starbucks consulting case
DESCRIPTION
Led fifteen students in a Deloitte consulting project, presented in Chicago.TRANSCRIPT
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StarbucksReturning to the Starbucks Experience
Student International Business Council
Student International Business CouncilUniversity of Notre Dame
Deloitte ConsultingApril 11th, 2008
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1. Summary of Issues 2. Financials 3. Current Operations 4. The Experience 5. Competitive Environment 6. Current Operation Problems 7. Schultz’s Vision 8. Plan to Achieve the Vision
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Agenda
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• Purveyor of premium coffee and handcrafted specialty beverages• Purchase from sustainable farms & oversee roast
• Enhancing coffee experience with Italian style brewing & increasing offering with joint ventures
• Retailing of specialty goods to have farther reach
• “We aren’t in the coffee business, serving people. We are in the people business, serving coffee” - Howard Schultz
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Business Model
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• The experience that makes Starbucks unique has taken a back seat to efficiency and overexpansion
• There has been a loss of focus on their target market and Schultz’ vision
• Costs and expenses are rising, cutting into the bottom line
• Revenues growth is slowing
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Current Situation
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• Increase revenue• More licensed branches abroad• Focus on specialty drinks
• Decrease cost • Remove unnecessary products• Slow domestic expansions• Decrease costs on particular non-drink items
• Enhance experience • In store attractions and focus on customer
Plan of Implementation
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1. Summary of Issues 2. Financials 3. Current Operations 4. The Experience 5. Competitive Environment 6. Current Operation Problems 7. Schultz’s Vision 8. Plan to Achieve the Vision
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Agenda
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• 1,065 store increase in the United States from 2006-2007
• 277 store increase internationally 2006-2007• Expenses increased significantly from
2005-2007• Earnings have peaked • Net Operating Income is increasing at a
decreasing rate
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Recent News
Source: Starbucks’ 10-K
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High-Level Financials
Dollars (in millions)
FYO,2007 FYO, 2006 FYO, 2005 FYO, 2004 FYO, 2003
Total Revenue
$9,411 $7,787 $6,369 $5,294 $4,076
Operating Income
$1,053 $893 $780 $606 $421
Net Earnings $672 $564 $494 $389 $265
Source: Yahoo Finance
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Key FinancialsYear 2007 2006 2005 2004 2003 2002 2001 2000
Revenue (in Millions)
$9411.5 $7786.9 $6369.3 $5294.3 $4075.5 $3288.9 $2649.0 $2169.2
% increase in revenue
17.26 18.2 16.88 23.02 19.3 19.46 18.11 22.54
Costs of goods
(in Millions)
$3999.1 $3178.8 $2605.2 $2198.7 $1685.9 $1350.0 $1112.8 $953.6
% increase cost of goods
20.51 18.04 15.6 23.32 19.92 17.57 14.31 22.29
Source: Starbucks’ 10-K
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Results of Operations
• Revenues are increasing, but expenses as a percentage of revenue are increasing a well. This takes away from the bottom line, net operating income.
2007 2006 2005
Revenues $9.4 billion
$7.8 billion
$6.4 billion
Expenses
(% of Revenue)
89.9% 89.7% 88.9%
Earnings
(% of Revenue)
7.1% 7.2% 7.8%
Source: Starbucks’ 10-K
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Slowing Revenue, Increasing Cost
• Percentage increase in revenue is strong from year to year until 2005 where it plummets.
• Cost percent increase remains the same until 2005, then begins to increase.
• Stock price peaks from 2005-2006, then drops.
Source: Yahoo Finance
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Percentage change in comparable store sales (%)
2007 2006 2005 2004 2003
United States 4 7 9 11 9
International 7 8 6 6 7
Consolidated 5 7 8 10 8
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Same-Store Sales Growth
• Domestically, the sales growth is increasing at a decreasing rate. Internationally, it is steady.
Source: Starbucks’ 10-K
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Growth Trends 2006-2007
Source: Starbucks’ 10-K
• International licensed stores appears to garner the greatest revenues.
% Growth in Net Revenue
% Growth in Licensed Stores
Domestic 17% 6%
International 25% 13%
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0
1000
2000
3000
4000
5000
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7000
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Inco
me
(In
Mil
lio
ns)
2007 2006 2005
Revenue-D
Licensing-D
Licensing-int
Revenue-int
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Domestic vs. International
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International Stores
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International Stores
2007 2006 % Change
Licensing Income:
$220.8 million $186 million 18.7%
Total Sales $625 million $824.5 million 31.9
Net Operating Income
$138 million $108 million 27
Source: Starbucks’ 10-K
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1. Summary of Issues 2. Financials 3. Current Operations 4. The Experience 5. Competitive Environment 6. Current Operation Problems 7. Schultz’s Vision 8. Plan to Achieve the Vision
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Agenda
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• 1971- First store opens in Seattle• 1982- Howard Schultz joins as director of retail
operations and marketing• 2 years later 1st Starbucks Café Latte served
• 1987-Schultz’s Il Giomale acquires Starbucks, becomes Starbucks Corporation
• 2000- Schultz becomes chairman/chief global strategist & Orin Smith becomes new CEO
• 2007- Schultz returns as CEO in an attempt to renew the company’s focus on customer experience and innovation.
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History
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• Establish Starbucks as the premier purveyor of the finest coffee in the world, while maintaining uncompromising principles as we grow
• Apply the highest standards of excellence to the purchasing, roasting and fresh delivery of our coffee
• Develop enthusiastically satisfied customers all of the time
• Recognize that profitability is essential to future success
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Mission Statement
Schultz’s Memo, April 2007
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• Starbucks primarily relies on its brand name and image to sell coffee
• Starbucks links its name with quality• Expect that customers will pay more for
quality• Customer focused marketing strategy: Young
urban middle-class; Students between the age of 15 and 35 and Professionals
• The entire process should be an experience rather than simply picking up coffee
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Initial Starbucks’ Operations
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• “The Third Place” (between home and work)• Launched their first TV campaign last winter• Marketing in-store: ambiance, music playing,
seating, friendly people• iTunes and Starbucks entertainment.
Customers can receive free songs in the store. They can also purchase songs playing at store on apple products.
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Marketing the Experience
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1. Summary of Issues 2. Financials 3. Current Operations 4. The Experience 5. Competitive Environment 6. Current Operation Problems 7. Schultz’s Vision 8. Plan to Achieve the Vision
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Agenda
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Starbucks Experience
• Store (Experience)• Warm atmosphere with brown and green toned
interior• Ambiance includes music, comfortable seating for
work or socializing, and friendly employees• Mix between classic and modern• Fixed temperature• Specific method of taking orders• Coffee aroma
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In-Store Experience
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Starbucks Experience
• Menu (Product)• Latin America, Africa/Arabia, Asia/Pacific, Dark
Roast Blends, Multi-Region Blends• Espresso, Frappuccino, Macchiato• Teas• Classic Favorites
The menu is diverse enough to appeal to a variety of tastes, even though each location is consistent in its look and feel.
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Product Experience
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• Starbucks offers luxury that is readily available.• Daily coffee without losing the indulgence of the
experience.• Ambiance, music playing, seating, friendly people.
• Customers experience personal service.• Only automated task should be the printing of a
receipt.• Employees know what regular customers want.• Grinding coffee in front of the customer.
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Summary: The Experience
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1. Summary of Issues 2. Financials 3. Current Operations 4. The Experience 5. Competitive Environment 6. Current Operation Problems 7. Schultz’s Vision 8. Plan to Achieve the Vision
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Agenda
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• Coffee is a 34 billion dollar industry in the United States
• The coffee industry currently exceeds $70 billion annually, with over 400 billion cups consumed each year
• Coffee, as a product, is actually the 2nd highest traded commodity globally, falling only shortly behind oil
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Source: Eimports.com, Packagedfoods, Boresha.com, Yahoo Finance
Coffee Demographics
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Competitors• Caribou Coffee is the second largest gourmet
coffee chain
• McDonalds provides an easy and accessible option for cheaper coffee
• Dunkin’ Donuts is the largest coffee and baked goods chain in the world
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Primary Competitors
Cariboucoffee.com, Dunkindonuts.com
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• Caribou Coffee is the second largest gourmet coffeehouse operator (484 coffeehouses, including 52 franchised locations)
• Caribou Coffee offers its customers high-quality gourmet coffee and espresso-based beverages, as well as specialty teas, baked goods, whole bean coffee, branded merchandise and related products
• Caribou Coffee also sells products to club stores, grocery stores, mass merchandisers, office coffee providers, airlines, hotels, sports and entertainment venues, college campuses and other commercial customers.
• Coffee comes from the finest Arabica beans• Amenities include free WiFi, meeting rooms, and drive thrus
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Source: cariboucoffee.com
Caribou Coffee
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• Offers low priced Premium Roast Coffee made from 100% Arabica beans and three flavors of iced coffee in over 9,000 stores
• McDonalds- plans to add Starbucks-style coffee bars to nearly 14,000 of its American restaurants, drinks are estimated to be roughly $.50 less than Starbucks pricing
• In 2007, began introducing McCafe concept restaurants in select locations in the US with comfy couches, cappuccinos and pastries
• Consumer Reports rated McDonalds coffee more highly than that offered by Starbucks
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Sources: moneycentral.com
McDonald’s
30Source: PRNewswire via COMTEX, www.dunkindonuts.com
• Dunkin' Donuts (the largest coffee and baked goods chain) sells more hot regular coffee, iced coffee, donuts, and bagels than any other quick service shop in America.
• They are known for simplicity and their unique orange and red cups
• 100% Arabic coffee beans (flavorful, smooth & mellow)
• Espresso, frappuccino, and iced coffee also available
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Dunkin’ Donuts
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• McDonalds • Premium Roast was voted better tasting than Starbucks or
Dunkin Donuts• McDonalds have more drive-thrus than any competitor• McDonalds does not rely on coffee sales to support their
business, allowing them to jump into the coffee industry sell coffee with a much lower profit margin
• Dunkin Donuts offers cheaper coffee than Starbucks along with a large selection of baked goods
• Caribou’s stores are larger, and usually in prime locations• Cheaper, more available, basic coffee has led to customers
substitute away from Starbucks
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Source: Consumer Reports, Belfast Telegraph 2.2.07
Advantages of the Competition
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1. Summary of Issues 2. Financials 3. Current Operations 4. The Experience 5. Competitive Environment 6. Current Operation Problems 7. Schultz’s Vision 8. Plan to Achieve the Vision
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Agenda
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The Loss of the Experience
• Starbucks interactive cup brewer for small-businesses detracts from “The Third Place”
• Selling in grocery stores diverts attention from the stores
• Brand recognition can be tied to the grocery store and not the actual Starbucks store
• Prepackaged products inhibit the incentive to make a trip to the store
Source: Business Week 2-19-08
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Losing the Experience
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Problems Inhibiting the Experience
• Change to automatic espresso machines when Schultz was gone
• Baristas were no longer required to hand-make many drinks
• Less emphasis on personal interaction between baristas and customers
• The present stores lack the influence from the original inspiration of the Pike’s Place location
• As a result, customers are no longer inclined to stay and enjoy the experience
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Losing the In-Store Experience
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• The average number of transactions per US location fell 1% in the last quarter of 2007
• The brand is starting to lose its reputation as a quality, worthwhile experience• Higher prices• Less interaction with the barista• Less personal attention• Starbucks commercializing their brand in
grocery stores.
Source: Business Week 2-19-08 and PR Week 2-15-08Student International Business Council
Losing Reputation
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1. Summary of Issues 2. Financials 3. Current Operations 4. The Experience 5. Competitive Environment 6. Current Operation Problems 7. Schultz’s Vision 8. Plan to Achieve the Vision
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Agenda
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• Starbucks has been a company that relies on their reputation• Quality• Availability
• The brand speaks for itself• The Starbucks experience and numerous
locations allow customers to indulge anywhere, anytime
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Foundational Values
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• Howard Schultz’ s strategy:– Slow down US store expansion– Close under-performing stores
• closing 100 stores
– “Spruce up” existing stores– Introduce new products (Pike Place Roast)
Source: Business Week 2-19-08 and 3-10-08
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Recovery Strategy
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• New Expresso Machines to better view the barista & barista training.
• Free WiFi through AT&T• Bought Coffee Equipment Co. and Clover Brewing
System• Discontinuance of warm breakfast.• Starbucks Artisan chocolate.• National Training Day - 2/26/08• Made Fortune 100 Best Companies to Work for in
2008• “Skinny” drinks
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Innovations post-Schultz Return
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1. Summary of Issues 2. Financials 3. Current Operations 4. The Experience 5. Competitive Environment 6. Current Operation Problems 7. Schultz’s Vision 8. Plan to Achieve the Vision
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Agenda
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1. Shifting the focus of operations back to Starbucks’ target market
2. Renewing the commitment to Schultz’ vision
3. Regaining “The Experience” and ensuring Starbucks is “The Third Place” between home and work
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Moving Forward
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• Revamp the experience of “The Third Place” and improve the quality of personal service to encourage customers to return to Starbucks
• Increase revenues by maintaining the “Starbucks Experience,” which adds value to the coffee and justifies the higher price
• Focus on premium products (specifically specialty drinks unique to Starbucks)
• International expansion of licensed stores adds to the bottom line
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Goals
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• Revamping Starbucks quality standards
• New quality standards for freshness, hand-scooping, and smaller brewed coffee batches with no more than 30-minute hold times
• The introduction of Pike Place Roast
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Quality Improvements
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• Partners• Choose employees who will implement
Starbucks’ core values and who are highly knowledgeable about coffee and its production
• Spend more money and time on training employees
• Hire fewer part time workers
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Experience Improvements
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• Store Environment• Offer free taste testing on select nights for the coffees
and the higher-priced specialty drinks• Have live music and readings on select nights• Use La Marzocca machines as opposed to automated
espresso machines in order to engage the customer in the drink making experience
• Brew coffee in-store to regain the aroma• Remove Tip Jars• Emphasizing the coffeehouse as a gathering place
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Sprucing up “The Third Place”
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• Reduce spending on materials from unnecessary/unpopular products
• Seek to cut costs from straws, recyclable cups, napkins, shot glasses (glass to metal/plastic), etc
• Eliminate the 25 cent discount for bringing reusable cups.• Digitize process of information management (store orders
placed to suppliers)• Curve domestic expansion that contributes to increasing
costs.• Cut down on seasonal gifts (Advent tree).• Decrease spending on print-media advertising as well as
the seasonal TV ad campaign
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Decreasing Costs
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• Improve quality and experience to prevent customers from pulling away from Starbucks.
• To counter cheaper prices of competitors, match the perceived value of Starbuck’s coffee with the high price.
• Ensure that customers are paying for a premium coffee and that their experience will draw them back to Starbucks in the future.
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Increasing Revenues
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Short-Term Expansion Timeline
2007 2008 2009
Followed by a 25% increase in 2009. (About 840 stores opened)
We propose a 20% increase in 2008. (About 560 stores opened)
There was a 13% increase in the international growth rate of licensed stores
Decrease to 1% growth in 2008 (About 490 stores opened)
Decrease the growth of domestic licensed stores to 2% growth in 2008 (About 820 stores opened)
This will help decrease expenses domestically.
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Questions?
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