Starbucks Case Study

Executive Summary

Starbucks performed well in fiscal 2007 under the care and guidance of Howard Shultz, the founder of the Company, Chairman, President and Chief Executive Officer all rolled into one. Starbucks does not rule the coffee realm unchallenged. The Company’s primary domestic competitors for coffee beverage sales are quick-service restaurants and specialty coffee shops.

Starbucks also faces well-established competitors in many International markets and increased competition in the U.S. ready-to-drink coffee beverage market. The Company’s whole bean coffees compete directly against specialty coffees sold through supermarkets, specialty retailers and a growing number of specialty coffee stores.

Starbucks is organized into three reportable operating segments: United States, International and Consumer Products Group (CPG). The United States and International segments both are made up of the basic Starbucks retail stores. The Company’s International stores continue to grow rapidly in number. Starbucks also makes their coffee and coffee-related products available via mail order and online.

The success of Starbucks in fiscal year 2007 may well be nothing more than a paper tiger. Even though domestic sales were within the Company’s projections, they had to accomplish their goals through price increases rather than increase in sales. This led to stabilization (even a decline in some areas) in the actual number of transactions that occurred, as new customers were balanced out by those that left due to the higher pricing. If this trend were to continue and the company persists in higher pricing of its product, the future may bode ill for the company as sale transactions continue to fall in favor of cheaper, yet quality competition.

Starbucks’ International Operations

I. Starbucks performed well in fiscal 2007. The company met its target for store openings and sales growth, even though it faced challenging economic conditions. The Company did well overseas, but suffered some setbacks domestically. Even though domestic sales were within the Company’s projections, they had to accomplish their goals through price increases rather than increase in sales. This led to stabilization (even a decline in some areas) in the actual number of transactions that occurred, as new customers were balanced out by those that left due to the higher pricing.

Consolidated net revenues for fiscal year 2007 did increase 21% to $9.4 billion due to the higher pricing, but this is a temporary stop gap and could eventually hurt the company in the long run if continued (SEC, 2007). Starbuck’s opened a total of 2,571 new stores during the year, with 70% in the U.S. and 30% in International markets, to end the year with over 15,000 stores (SEC, 2007). Diluted earnings per share for fiscal 2007 increased to $0.87 compared to $0.71 a year ago, while not making shareholders rich, at least showed them growth.

The mission of Starbucks is “to establish Starbucks as the premier purveyor of the finest coffee in the world while maintaining our uncompromising principles while we grow” (Starbucks, 2008). The company plans to achieve this mission through the vision to �establish Starbucks as the most recognized and respected brand in the world.’ (Starbucks, 2008). This mission statement should give the who, what, why, and how (and if possible- when.) In this regards, the mission and vision are hopelessly vague.

According to Starbuck’s 2007 Annual report, the company’s objectives for fiscal year 2008 are to improve operational excellence at the store level, improve innovation of their stores to set them apart, and streamlining of administrative practices. Targets for the 2008 include the opening of approximately 2,500 new stores, a targeted sales growth of 3%-5%, total net revenue growth of approximately 18%, and increasing the Earnings per Share to $1.05, which represents a 21% increase (SEC, 2007).

Throughout fiscal 2007, Starbucks was hit hard by the debated “recession”. Recession or not, it is readily apparent that the US economy had significantly weakened, cutting sales across the boards. In order to overcome these challenges, if they continue in fiscal year 2008, Starbucks intends to focus in the following key areas: (SEC, 2007).

(1) Better operational excellence at the store level;

(2) More meaningful innovation to continue to differentiate the store experience; and

(3) Increased efficiencies and effectiveness in the general and administrative infrastructure, to become more capable of navigating through the