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Starbucks Case Study
- 1. Case 1 Starbucks: the coffee goes cold Benjamin Seigler & Mark Meyerson 1
- 2. Q1) How is Starbucks performing? Is Starbucks in dire straits? 2 Performanceindicators ROE Du Pont analysis ROA
- 3. 3 ROE = Net Income / Shareholder Equity
- 5. ROA = Net income / total Assets 5
- 6. 6 Other indicators: After reaching a peak of $40 in October 2006, Starbucks Share price declined by more than 75% over the next 2 years. Final quarter 2008 revenues showed net income was down by 70%. This was thefirst ever decline in quarterly revenues (down to 64.3 mill from 208.1 from Dec 30, 2007) The above announcement prompted a 33c decline in Starbuck’s share price to $9.33 During 2007, growth of same-store sales and operating profits slowed. From $1331.2 million in September 2007 to $1258.7 million in September 2008 Q1) How is Starbucks performing? Is Starbucks in dire straits?
- 7. Q2) 7 What are the sources of Starbucks’ declining performance? How far are Starbucks’ problems in February 2009 the inevitable consequences of the economic recession and to what extent are there other reasons for Starbucks’ declining performance
- 8. Trend Analysis (i) 8 Return on Equity
- 9. Trend Analysis (ii) 9 Net income 2005-2008
- 10. Trend Analysis (iii) 10 Financial Leverage 2005-2008
- 11. Trend Analysis (iv) 11 Return On Assets
- 12. Conclusions 12 Sources of declining Performance 1. Declining ‘Net margin ’ (slides 4 & 9) 2. Declining financial leverage (impaired ability to enhance profits) 2. Aggresive U.S expansion 3. Competition from above and below, (changing market) Are these problems a result of the recession? -competitors not following the same trends. -Management decisions such as Expansion Policy, are internal Other Possible Reasons for Deteriorating performance -Bad management decisions – Expansion, concentration Policy - Raw materials too highly priced, charging high prices, with low net margin? -poorly differentiated from competitors.
- 13. Q3) 13 What is Schultz’s strategy for restoring Starbucks’ financial performance? Do you agree with the measures that Schultz is taking? What should Schultz be doing differently in your opinion?
- 14. 14 Schultz’s Strategy: What they planned to do (from statements by Schultz and Alstead) More efficient operations Preserving fundamental strengths and values of Starbucks brand Provide value and innovation Scale cost structure Meet current business trends Position the company to drive margin expansion when the environment improves. What they actually did: 1. Retrenchment measures 2. Rediscover & Revitalise the Starbucks experience for customers 3. Emphasis on social responsibility
- 16. Make better use of assets, increase ROA.Starbucks has more competitors, needs new ways to differentiate itself. Use more debt financing to enhance profits (financial leverage)
Hinweis der Redaktion
- -15 slides, -containing no more than 30 words per slide. -Comments of up to 10 lines can be added in the Notes area, underneath the slide. -Power Point files will be e-mailed two days prior to the lecture date (before midnight) to the lecturer and to the teaching assistant. On the following morning, before 8:00 a.m., some teams will be asked (by return email) to present specific parts of their analysis in class.
- -These three measures are used to analyse the performance or operating efficiency of a company. -This is because they measure how well the company is utilising equity and assets to generate profit-Du Pont is able to pinpoint where exactly the problems are occurring.
- -ROE measures the success of the company in using shareholders capitol to generate profits.-This table shows Starbucks ROE in the years ended August, from 2005 to 2008. Looking at these measures we can understand how well Starbucks is making profitable their capitol.-Starbucks ROE was gradually increasing from 2005 – 2007, then it showed a steep decline in 2008 to an ROE, below that of even 2005. This is a sharp fall in ROE, suggesting profit’s and Starbuck’s ability to generate profits has fallen sharply in 2008 to a record 3 year low.-This suggests Starbucks is having continuing difficulty in generating profits from its equity.
- -In order to understand where Starbucks is failing, we use Du Pont analysis. Du Pont allows us to Disaggregate financial ratios into measures reflecting operational efficiency and capital use efficiency -As we see, One of the main cause of the decreasing ROE in 2008 is the decrease in Net Margin. If the net Margin decreases, this means that every sale brings in less money, which results in a lower ROE. As we see, the number of sales have actually increased in 2008, the net income from each sale is what has lowered significantly.-Starbucks’ asset turnover is relatively stable and healthy, rising in 2008. This shows us the level of sales Starbucks generates with respect to their assets.Starbucks’s increasing financial leverage also dropped in 2008, which was also a cause of decreasing ROE in 2008. When financial leverage decreases, this means that the firm is taking on less debt, although this means less risk, it also means less ability to enhance profits. Thus we see that Starbuck’s is in dire straights as even with increasing sales, less profit is generated. Something needs to be done regarding their sales model. Furthermore with less financial leverage, they will have less ability to turn generate the increasing profits they need to recover.
- ROA tells us how well a company is doing with the assets that it has-We see that Starbucks from 2005 to 2008 has had a declining ROA, which dropped significantly in 2008. Suggesting that for the amount of Assets the company has, they are being less and less utilised to their full ability, reflecting an operational deficiency which will be difficult to overcome
- -ROE represents how well a company is using shareholder equity to make profits. This graph shows the ROE of Starbucks, as well as industry competitors from 2005 to 2008. Hence it shows how well, Starbucks and her competitors are making profitable their capitol-looking at the competitors McDonalds ROE had a smaller fall in the end of 2007, but then regained itself in 2008 to a 3 year high. It’s important to note that McDonalds is in a slightly different Market to Starbucks, since they sell cheaper coffee-Caribou coffee which has had a negative ROE, has had an increasingly worse ROE until 2008, where it’s ROE (although still negative) had a more positive result. -Therefore, we see a trend both of Caribou and McDonalds made strong recoveries beginning in 2008. Starbucks shows a different trend with a drop in ROE, towards the end of 07, continuing into 08 without recovery. -Looking at competitors, this suggests that Starbuck’s decline in ROE has little to do with the environment. Their ability to generate profit seems to be an internal problem
- -Net income is one of the factors of ROE. As we saw earlier (slide 4) this is one of the causes in the drop in Starbucks ROE. And as we see here, the graph of net income for Starbucks is similar to the graph of ROE for Starbucks. -looking now at competitors, we see that for the year beginning 07, everyone’s net income dropped. However from September ‘07 threseemed to be improvements for both Caribou and McDonalds, whereas Starbucks showed continual negative net income trend throughout 2007 & 2008. -Thus, it is possible to say that Starbucks’ problem is an internal one evidenced by it’s competitors better performance in the same periods.
- -looking at competitors we see that coming into 2008, everyone except Starbucks is increasing their financial leverage. This means they are taking on more debt, and although this is more risky, they are still positioning themselves in a better position to increase profits.Starbucks on the other hand has decreasing financial leverage.
- ROA tells us how well a company is using the assets it has to generate profits.-In isolation we saw (slide 5) that Starbucks has a declining ROA in 2008.Caribou coffee, one of Starbucks’ main competitors, also reflects a similar pattern to Starbucks, however in 2008, they actually made a recovery on and increased their ROA significantly, suggesting better operational efficiency in the face of the financial recession. -McDonalds, although not as close a competitor, also showed increasingly strong ROA from 2005 to 2008. -this further suggests that Starbucks problems are internal and it will be difficult for them to reverse the situation that they are in. We believe Starbucks is in dire straits as a result of its internal problem. The data indicates that when the world economy recovers, Starbucks’ position may not recover with it. This reveals a more fundamental and damaging problem as it is no longer about weathering a storm, but rather the company itself is in dire straits.
- Sources of declining performance-Declining Net Margin – Each sale is not profitable enough, cost structure is not sufficient-Aggressive expansion - resulting in excessive store density in metropolitan areas. Also continued expansion significantly raises cost, (e.g. restructuring costs due to closure of 61 company operated stores in Australia P27 and other reasons) - Competition – Below Fast food chains adding gourmet coffee (E.g. McDonaldsandDunkin Donuts), dilute theMarket. Above – Starbucks educates Americans about coffe which in turn allows them to pursuebetter quality European coffees such as Illyand LavazzaRecession-competitors following differenttrends – e.g.- McDonalds ROE regained in 2008 to 3 year high (slide 2) and has had an increasingly strong ROA from 2005 to 2008 (slide 4) -Carouiee had gain in ROE and in ROA in 2008 (slide 2 & 4)
- 1.-300 store closures, 6700 job losses, $500 million in operating cost savings for 2009. -Reduction in new openings of company owned stores from 270 to 170-Schultz cut his own salary drastically-3 corporate Jets up for sale2.-Return to hand made, quality coffee-Revising Starbucks food menu Eliminating non-core products -Meeting with employees to reinforceand reignite drive and enthusiasm. Raising awareness of the issues with staff and managersin order to empower them.3. -Community projects ranging from repainting damaged houses to cleaning up neighbourhoods-Starbucks shared planet (p16)-Increased commitment to small scale coffee famers by doubling Starbucks’ purchases of fair trade Certified coffee in 2009-Partnership with Bono and the global fund to donate 5 cents from certain sales to support aids programs in Africa.
- -Too long term Creating a better image may eventually give the company a competitive advantage and consumers today are concerned with these issues. However, this will take a significant amount of time, and Starbucks’ problems are very pressing and require more immediate attention. A more short term approach is required to boost shareholder confidence and halt stock price from dropping. -Short term profits Schultz’s revitalisation is focusing in going back to the Starbucks brand. Ceasing to sell other foods that mask the coffee aroma. Yet these products have a lower cost of sales and therefore increase net income, which is the more immediate issue which requires attention. Perhaps this could be a long term strategy. -Differentiation A return to higher quality coffee may not be the answer, there are already European coffee houses of superior quality. Starbucks needs to find an different competitive advantage to truly differentiate itself from competitors.