netrashetty
Netra Shetty
Starbucks Corporation (NASDAQ: SBUX) is an international coffee and coffeehouse chain based in Seattle, Washington.
Starbucks is the largest coffeehouse company in the world,[2] with over 16,858 stores in 50 countries, including over 11,000 in the United States, over 1000 in Canada, and over 700 in the UK.[1][3]
Starbucks sells drip brewed coffee, espresso-based hot drinks, other hot and cold drinks, coffee beans, salads, hot and cold sandwiches and panini, pastries, snacks, and items such as mugs and tumblers.
Through the Starbucks Entertainment division and Hear Music brand, the company also markets books, music, and film. Many of the company's products are seasonal or specific to the locality of the store. Starbucks-brand ice cream and coffee are also offered at grocery stores.
From Starbucks' founding in later forms in Seattle as a local coffee bean roaster and retailer, the company has expanded rapidly. In the 1990s, Starbucks was opening a new store every workday, a pace that continued into the 2000s. The first store outside the United States or Canada opened in the mid-'90s, and overseas stores now constitute almost one third of Starbucks' stores.[4] The company planned to open a net of 900 new stores outside of the United States in 2009,[5] but has announced 900 store closures in the United States since 2008.
Starbucks has been a target of protests on issues such as fair-trade policies, labor relations, environmental impact, political views, and anti-competitive practices.
Starbucks Corporation (NYSE: SBUX) is an international coffeehouse that has built one of the world's most powerful and recognizable brands of high-quality coffee and the unique "Starbucks Experience."[1] In fiscal 2010, the company's stores (retailer and licensed) generated US$ 10.7 billion in revenue. [2]
Starbucks first revolutionized the coffeehouse industry by marketing expensive, high-quality coffee as well as a "third place" between work and home - a warm, clean, and inviting environment where customers go to escape the chaos of daily life. [3] However, while the company faced significant growth in the early 2000s, Starbucks faces significant headwinds as its stores face saturation in the domestic market. A shift in consumer spending triggered by the global recession has also driven consumers to less costly competitors such as McDonald's.
Business Overview
Source:Company Reports
Starbucks Corporation generates revenue both from its company-operated retail stores and from specialty operations.
Through its "company-operated retail" coffee houses, Starbucks sells high-quality whole bean coffee, freshly brewed coffee, premium teas, a variety of cold blended beverages, various food/pastry items, and coffee/beverage related equipment and accessories, as well as a line of CDs. In 2010, Starbucks operated 11,131 retail stores in North America and 5,727 stores internationally.
Third Place Experience
Contents
1 Business Overview
1.1 Third Place Experience
1.2 Specialty Operations
1.3 Quarterly/Annual Business Financials
1.3.1 FY2009 Annual Earnings Summary
1.3.2 Q1 FY2010 Earnings Summary
1.3.3 Q2 FY2010 Earnings Summary
1.3.4 Q3 FY2010 Earnings Summary
1.3.5 Q4 FY2010 Earnings Summary
1.3.6 Q1 FY2011 Earnings Summary
2 Key Trends and Forces
2.1 As a Luxury Product, Starbucks' Line of Business Relies Heavily on the Health of Global Economy
2.2 As Starbucks Continues to Saturate US Markets, SBUX Faces both Expansion and Cannibalization risk
2.3 Starbucks is Battered by Small and Large Enterprise Market Entries into the Lucrative Coffee Market
2.4 SBUX's Target Demographics are Yuppies and Teens who are More Willing to Spend for Personal Image
3 Competition
4 Appendix
5 References
Starbucks’ success is due in large part to the trendsetting triumph of its coffeehouses as an informal and convenient "third place" outside of home and work, ideal both for informal meetings and a quiet moment away from the hubbub of daily life. Wi-fi internet access in all stores also makes it a place where customers can work. Book and music events also take place at Starbucks, in accordance with the company's goal of making each location a community center of sorts to garner the loyalty of local customers. [4]
Specialty Operations
Starbucks’ specialty operations segment tries to develop the company's brand through third parties outside the traditional coffeehouse. Specialty retail operations accounted for 16% of Starbucks’ total revenue in FY2010. [5]
Licensed Stores: Located in places like airports and supermarkets, licensed stores generate licensing fees and royalties as well as revenue from Starbucks’ coffee, tea, and CDs resold in the licensed locations. In 2010, Starbucks had 4,424 licensed stores in North America and 3,601 abroad.[6]
Packaged Tea and Coffee: Starbucks sells its packaged coffee and tea as a retail product at various food stores.
Branded Products: Starbucks has partnerships with Pepsi and Dreyer's to develop and distribute ready-to-drink beverages and ice creams.
Foodservices Operations: Starbucks sells its coffee to foodservice operators like restaurants, offices, hotels, and cafes (including the Barnes and Noble Cafes) that operate under different licensing contracts.
Other: Starbucks also has entertainment business relationships with Hear Music, Satellite XM Radio (24-hour Starbucks Hear Music digital music channel), and provides wireless broadband Internet service in company-operated retail stores in U.S and Canada. Starbucks also has a credit card agreement with Chase.
Quarterly/Annual Business Financials
FY2009 Annual Earnings Summary
Announcing restructuring in January 2009, Starbucks closed nearly 800 company-owned Starbucks in the U.S. and 100 abroad by the end of September 2009. [7] These store cuts have had a positive effect on Starbucks profit, leading to Q3 results that beat analyst expectations. As a result, Starbucks shares jumped 10% after the earnings news.[8]
Q1 FY2010 Earnings Summary
In fiscal Q1 2010 (ended December 27, 2009), Starbucks earned $2.7 billion in revenues, a 4% increase over the same quarter of fiscal 2009. Comparable store sales increased 4% driven by 1% increase in traffic and a 4% increase in average ticket. Growth was especially strong in Starbucks’ international segment, which expanded its revenues by 19% (for a total of $561 million), growing from 18% to 21% of Starbucks earnings. At the same time, Starbucks saw great growth in its operating margins. Consolidated margins grew to 13.0% from 4.5% in Q1 FY09. U.S. operating margins grew to 17.3% from 5.8%, while international operating margins expanded to 7.4% from 2.6%. [9]
Q2 FY2010 Earnings Summary
In fiscal Q2 2010, Starbucks posted $217.3 million worth of net earnings, an increase compared to $25.0 million in Q2 FY2009.[10] This translates to $0.28 EPS in Q2 FY2010 compared to $0.03 EPS in Q2 FY2009.[11] Further, net revenues increased 9% to $2.5 billion and domestic comparable store sales increased 7% driven by a 3% increase in traffic. Operating margin also improved to 13.4% from 1.8% in Q2 FY2009.[12]
Starbucks attributes positive Q2 FY2010 results from the impact of innovation from new products such as the Starbucks VIA, the opening of new stores in Asia, Europe and US, as well as the transition from in-store coffee sales to packaged Starbucks goods to make its products more available at home. These factors, combined with the effects of a recovering economy, brought about strong revenue growth and lowered costs.
Q3 FY2010 Earnings Summary
Starbucks posted $207.9 million of profits, a 37% increase compared to Q3 FY2009.[13] Sales in the third quarter also increased to $2.61 billion, a 8.7% increase compared to same quarter FY2009.[14] Earnings were in line with analyst estimates. The increase in bottom-line and top-line can be attributed to the combination of increased sales for the bottled Frappuccino and the launch of the new Frappuccino in May, with sales at Starbucks stores-open-more-than-one-year rose 9% in the third quarter, beating analyst estimates of 7%.[15]
However, as a direct result of the product launch, marketing costs represented 2.5% of sales, a more than 50 basis point increase compared to less than 2% same quarter FY2009.[16] Further, Starbucks have been dealing with high dairy costs as milk-shakelike drinks bring more than 4$2 billion a year in sales (20% of total revenue); the total implication of milk related expenses will take an approximate four cent per share decrease for earnings in FY2011.[17]
Q4 FY2010 Earnings Summary
Starbucks posted earnings of 399.3 million or $0.37 EPS, up 86% compared to $199.4 million from same quarter last year. This figure beat analyst estimates of $0.32 EPS.[18] Sales also rose 17% to 2.8 billion as comparable store sales added 8% in domestic markets.[19]
This was the fourth straight quarter of positive growth for Starbuks and as a result has raised outlook for FY2011 earnings to a range of $1.41 - $1.47.[20] International same store sales were up 7% as the company plans to add 500 new domestic stores and 400 new international stores in FY2011.[21] Despite a positive outlook, commodity costs coming especially from rising coffee costs are now expected to have a large negative impact of $0.08 to $0.10 EPS on the bottom line. As of current, year-to-date coffee futures are up 51%.[22]
Q1 FY2011 Earnings Summary
Starbucks posted earnings of $346.6 million, or $0.45 EPS, for the first quarter of fiscal 2011, a 44% increase compared to $241.5 million, or $0.32 EPS, same quarter last year.[23] This figure beat analyst average estimates of $0.39 EPS. Further, SBUX's revenues rose nearly 8% to $3 billion, compared to analyst consensus estimates of $2.93 billion.[24]
Starbucks attributes more customers and more spending to be the attributable factor of its increase, primarily due to SBUX's new product lineup and in-store experience, the company also improved operating margins that offset the impact of this quarter's unusually high coffee costs. Sales at stores open at least one year showed a rise of 7%, which was driven by a 5% boost in traffic and 2% increase in average transaction.[25] This figure was 8% in the domestic U.S. markets and 5% internationally. Despite rising coffee sales though, SBUX does not plan to raise prices to cover the extra expense, though rising prices for ingredients from not only coffee and milk but also beef and bread are squeezing all restaurant operators.[26]
Key Trends and Forces
As a Luxury Product, Starbucks' Line of Business Relies Heavily on the Health of Global Economy
Starbucks coffee is a premium coffee and, as such, a luxury good. The company relies on consumer discretionary spending to drive sales. Consequently, a major economic change can have a large impact on revenues. Throughout the global economic recession of 2008-2009, for example, potential customers have less money and are more likely to forgo a $4 specialty coffee in favor of a cheaper alternative. Revenues in Q1 2009 were down 7% to $2.6 billion from Q1 2008 as consumers pinched their pockets. Until the economy recovers, Starbucks' bottom line may continue to be negatively affected.
As Starbucks Continues to Saturate US Markets, SBUX Faces both Expansion and Cannibalization risk
Starbucks currently has over 11,500 stores in the United States alone. Over the past two years, Starbucks has expanded aggressively, adding 3,500 stores, often within eyesight of existing stores. Until recently, the company has been blessed with extraordinary growth in transactions per store (traffic) and same store sales, which has consistently been in the high single to low double-digits. The trend reversed itself, however, in Q1 FY2009. A conference call with Starbucks CFO Troy Alstead revealed an expected drop of 9% in the statistic. [27] Much of this may be attributable to the US economic slowdown, but nvestors fear that these weak growth figures could indicate saturation in the U.S. market. Regardless, Starbucks aims to double its US locations to 20,000 and eventually open 40,000 locations worldwide. [28] Starbucks closed 600 underperforming locations in 2008. This seems to be an admission that cannibalization seems to be a major problem. [29]
As the global economy continues its recovery, Starbucks is planning to open an average of more than one store each day. In particularly, SBUX plans to open 500 stores in FY2010, 400 of which will be located outside of the US. China is SBUX's largest target, as it is expected to be the biggest growth market over the next two years. As such, Starbucks continues to close domestic stores that have already saturated the market, and replacing them with international stores abroad.[30]
Starbucks is Battered by Small and Large Enterprise Market Entries into the Lucrative Coffee Market
Starbucks road to fame was marked by a move into a small coffee drinker market over one decade ago, but as Starbucks starts to hit market saturation, large and small enterprises alike are starting to enter to steal market share.
For example in 2008, McDonald's introduced the McCafe to select stores, where customers can purchase espressos and cappuccinos. These drinks, which are priced in the $2-4 range, represent McDonald's foray into the high-margin caffeinated beverages market, currently dominated by Starbucks.[31]
Analysts have taken notice of this threat and expect McCafe to have a negative impact on Starbucks' same-store sales.[32] In a response to the McDonald's challenge Starbucks is teaming up with Burger King, which has announced that by September 2010 it would begin selling Starbucks' Seattle's Best Coffee in about 7,250 U.S. outlets. The new drinks will sell for $1 to $2.79 and will replace Burger King's BK Joe brew, which was introduced in 2005. [33]
The resulting "coffee war" amongst the food giants began to tear away at the premium model which Starbucks used to hold so steadfast. In response, these large companies specifically McDonald's began a large ad campaign to orient customers away from Starbucks and to cheaper alternatives. This bidding war allowed small-time coffee chains such as Green Mountain Coffee Roasters (GMCR) and Caribou Coffee Company (CBOU) to steal market share as unique quality coffees, the very type of business model that Starbucks attempted to implement in the early days.[34] However, as commodity prices for coffee continue to rise, it is uncertain whether these small chains will be able to survive against large food giants which have the capacity and experience to hedge effectively.
SBUX's Target Demographics are Yuppies and Teens who are More Willing to Spend for Personal Image
Starbucks targets a higher-income crowd of the young and college-educated, a group that tends toward higher luxury-consumption levels. Although this focus allows the company to maintain high profit margins, it also puts Starbucks at greater risk from a shift in consumer spending habits. If Starbucks chooses to expand further into coffee for home consumption, it could find a new consumer base in baby boomers (the largest demographic, 26% of the population), who are more likely to drink their coffee at home but who are more price sensitive than "yuppies" (young urban professionals). Teen coffee drinkers are also important to Starbucks--many believe that this segment will be the main driver of domestic specialty coffee consumption in the next few years.
Competition
Starbucks' close competitors include other specialty coffee shops, doughnut shops, and restaurants.
Starbucks holds a dominant position in the specialty coffeehouse market and has no single clear rival in the sector. (Its closest specialty coffeehouse competitor is Caribou Coffee, with 415 stores in the US--less than 5% of Starbucks' 11,000-plus). Its most intense specialty coffeehouse competition is dispersed among the thousands of independent or small-chain coffee shops around the nation and the world.
More intense competition comes from perennial heavy hitter McDonald's (MCD), which became a Starbucks rival when it upgraded its coffee in 2006. McDonald's has 14,000 stores in the U.S. and caters to a wider demographic than Starbucks; it also enjoys increased traffic from its variety of well-established breakfast options. McDonald's coffee sales increased 15% in 2006. In January 2008, McDonald's made yet another aggressive foray in the battle for high-end coffee drinkers, announcing that it would install coffee bars in all 14,000 of its U.S. locations. Aggressive marketing campaigns have also emphasized the large cost differential. That being said, there may be enough room for McDonald's and Starbucks to coexist. It should also be noted that McDonald's brew Seattle's Best brand coffee, a brand owned by Starbucks.
The National Coffee Association estimates that the US coffee market will reach $29 billion in 2011 [35], and the markets the two competitors target are different. The former aims at the cheaper coffee to go, whereas the latter aims at providing a premium experience for a luxury price. McDonald's larger retail footprint may overlap more with Starbucks' core markets, but their stark differences as stores are reflective of the general differences between their core customers.
Privately owned Dunkin Donuts is another major competitor, with nearly 5,000 stores in the U.S. Although Dunkin' Donuts' retail footprint also overlaps largely with that of Starbucks, their customer experience is much more similar to the coffee-to-go model rather than the "third place to work and relax" model. Consequently, they are likely to compete more directly with McDonald's than with Starbucks.
The table below shows fiscal 2009 data for the largest publicly traded food service competitors by revenues. Subway and Dunkin' Donuts, also a major players, are privately owned.
Company Revenues (M) Net Income (M) Net Margin Restaurants Franchised %
McDonald's (MCD) $22,745 $4,551 20.0% 32,478 81%
Yum! Brands (YUM) $10,836 $1,083 10.0% 37,000
Starbuck’s (SBUX) $9,775 $391 4.0% 16,635 0%
Darden Restaurants (DRI) $7,218 $372 5.2% 1,773
Brinker International (EAT) $3,621 $79 2.2% 1,689 40%
Wendy's International (WEN) $3,581 $4 0.1% 6,451 80%
Burger King Holdings (BKC) $2,537 $200 7.9% 11,925 88%
Jack in the Box (JACK) $2,471 $131 5.3% 2,212 46%
CKE Restaurants (CKR) $1,419 $48 3.4% 3,141 71%
Domino's Pizza (DPZ) $1,404 $80 5.7% 9,339 91%
Panera Bread Company (PNRA) $1,353 $87 6.4% 1,380 58%
Data from company FY 2009 annual reports (CKE data from FY annual, ended January 31, 2010).
Starbucks is the largest coffeehouse company in the world,[2] with over 16,858 stores in 50 countries, including over 11,000 in the United States, over 1000 in Canada, and over 700 in the UK.[1][3]
Starbucks sells drip brewed coffee, espresso-based hot drinks, other hot and cold drinks, coffee beans, salads, hot and cold sandwiches and panini, pastries, snacks, and items such as mugs and tumblers.
Through the Starbucks Entertainment division and Hear Music brand, the company also markets books, music, and film. Many of the company's products are seasonal or specific to the locality of the store. Starbucks-brand ice cream and coffee are also offered at grocery stores.
From Starbucks' founding in later forms in Seattle as a local coffee bean roaster and retailer, the company has expanded rapidly. In the 1990s, Starbucks was opening a new store every workday, a pace that continued into the 2000s. The first store outside the United States or Canada opened in the mid-'90s, and overseas stores now constitute almost one third of Starbucks' stores.[4] The company planned to open a net of 900 new stores outside of the United States in 2009,[5] but has announced 900 store closures in the United States since 2008.
Starbucks has been a target of protests on issues such as fair-trade policies, labor relations, environmental impact, political views, and anti-competitive practices.
Starbucks Corporation (NYSE: SBUX) is an international coffeehouse that has built one of the world's most powerful and recognizable brands of high-quality coffee and the unique "Starbucks Experience."[1] In fiscal 2010, the company's stores (retailer and licensed) generated US$ 10.7 billion in revenue. [2]
Starbucks first revolutionized the coffeehouse industry by marketing expensive, high-quality coffee as well as a "third place" between work and home - a warm, clean, and inviting environment where customers go to escape the chaos of daily life. [3] However, while the company faced significant growth in the early 2000s, Starbucks faces significant headwinds as its stores face saturation in the domestic market. A shift in consumer spending triggered by the global recession has also driven consumers to less costly competitors such as McDonald's.
Business Overview
Source:Company Reports
Starbucks Corporation generates revenue both from its company-operated retail stores and from specialty operations.
Through its "company-operated retail" coffee houses, Starbucks sells high-quality whole bean coffee, freshly brewed coffee, premium teas, a variety of cold blended beverages, various food/pastry items, and coffee/beverage related equipment and accessories, as well as a line of CDs. In 2010, Starbucks operated 11,131 retail stores in North America and 5,727 stores internationally.
Third Place Experience
Contents
1 Business Overview
1.1 Third Place Experience
1.2 Specialty Operations
1.3 Quarterly/Annual Business Financials
1.3.1 FY2009 Annual Earnings Summary
1.3.2 Q1 FY2010 Earnings Summary
1.3.3 Q2 FY2010 Earnings Summary
1.3.4 Q3 FY2010 Earnings Summary
1.3.5 Q4 FY2010 Earnings Summary
1.3.6 Q1 FY2011 Earnings Summary
2 Key Trends and Forces
2.1 As a Luxury Product, Starbucks' Line of Business Relies Heavily on the Health of Global Economy
2.2 As Starbucks Continues to Saturate US Markets, SBUX Faces both Expansion and Cannibalization risk
2.3 Starbucks is Battered by Small and Large Enterprise Market Entries into the Lucrative Coffee Market
2.4 SBUX's Target Demographics are Yuppies and Teens who are More Willing to Spend for Personal Image
3 Competition
4 Appendix
5 References
Starbucks’ success is due in large part to the trendsetting triumph of its coffeehouses as an informal and convenient "third place" outside of home and work, ideal both for informal meetings and a quiet moment away from the hubbub of daily life. Wi-fi internet access in all stores also makes it a place where customers can work. Book and music events also take place at Starbucks, in accordance with the company's goal of making each location a community center of sorts to garner the loyalty of local customers. [4]
Specialty Operations
Starbucks’ specialty operations segment tries to develop the company's brand through third parties outside the traditional coffeehouse. Specialty retail operations accounted for 16% of Starbucks’ total revenue in FY2010. [5]
Licensed Stores: Located in places like airports and supermarkets, licensed stores generate licensing fees and royalties as well as revenue from Starbucks’ coffee, tea, and CDs resold in the licensed locations. In 2010, Starbucks had 4,424 licensed stores in North America and 3,601 abroad.[6]
Packaged Tea and Coffee: Starbucks sells its packaged coffee and tea as a retail product at various food stores.
Branded Products: Starbucks has partnerships with Pepsi and Dreyer's to develop and distribute ready-to-drink beverages and ice creams.
Foodservices Operations: Starbucks sells its coffee to foodservice operators like restaurants, offices, hotels, and cafes (including the Barnes and Noble Cafes) that operate under different licensing contracts.
Other: Starbucks also has entertainment business relationships with Hear Music, Satellite XM Radio (24-hour Starbucks Hear Music digital music channel), and provides wireless broadband Internet service in company-operated retail stores in U.S and Canada. Starbucks also has a credit card agreement with Chase.
Quarterly/Annual Business Financials
FY2009 Annual Earnings Summary
Announcing restructuring in January 2009, Starbucks closed nearly 800 company-owned Starbucks in the U.S. and 100 abroad by the end of September 2009. [7] These store cuts have had a positive effect on Starbucks profit, leading to Q3 results that beat analyst expectations. As a result, Starbucks shares jumped 10% after the earnings news.[8]
Q1 FY2010 Earnings Summary
In fiscal Q1 2010 (ended December 27, 2009), Starbucks earned $2.7 billion in revenues, a 4% increase over the same quarter of fiscal 2009. Comparable store sales increased 4% driven by 1% increase in traffic and a 4% increase in average ticket. Growth was especially strong in Starbucks’ international segment, which expanded its revenues by 19% (for a total of $561 million), growing from 18% to 21% of Starbucks earnings. At the same time, Starbucks saw great growth in its operating margins. Consolidated margins grew to 13.0% from 4.5% in Q1 FY09. U.S. operating margins grew to 17.3% from 5.8%, while international operating margins expanded to 7.4% from 2.6%. [9]
Q2 FY2010 Earnings Summary
In fiscal Q2 2010, Starbucks posted $217.3 million worth of net earnings, an increase compared to $25.0 million in Q2 FY2009.[10] This translates to $0.28 EPS in Q2 FY2010 compared to $0.03 EPS in Q2 FY2009.[11] Further, net revenues increased 9% to $2.5 billion and domestic comparable store sales increased 7% driven by a 3% increase in traffic. Operating margin also improved to 13.4% from 1.8% in Q2 FY2009.[12]
Starbucks attributes positive Q2 FY2010 results from the impact of innovation from new products such as the Starbucks VIA, the opening of new stores in Asia, Europe and US, as well as the transition from in-store coffee sales to packaged Starbucks goods to make its products more available at home. These factors, combined with the effects of a recovering economy, brought about strong revenue growth and lowered costs.
Q3 FY2010 Earnings Summary
Starbucks posted $207.9 million of profits, a 37% increase compared to Q3 FY2009.[13] Sales in the third quarter also increased to $2.61 billion, a 8.7% increase compared to same quarter FY2009.[14] Earnings were in line with analyst estimates. The increase in bottom-line and top-line can be attributed to the combination of increased sales for the bottled Frappuccino and the launch of the new Frappuccino in May, with sales at Starbucks stores-open-more-than-one-year rose 9% in the third quarter, beating analyst estimates of 7%.[15]
However, as a direct result of the product launch, marketing costs represented 2.5% of sales, a more than 50 basis point increase compared to less than 2% same quarter FY2009.[16] Further, Starbucks have been dealing with high dairy costs as milk-shakelike drinks bring more than 4$2 billion a year in sales (20% of total revenue); the total implication of milk related expenses will take an approximate four cent per share decrease for earnings in FY2011.[17]
Q4 FY2010 Earnings Summary
Starbucks posted earnings of 399.3 million or $0.37 EPS, up 86% compared to $199.4 million from same quarter last year. This figure beat analyst estimates of $0.32 EPS.[18] Sales also rose 17% to 2.8 billion as comparable store sales added 8% in domestic markets.[19]
This was the fourth straight quarter of positive growth for Starbuks and as a result has raised outlook for FY2011 earnings to a range of $1.41 - $1.47.[20] International same store sales were up 7% as the company plans to add 500 new domestic stores and 400 new international stores in FY2011.[21] Despite a positive outlook, commodity costs coming especially from rising coffee costs are now expected to have a large negative impact of $0.08 to $0.10 EPS on the bottom line. As of current, year-to-date coffee futures are up 51%.[22]
Q1 FY2011 Earnings Summary
Starbucks posted earnings of $346.6 million, or $0.45 EPS, for the first quarter of fiscal 2011, a 44% increase compared to $241.5 million, or $0.32 EPS, same quarter last year.[23] This figure beat analyst average estimates of $0.39 EPS. Further, SBUX's revenues rose nearly 8% to $3 billion, compared to analyst consensus estimates of $2.93 billion.[24]
Starbucks attributes more customers and more spending to be the attributable factor of its increase, primarily due to SBUX's new product lineup and in-store experience, the company also improved operating margins that offset the impact of this quarter's unusually high coffee costs. Sales at stores open at least one year showed a rise of 7%, which was driven by a 5% boost in traffic and 2% increase in average transaction.[25] This figure was 8% in the domestic U.S. markets and 5% internationally. Despite rising coffee sales though, SBUX does not plan to raise prices to cover the extra expense, though rising prices for ingredients from not only coffee and milk but also beef and bread are squeezing all restaurant operators.[26]
Key Trends and Forces
As a Luxury Product, Starbucks' Line of Business Relies Heavily on the Health of Global Economy
Starbucks coffee is a premium coffee and, as such, a luxury good. The company relies on consumer discretionary spending to drive sales. Consequently, a major economic change can have a large impact on revenues. Throughout the global economic recession of 2008-2009, for example, potential customers have less money and are more likely to forgo a $4 specialty coffee in favor of a cheaper alternative. Revenues in Q1 2009 were down 7% to $2.6 billion from Q1 2008 as consumers pinched their pockets. Until the economy recovers, Starbucks' bottom line may continue to be negatively affected.
As Starbucks Continues to Saturate US Markets, SBUX Faces both Expansion and Cannibalization risk
Starbucks currently has over 11,500 stores in the United States alone. Over the past two years, Starbucks has expanded aggressively, adding 3,500 stores, often within eyesight of existing stores. Until recently, the company has been blessed with extraordinary growth in transactions per store (traffic) and same store sales, which has consistently been in the high single to low double-digits. The trend reversed itself, however, in Q1 FY2009. A conference call with Starbucks CFO Troy Alstead revealed an expected drop of 9% in the statistic. [27] Much of this may be attributable to the US economic slowdown, but nvestors fear that these weak growth figures could indicate saturation in the U.S. market. Regardless, Starbucks aims to double its US locations to 20,000 and eventually open 40,000 locations worldwide. [28] Starbucks closed 600 underperforming locations in 2008. This seems to be an admission that cannibalization seems to be a major problem. [29]
As the global economy continues its recovery, Starbucks is planning to open an average of more than one store each day. In particularly, SBUX plans to open 500 stores in FY2010, 400 of which will be located outside of the US. China is SBUX's largest target, as it is expected to be the biggest growth market over the next two years. As such, Starbucks continues to close domestic stores that have already saturated the market, and replacing them with international stores abroad.[30]
Starbucks is Battered by Small and Large Enterprise Market Entries into the Lucrative Coffee Market
Starbucks road to fame was marked by a move into a small coffee drinker market over one decade ago, but as Starbucks starts to hit market saturation, large and small enterprises alike are starting to enter to steal market share.
For example in 2008, McDonald's introduced the McCafe to select stores, where customers can purchase espressos and cappuccinos. These drinks, which are priced in the $2-4 range, represent McDonald's foray into the high-margin caffeinated beverages market, currently dominated by Starbucks.[31]
Analysts have taken notice of this threat and expect McCafe to have a negative impact on Starbucks' same-store sales.[32] In a response to the McDonald's challenge Starbucks is teaming up with Burger King, which has announced that by September 2010 it would begin selling Starbucks' Seattle's Best Coffee in about 7,250 U.S. outlets. The new drinks will sell for $1 to $2.79 and will replace Burger King's BK Joe brew, which was introduced in 2005. [33]
The resulting "coffee war" amongst the food giants began to tear away at the premium model which Starbucks used to hold so steadfast. In response, these large companies specifically McDonald's began a large ad campaign to orient customers away from Starbucks and to cheaper alternatives. This bidding war allowed small-time coffee chains such as Green Mountain Coffee Roasters (GMCR) and Caribou Coffee Company (CBOU) to steal market share as unique quality coffees, the very type of business model that Starbucks attempted to implement in the early days.[34] However, as commodity prices for coffee continue to rise, it is uncertain whether these small chains will be able to survive against large food giants which have the capacity and experience to hedge effectively.
SBUX's Target Demographics are Yuppies and Teens who are More Willing to Spend for Personal Image
Starbucks targets a higher-income crowd of the young and college-educated, a group that tends toward higher luxury-consumption levels. Although this focus allows the company to maintain high profit margins, it also puts Starbucks at greater risk from a shift in consumer spending habits. If Starbucks chooses to expand further into coffee for home consumption, it could find a new consumer base in baby boomers (the largest demographic, 26% of the population), who are more likely to drink their coffee at home but who are more price sensitive than "yuppies" (young urban professionals). Teen coffee drinkers are also important to Starbucks--many believe that this segment will be the main driver of domestic specialty coffee consumption in the next few years.
Competition
Starbucks' close competitors include other specialty coffee shops, doughnut shops, and restaurants.
Starbucks holds a dominant position in the specialty coffeehouse market and has no single clear rival in the sector. (Its closest specialty coffeehouse competitor is Caribou Coffee, with 415 stores in the US--less than 5% of Starbucks' 11,000-plus). Its most intense specialty coffeehouse competition is dispersed among the thousands of independent or small-chain coffee shops around the nation and the world.
More intense competition comes from perennial heavy hitter McDonald's (MCD), which became a Starbucks rival when it upgraded its coffee in 2006. McDonald's has 14,000 stores in the U.S. and caters to a wider demographic than Starbucks; it also enjoys increased traffic from its variety of well-established breakfast options. McDonald's coffee sales increased 15% in 2006. In January 2008, McDonald's made yet another aggressive foray in the battle for high-end coffee drinkers, announcing that it would install coffee bars in all 14,000 of its U.S. locations. Aggressive marketing campaigns have also emphasized the large cost differential. That being said, there may be enough room for McDonald's and Starbucks to coexist. It should also be noted that McDonald's brew Seattle's Best brand coffee, a brand owned by Starbucks.
The National Coffee Association estimates that the US coffee market will reach $29 billion in 2011 [35], and the markets the two competitors target are different. The former aims at the cheaper coffee to go, whereas the latter aims at providing a premium experience for a luxury price. McDonald's larger retail footprint may overlap more with Starbucks' core markets, but their stark differences as stores are reflective of the general differences between their core customers.
Privately owned Dunkin Donuts is another major competitor, with nearly 5,000 stores in the U.S. Although Dunkin' Donuts' retail footprint also overlaps largely with that of Starbucks, their customer experience is much more similar to the coffee-to-go model rather than the "third place to work and relax" model. Consequently, they are likely to compete more directly with McDonald's than with Starbucks.
The table below shows fiscal 2009 data for the largest publicly traded food service competitors by revenues. Subway and Dunkin' Donuts, also a major players, are privately owned.
Company Revenues (M) Net Income (M) Net Margin Restaurants Franchised %
McDonald's (MCD) $22,745 $4,551 20.0% 32,478 81%
Yum! Brands (YUM) $10,836 $1,083 10.0% 37,000
Starbuck’s (SBUX) $9,775 $391 4.0% 16,635 0%
Darden Restaurants (DRI) $7,218 $372 5.2% 1,773
Brinker International (EAT) $3,621 $79 2.2% 1,689 40%
Wendy's International (WEN) $3,581 $4 0.1% 6,451 80%
Burger King Holdings (BKC) $2,537 $200 7.9% 11,925 88%
Jack in the Box (JACK) $2,471 $131 5.3% 2,212 46%
CKE Restaurants (CKR) $1,419 $48 3.4% 3,141 71%
Domino's Pizza (DPZ) $1,404 $80 5.7% 9,339 91%
Panera Bread Company (PNRA) $1,353 $87 6.4% 1,380 58%
Data from company FY 2009 annual reports (CKE data from FY annual, ended January 31, 2010).
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