Week 1 - 1.1 Case Analysis

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Week 1 Case Analysis: Starbucks Financial Statements R. Claire Salinas Online MBA Program, Point University ACCT 535: Financial Statement Analysis Dr. Christopher Peak October 28, 2023

Case Analysis Industry and Strategy Analysis 1. Porter’s Five Forces a. Rivalry Among Existing Firms i. Within the specialty coffee retail industry, Starbucks faces intense direct competition. They compete with many beverage retailers of similar size, such as McCafé, Dunkin’, Krispy Kreme, and many others. Many smaller companies have also begun to grow bakery-café environments similar to that of Starbucks, such as Panera, Caribou Coffee, and Diedrich Coffee. Even still, Starbucks faces competition from local coffee shops. Starbucks has focused on building a brand that not only sells coffee but sells the “Starbucks Experience.” However, many of these local shops offer the same value proposition: a good cup of coffee and a warm environment where people can “[sit] alone or in groups, lingering over their drinks while chatting, reading, or checking email and surfing the internet through the store’s Wi-Fi network” (Wahlen, 2015, p. 69). Thus, we characterize industry rivalry as strong. b. Threat of New Entrants i. The specialty coffee retail industry is a very concentrated industry, saturated with large companies such as Dunkin’, medium-sized companies such as Panera, and small companies such as local coffee shops. The cost of entry and cost of doing business within the coffee industry is relatively low, making it fairly easy for new entrants to enter the market. However, because of the highly concentrated market, the ability for new entrants to develop a well-recognized brand is very difficult. Established brands, like Starbucks, will be virtually untouched by new entrants into the market. Thus, we characterize the threat of new entrants as low. c. Threat of Substitutes i. Starbucks operates in the specialty coffee industry, which is a part of the larger food and beverage industry. A ready-to-drink beverage and ready-to-eat food is the reason that customers choose to visit Starbucks. However, this industry is highly concentrated and the opportunity to substitute is readily available with low switching costs. Other companies, such as those in the fast-food industry, offer similarly priced, if not lower, options for a meal and beverage that are ready just as quickly as a Starbucks order. Although Starbucks provides a unique experience, the product can easily be substituted with that of another in the industry. Thus, we characterize the threat of substitutes as strong. d. Buyer Power i. Because of the highly concentrated specialty coffee retail industry and the high availability of substitutes, the power of buyers is strong. Customers have many options when it comes to choosing where to dine and can easily choose to go to a different coffee shop or a different food/beverage restaurant altogether. The cost of choosing a different shop over Starbucks is very low and the products offered are direct substitutes. The direct substitutes offer similar prices to Starbucks with the same level of convenience. Because of this, the bargaining power lies in the hands of the customer. Thus, we characterize buyer power as strong.

e. Supplier Power i. Starbucks purchases its coffee beans from many regions around the world and custom roasts and blends them to their standards. Because their beans are purchased under fixed-price purchase contracts, where the prices reset annually, suppliers have the power to define the purchase price of their beans. However, because Starbucks is responsible for the roasting and blending process, and the coffee bean industry is concentrated, they have the freedom to switch to another bean supplier if the price provided under the contract is more than they are willing to pay. The prices of Starbucks’ paper and plastic products come from several suppliers and the prices vary based on the commodity of paper and plastic resin. Thus, we characterize supplier power as moderate. 2. As listed on Starbucks’ 10-k form from 2012, their retail objective is to “be the leading retailer and brand of coffee in each of [their] target markets by selling the finest quality coffee and related products. And by providing each customer a unique Starbucks Experience” (Wahlen, 2015, p. 69). Their strategy focuses on creating an environment where customers feel comfortable and welcome. This is the main cause of their early growth. While, in 2012, most of the stores were located within the US, Starbucks’ strategy focuses on global expansion, being recognized as a world-leading brand. Starbucks also strives to be a well-recognized brand associated with feelings of comfort and warmth, whether that be in their retail locations or not. Part of their ongoing strategy is to offer their products and facilitate food service locations on university campuses, in hotels, in airports, on airplanes, in apartment offices, etc. Starbucks seeks to “reach customers where they work, travel, shop, and dine” (Wahlen, 2015, p. 71). Because Starbucks focuses on leading the industry regarding quality and experience, Starbucks employs a product differentiation strategy that strives to set the company apart from others. While Starbucks purchases its coffee beans from suppliers around the world, they roast and blend their own coffee, serving as their own manufacturer and retailer. Thus, Starbucks has a vertically integrated strategy that leverages its brand name to conduct integration into industries such as the grocery industry. Interpreting Financial Statement Relationships 3. Although the dollar amount for cash equivalents increased from $1,148 to $1,189 from 2011 to 2012, the percentage of total assets decreased from 15.6% to 14.5%. This is due to an increase in assets other than cash and cash equivalents, making the total asset value increase from 2011 to 2012. Total assets increased by 11.67% from 2011 to 2012 making the portion of cash and cash equivalents a smaller percentage of the total assets. Because common-size financials are measured as a percentage of a base number, it is possible for the percentage to decrease from one year to the next, despite the dollar figure reflecting an increase. 4. In financial statement analysis, the formula on which we base our calculations is the accounting equation, stating that “Assets = Liabilities + Shareholders’ Equity” (Wahlen, 2015, p. 18). Because of how the formula is set up, liabilities and shareholders’ equity function as inverse variables, with one increasing as the other decreasing, given that assets remain the same. One possible explanation for this could be paying off a liability, such as a property loan. In this example, if the owner of Starbucks pays off 10% of their total liabilities by paying off the property loan, this would add 10% to the value of shareholders’ equity. In a situation such as this, liabilities would decrease, and shareholders’ equity would increase. 5. From 2009 to 2012, company-operated retail decreased from 83.7% of total revenue to 79.2%. Licensing also decreased from 12.5% in 2009 to 9.1% in 2012. However, “Foodservice and

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other” increased from 3.8% of total assets in 2009 to 11.7% in 2012. The increase in the “Foodservice and other” category reflects Starbucks’s strategy of generating revenues by methods other than just in-store sales. For example, Starbucks has many products and food service locations on university campuses, in hotels, in airports, on airplanes, in apartment offices, etc. Starbucks seeks to create this “Starbucks experience” (Wahlen, 2015, p. 69) in locations other than just within their store’s physical location. They aim to tie the name of the brand with feelings of comfort and warmth. 6. The most significant changes from 2009 to 2012 that would impact the net earnings as a percentage of total revenue would be the 5.5% decrease in store operating expenses, the 3.4% decrease in restructuring costs, the 1.4% decrease in depreciation and amortization expenses, and the 0.5% decrease in cost of sales. All these differences led Starbucks to realize a 15.6% decrease in total operating expenses, allowing net earnings to realize a 7.2% increase from 2009 to 2012. Wahlen notes that, in 2010, Starbucks “[closed] 57 company-owned stores” and “[opened] 60 licensed stores” (Wahlen, 2015, p. 71). Within the years 2009 to 2012, Starbucks took a very conservative approach to opening new company-owned locations. However, the biggest factor impacting the decrease in operating expenses is likely the bankruptcy of Borders’ Bookstores in 2011, a chain that partnered with Starbucks coffee, causing a closing of 475 Starbucks stores that were licensed. This event caused a “negative net growth of 342 licensee closings in 2011 in the United States” (Wahlen, 2015, p. 71) in 2011. However, despite all these closures, the restructuring efforts of Starbucks seemed to prove successful, allowing Starbucks to reduce its costs and realize “record high profits in 2010, 2011, and 2012” (Wahlen, 2015, p. 72). These factors combined were the cause of Starbucks’ increase in net earnings from 2009 to 2012.

References Wahlen, J. M. (2015). Financial Reporting, Financial Statement Analysis, and Valuation: A Strategic Perspective (8th ed.). Cengage Learning.