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Starbucks Corporation Case Study

Essay by   •  February 27, 2012  •  Case Study  •  3,363 Words (14 Pages)  •  1,263 Views

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To: Mr. Harland Hodges, Ph.D.

From: Miles White

Date: 02/14/2012

Subject: Why Starbucks has been

In the following memo, I will determine whether or not Starbucks Corporation is being financially well managed by analyzing seven different financial indicators, three derived from the Income Statement and four derived from the Balance Sheet.

Income Statement Financial Indicators:

Total Revenue:

Revenue (In Thousands)

2-Oct-11 3-Oct-10 27-Sep-09

Total Revenue 11,700,400 10,707,400 9,774,600

Sales Growth 9.3% 9.5%

Percent of Merchandise Sales by Category

Beverage 62 63 64

Food 17 18 17

Whole Bean and Soluble Coffees 12 10 10

Other 9 9 9

Starbucks Corporation has seen almost a 20% growth in revenues since 20091. This growth can be attributed to many different factors, but the most influential of these are arguably the growth of markets and the introduction of new products.

Growth of Markets:

Starbucks is well underway in its mission to becoming a more globally recognized brand with its growth of current and new markets. In their first fiscal quarter of 2012 alone, Starbucks had opened 241 new stores, establishing over 500 stores in both mainland China and Latin America2. While stores operating in the United States still represent a majority of the revenue at 69%, International revenues grew to represent 22%, leaving 9% of revenues attributable to Consumer Packaged Goods.

In terms of revenue growth alone, all three of these segments have been incredibly successful and continue to expand. The United States saw the least growth, with an increase of 6% in total revenues, accredited to an increase in comparable store sales, an increase in transactions and an increase in average value per transaction. With the introduction of new food and beverage items and a redesigned loyalty program, Starbucks continues to expand their brand out to new customers and offer their American customers a better experience resulting in a greater customer loyalty. In addition, Starbucks' in the United States have seen a bit of cannibalization in the past (due to the abundance of stores located in certain urban areas) and Starbucks has been successful in curbing this cannibalization with the closing of almost 660 stores across the country, resulting in the mentioned increase of comparable store sales.

International revenue saw almost a 15% growth in revenues, largely attributed to foreign currency exchange with the weakening of the US Dollar and also to the opening of many new company-operated stores. With Starbuck's newly acquired deal to open stores in India, (through the support of Tata Global Beverages, one of India's largest coffee and tea suppliers) and their rapid growth in the China and Asia Pacific markets, Starbucks can expect to continue to see growth in International revenues if they can apply what they've learned here in the United States.

Lastly, Consumer Packaged Goods saw the largest growth in revenue with an impressive 22%. Starbucks had previously had a distribution agreement with Kraft (where Kraft would market, advertise and distribute all of Starbucks' packaged goods) and Starbucks has recently terminated this partnership in order to directly distribute and promote their packaged goods. This new direct-distribution model is largely responsible for this growth with the addition of newly released packaged goods that have proven to be successful. Starbucks is hoping to make their Consumer Packaged Goods into a billion dollar industry and if they continue to expand their distribution channels as they are doing (i.e. not just in grocery and department stores, but also major hotel brands and convenience stores), they could very well do so.

Introduction of New Products:

In terms of the introduction of new products, Starbucks continues to innovate and find ways to attract new customers. One of Starbucks' new "blueprints for profit," is to make Consumer Packaged Goods a much larger factor in total revenues. Starbucks is already showing signs of accomplishing this with the success of their VIA Ready Brew Coffee and the release of their K-Cup Packs (VIA Ready Brew allows for instant, fresh-tasting coffee if mixed with just a cup of water and K-Cups allow consumers to brew hot, single cups of coffee conveniently in their own home). The premium single cup coffee segment has seen a staggering 138% growth over the past year ending on January 1st, 2012, a figure that can seem very attractive to a coffee mogul such as Starbucks. If Starbucks can utilize their newly implemented direct-distribution model for packaged goods, they can easily become one of the leading suppliers of packaged teas and coffees in the country.

In addition to newly released Consumer Packaged Goods, Starbucks continues to expand their offerings to in-store consumers with the introduction of hot food and new coffee roasts. The introduction of their new Blonde Roast has been one of the most successful, a roast that appeals to lighter coffee drinkers, a market consisting of roughly 54 million consumers in the Americas alone. From their website, Starbucks stated that more than 40% of U.S. coffee drinkers prefer a lighter roast and more than 70% of total premium coffee sales in grocery are in the light roast category.

Cost of Goods Sold:

Cost of Revenue (In Thousands)

2-Oct-11 3-Oct-10 27-Sep-09

Cost of Revenue 4,949,300 4,458,600 4,324,900

COGS to Sales 42.3% 41.6% 44.2%

Cost of Sales (United States) 3,093,900 2,906,100

Cost of Sales (International) 1,259,800 1,078,200

Cost of Sales (Global Consumer Products) 492,500 384,900

Cost of Sales (Other) 103,100 89,400

In reference to Starbuck's Income Statement, it is clear that Starbucks' Cost of Revenue has increased

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