tax on $10,000 than loss occurs of worth $4000. The

company has to pay income tax only on $6000 instead of $10,000.

The deferred income tax will come under liability if the company has to pay income tax for the incomegenerated in the previous years. Usually installment sale goods will give effect to deferred tax.

Part h:

Accumulated Other Comprehensive Income: Unrealized gains and losses are accounted for this section.

The net income refers to the income which has already been realized. When the unrealized gains and

losses become realized then the amount is considered under net income.

Part i:

Company-operated stores: The growth in revenue earned through these retail stores is due to opening

of new stores and also increase in sales from the store which are open at least for 2 years. As the

company regularly introduces its new products the growth rate is maintained.

Licensing: The company has increased its licensed store tremendously from 363 to 3354 stores. This

illustrates its growth in revenue.

Food service: Further, the company products are made available in food service industry (20,000

grocery stores) all over the US. This also boosted its revenue growth.

Part j:

Cost of Sales: The costs incurred while due to purchasing of goods and manufacturing the finished

products. This includes purchasing of green coffee beans, dairy products etc and their blending cost.

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Occupancy costs: The cost incurred towards rent, property tax, real estate tax of the place.

Store operating Expenses: The costs incurred while maintain the stores. For example, utility bills,

salaries of the employees.

Part k:

Income from equity investees increased from 38.4million to 60.7million. This huge increase amounts toits gain in profit in year 4. The partnerships to produce and distribute bottled Frappucino and

Doubleshot drinks with pepsico and premium ice creams with Dreyer͛s Grand Ice cream, Inc are a

success. This also poses that Startbucks coffee is accepted in European continent.

Part l:

Part m:

Part n:

Part o:

Part p:

Part q:

Part r:

Part s:

Starbucks has good sales growth by the end of year 4 majorly in U.S. It has also extended its market

globally which is also showing good results. The acquisition of common stock is one of the main reason

of high cash flows. Other reasons for more retained earnings would be less reinvestment or more

treasury stock.

Part t:

The company is investing in property, plant, and equipment to expand world widely. In fiscal year 4

alone, Starbucks has opened 1,344 new store locations. Five years ago it had only 363 licensed stores

but now it has 3,354 stores. Moreover, the Starbucks is operating more than 1,100 stores in the Asia-

Pacific region. This new opened stores illustrate that the company is spending its money in property and

equipment.

Part u:

The percentage allocation in property, plant and equipment is less when compared to fiscal year 2. This

is majorly because the sales have increased. This boasts success of Starbucks in European and Asia-

Pacific regions.

Part v:

Additional paid-in capital has decreased explains that the shareholders equity has decreased. It is the

capital the company posses when its share prices in market go up when it issues the stock.

Part w:

The acquisition of common stock explains that the company is buying other company͛s shares from the

market. This is increasing its retained earnings while the market prices of shares are not so rewarding.

Hence, the company is ending up in low shareholder equity proportion.

Part x:

The revenue mix has not changed much. The company strategy was to expand globally with new

business model through new channel development, new products. The company has got saturated in

the U.S. market and needs lot of growth internationally.

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Part y:

The revenues earned increased significantly as Starbucks has good sales growth. The company also had

good income from equity investees. These two explain the increase in net income.

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