INTRODUCTION
Starbucks is known to be the world’s largest coffee company. With over 17000 locations in over 50 countries the brand has positioned itself in customer mindset through its quality product, service and environment.
The marketing plan is going to investigate the possible launch of the franchise of Starbucks Coffee shop in Dhaka, Bangladesh. The focus of the report is the analysis of the marketing and the financial forecast of the project to determine the success and return of the proposed project.
MISSION AND VISION
The mission is to introduce Starbucks as a franchise of the original Starbucks of Seattle Washington in Bangladesh in order to deliver the signature coffee and quality experience that had always been the trademark of Starbucks. We will focus on making our Amsterdam store successful by adapting to the needs of the local customers while keeping the core Starbucks strengths intact. This store will set a positive example of corporate social responsibility by adhering to our high environmental standards and create a positive experience for customers to create repeat business.
Vision: We see a world in which we inspire and nurture the human spirit – one person, one cup and one neighborhood at a time.
Mission: To introduce Starbucks, the most recognized and respected brand in the world, in Bangladesh with the highest quality whole bean coffee.
Starbucks thrives to provide the world with joy and inspire the people to see what we see. We continue to be the most recognized and respected brand of coffee in the world and will never stop providing our consumers with the highest quality of whole bean coffee. Our mission and vision provides our consumers, partners and prospective sponsors with our beliefs and morals with no room for misinterpretation.
CURRENT MARKETING SITUATION
The international market of Starbucks Coffee Company is in 49 countries with more than 16500 stores. Starbucks was based on the idea that enjoying a cup of coffee is a social experience. Our project aims on delivering the same experience in Dhaka by franchising The Starbucks Company and hence utilizing its brand equity. Bangladesh has recently encountered a boost in the
Page | 1 entertainment sector of its economy where social hangouts with friends and peer have recently captivated the youth culture. With a few competitors like Gloria Jeans and Coffee World the consumer group is not left with much of option to diversify their experience. Since Starbucks had always stuck with the motto of delivering the most expensive coffee in the world our target consumer group is the elite social group that either reside or work in Banani, which is equivalent to the Beverly Hills in Bangladesh.
MARKET DESCRIPTION
We would segment our market based on Demographic segmentation. For Demographic segmentation we would primarily focus on the age group discrimination. The targeted age groups that lie between 17-25 are more concerned about the environment and the service that comes with the product. It is much easier to develop brand loyalty among this targeted segment. Therefore the venue should provide incidental services like free Wi-Fi zone and couch seating arrangement as they usually accompany in groups. The 25-40 group is all working class and therefore are more concerned about the product than the experience. Hence in order to satisfy this consumer group we should offer take-away coffee in disposable Starbucks Cup.
ANALYSIS OF STARBUCKS THROUGH SWOT ANALYSIS
SWOT analysis is an excellent tool in evaluating the strength, weakness, opportunity and threat of the proposed project particularly because the project involves the risk of penetration of a foreign franchise into the domestic market.
Strength
Brand equity: All across the globe Starbucks is well established as a pioneer in the Coffee Company. This well established brand equity can be easily liquidated to customer equity through awareness. It provides a range of different quality coffee that has been its Unique Selling Point in Bangladesh market because the concept is still not dispersed in the Bangladesh market and it has to survive through few competitors who include Gloria Jeans and Coffee World. Extended worldwide network and community helps to generate insight into consumer behavior and quality expectation thereby giving it an edge against its competitors.
Page | 2 Weakness
The premium price charged against the product (coffee and other incidentals) reduces its number of target consumer group because the economy of Bangladesh has a lower GDP than the other countries where Starbucks is dispersed. There had been events of past failure of similar projects when started in Holland because of differentiation on evaluation of domestic consumers against a broad spectrum of international homogenous consumer group.
Opportunities
As previously discussed the takeaways in Starbucks customized parcel bearing its logo could serve as an excellent tool for promotion among the demographics of its targeted customers. Also by providing an excellent and memorable location in adjacent with the quality product will allow the Starbucks franchise in Bangladesh to gain competitive advantage to its customers. Increased revenue with expanding new market base is another opportunity for Starbucks.
Threat
The political disruptions in Bangladesh can have an impact on the operations of the Starbucks coffee shop in Bangladesh. Such disruptions can hinder the revenue generation stream and also hence cause risk if the capital structuring is through non-recourse debt financing.
The stealing/copying of brand name and logo with slight/ minor alteration is a common practice in Bangladesh and there had been recent cases and several victims of the same which also include the franchise KFC.
Page | 3 SWOT ANALYSIS
OBJECTIVES AND ISSUES
Objectives
We have set aggressive but achievable objectives for the first and second years of market entry. First-year objectives. During 2014 initial year on the market, we are aiming for unit sales volume of BDT 5,000,000. Second-year objectives. Our second-year objectives are to sell a combined total of one million units and break even early in this period.
Issues
In relation to the product launch, our major issue is the ability to establish a well-regarded brand name linked to meaningful positioning. We will invest heavily in marketing to create a
Page | 4 memorable and distinctive brand image projecting innovation, quality, and value. We also must measure awareness and response so we can adjust our marketing efforts as necessary.
MARKETING STRATEGY
Segmentation:
The segmentation part will be similar to the standard Starbuck segmentation. We will use demographic, psychographic and behavioral segments. First of all, the demographic segmentation will focus on age, income and occupation. We see the 15-40 group as our main customer. This correlates with our own observations in French and Swiss Starbucks’. This group can be divided in two other groups. The group 15-25, and the group 25-40. The first group will have a lower income, and probably be students. This is the youngest generation, and for this segment Starbucks has to be hip and modern. The other group is probably working and has a higher income. The difference between the groups is also that the first group will probably use the sitting space whereas the second will most likely be customers who make purchases and consume them outside of the store.
In the psychographic segment we have focused primarily on lifestyles segmentation. This is very similar to the demographic segment above. The students will have another lifestyle than the working group. Another lifestyle segment will be the people who drink coffee, and those who do not drink coffee. This is a crucial segment, because Starbucks has to have an image that you don’t have to be a coffee drinker to enjoy Starbucks.
The behavioral segment is the most interesting one, and also the segment that can be the most influenced. It is strong because we can create new segments. First of all, we will segment customers with respect to benefit and usage. Benefit segmentation is for the customers who go to Starbucks because of the Starbucks products or Starbucks service. So the segmentation here will be (again similar to the demographic and psychographic) the people who prefer to sit down and enjoy their product and the buy & go customers. The usage can be divided into light, medium and heavy users. We recommend focusing primarily on the high usage segment. The advantage of this type of segmentation, mentioned before, is that Starbucks can create a new behavioral segment group and through this, new customers. This can be achieved through segmenting customers based on their desired benefits. A very recent example of this, introduced in several Starbucks’ through the world is wireless internet. This is an extra incentive to go to Starbucks, because of the creation of benefits driven segments, in this example, customers who use wireless internet.
Page | 5 Target Market:
Starbucks strives to provide it consumers with a product that best fits the consumer’s needs. To do this we have selected a specific target market to provide for: Male and Female Age 15-35 Inner city residence White collar ambiance career Environmentally friendly consumer Generally purchase more than just coffee Latte, specialty flavors, reusable cups
Positioning Strategy
Starbucks has already brand equity therefore the objective is to convert the established brand equity in international market into customer equity in Bangladesh market. Our marketing will focus to deliver the signature coffee and quality experience that had always been the trademark of Starbucks. Product Positioning Quality Ambiance Frame of Reference: “PREMIUM QUALITY”
Pricing Strategy
Starbucks already has a reputation of having the most expensive coffee in the marketplace. Therefore we try to retain the Starbucks ideology by following the Market skimming pricing which focuses on setting high initial prices to skim revenues layer by layer from the market. The premium price is justified for the Starbucks quality and image. Also the demographic location of its launch in Bangladesh is consistent with the company’s primary objective.
Product Strategy
The main product of Starbucks is its coffee line therefore the primary object for our promotion would be the Starbucks signature coffee. All different coffee variations that are popular in Starbucks would be included in the initial product portfolio. However, depending on sales response amendments could be made. Another important group of products that are served as incidentals in the various outlets of Starbucks include light snacks particularly donuts and
Page | 6 muffins. Though the popularity of such snacks is still limited but during initial promotion these line of products would be included in the product portfolio.
The Starbucks franchise in Bangladesh would also allow takeaways as the classic disposable coffee mugs bearing the logo of Starbucks will serve as promotion and create awareness amongst potential target customers.
Distribution Strategy
The coffee shop is located in the posh area of Dhaka city where the demographics of the target customer is highest. Since Starbucks is popular for its high quality and high premium price the venue chosen for its launch comply with the overall success of the project. We have selected Banani, Gulshan, Dhanmondi and Uttara as our primary locations.
Action Program
June 2014 We will launch a sales promotion campaign of BDT 10,00,000 to educate our target customers through major advertisement in Billboards in the rush areas of Banani, Gulshan, Dhanmondi and Uttara. Also promotion can be done through distributing invite to the Embassy’s situated in the vicinity including other multinational company’s CEO or other influential people. The invite can be accompanied by complimentary coffee sample to hook the target customer to pay at least a single visit during its launch.
July 2014 We would increase our sales promotions by crowd sourcing were our customers would be asked to submit a snap of their most nostalgic memories with their friends in their favorite hangout place at the company’s new website hosted. This return response will help us realize our target consumer’s perception of an ideal environment to enjoy coffee experiences. The promotion will create a buzz and would also create awareness of the launch of the product. The contest would run for 1 whole month, thereby giving time to disperse the news to our target group. The winner will be rewarded with a free one month subscription of Starbucks Tall Latte.
August 2014 After analyzing the responses from the mob of contestants, an analyst group will try to evaluate the psychology of the participants. They would try to formulate what majority of consumers find appealing in a hangout place. This information will be processed into the interior of our venue.
September 2014 The promotion will run simultaneously with the interior work of the project. October 2014
Page | 7 Starbucks franchise will be inaugurated with a great response from our target group.
Budget
Total first-year sales revenue for the franchise is projected at BDT 75 million, with an average wholesale price of BDT 150 per unit and a variable cost per unit of BDT 100 for 500,000 units. Break-even calculations indicate that we will become profitable after the sales volume exceeds 650,000, which we anticipate early in the product’s second year. Our break-even analysis of first smartphone product assumes wholesale revenue of BDT 150 per unit, variable cost of BDT 100 per unit, and estimated first-year fixed costs of BDT 32,500,000. Based on these assumptions, the break-even calculation is as follows:
BDT 32,500,000 / (BDT 150 per unit – BDT 100 per unit) = 650,000 units
THE FOUR P’S
Product
The Starbucks ‘product’ can be divided into actual tangible products (which can be further divided into direct consumption products and merchandise products) and an intangible service part. The products will be described first; later on the service aspects of Starbucks will be explained.
Evidently, the main product of Starbucks is coffee. That is what the chain is known for. All different coffee variations are part of their product portfolio. Other drinks, like tea and soft drinks, are also direct consumption products. When launching the Starbucks location in Dhaka, this group of Starbucks products should remain the same as they (especially the coffees) carry the absolute essence of Starbucks.
Another important group of products that are directly consumed within Starbucks are small snacks. Starbucks chains in the United States for instance are known for the fact that they also serve donuts, muffins, cake and other snacks that are alike. These products are quite popular and frequently ordered by customers to go with a cup of Starbucks coffee. One of the reasons for the success of these side snacks is the American culture of having breakfast and lunch outdoors. Moreover, these snacks are for some American Starbucks customer’s actual breakfast products. However, the situation in Dhaka, Bangladesh is quite different than in the United States due to cultural and behavioral differences. For instance, Bangladeshi people are known to be a bit closed and breakfast and lunch moments are seen as private moments of quality time, also for business people. When launching Starbucks in Dhaka, without adapting anything, the side, and
Page | 8 snack products could become a bottleneck as sales could be disappointing. In other words, this product category poses a challenge as the objective is to launch Starbucks in Dhaka and serious decreases in any of the product categories could seriously harm this ambitious goal. Needless to say, an adaptation within this snack product category should be made to fit our quality standards, behavior and culture. Donuts and muffins could easily stay in the product portfolio, but they should not be characterized as breakfast or lunch products. They should be seen and promoted as side snacks. Different sorts of cakes could also be added, as they are very popular in Bangladesh to go with a cup of coffee or tea. Products that could be served as lunch could be healthy sandwiches and salads. Sweet products should never be promoted as lunch products as they are normally seen in Bangladesh as snacks as opposed to lunch food. On the other hand, one should never change a winning formula. It is wise to slightly adapt the Starbucks formula to fit the Bangladesh market, but this should not be overdone, because then Starbucks would run the risk of becoming like ‘others’. In other words Starbucks should keep its identity and make slight adjustments to serve the Bangladesh market best.
Product Quality Variety Sizes Brand
High Quality coffee - Comes from Asia Pacific and other places, offering only the BEST. Variety: Wide selection of coffee, food, tea and more > to provide customer satisfaction. Sizes: We offer all sizes from tall, Grande, venti and more to accommodate our customer’s needs.
Brand: “STARBUCKS” … our name is our brand “Starbucks”= premium quality which is also our strength
Another product category consists of the products that are not immediately consumed at the spot. Starbucks merchandise, like coffee mugs, and coffee in packages are important products here. A regular Starbucks customer can purchase his or her own coffee mug or buy the real Starbucks coffee to create the same kind of coffee at home to get a consumption experience that matches the one at Starbucks. Fair trade products are quite popular in Bangladesh and one of the most consumed fair trade products is coffee. Another opportunity within this product category is formed by a link with the other, direct consumption, products. This link is given shape by the possibility of launching a saving and bonus system. Almost every popular store in Dhaka uses a saving and bonus system. Starbucks could, for instance, give customers that frequently order coffee at Starbucks the opportunity to save certain saving units (for instance ‘Bucks’) in order to get free merchandise (for instance a free coffee mug). Also, to fit the notion of servitization: the
Page | 9 adding of services to make a product a more complete one, one could be given to opportunity to customize his/her own coffee mug. Evidently, this service should be launched later on and only if the coffee mugs prove to be a commercial success.
Another aspect of the Starbucks ‘product’ is the service part. Maybe the biggest part of the Starbucks service is the creation of a very cosy, home-like atmosphere that invokes social interaction (which is beautifully characterized by the American hit television series ‘Friends’). This intangible atmosphere is supported by certain tangibles like comfortable couches and big lounging chairs. This creation of tangibles is very important as it makes the intangible atmosphere ‘tangible’. This relaxed and friendly atmosphere is also enhanced by the way customers are treated by Starbucks personnel. The ordering system does not look extremely streamlined and therefore sends out a comfortable and relaxed atmosphere. Ironically, all ‘customization’ of the coffee and tea is done by the customers themselves at specially designed corners with sugar, milk and other products. This customer ‘freedom’ contributes to the relaxed and cosy atmosphere while it also helps Starbucks to reduce personnel tasks and handle/serve more customers than otherwise would be possible. A possibility when launching Starbucks in Dhaka could be providing a free WiFi wireless internet connection. This service would also enhance consumption at Starbucks within certain targeted segments (mainly young to middle- aged people and business people) like, university students in Banani and Dhanmondi area, and it could gently help keeping other customer groups out of the Starbucks location (youth hanging on the streets). Therefore it could help Starbucks create more of a sophisticated image as WiFi wireless internet connections are not yet a common service at lunch places and chains in the Bangladesh as opposed to other countries. This possible service thus provides Starbucks Dhaka with a valuable opportunity.
Price
According to the Economist and CNN/Money a Tall Latte in Starbucks (one of the most ordered coffees) costs in Europe around $3.72, or € 3.10. Our suggestion is to use this price. We have several reasons for this. First of all, this is a Tall latte, a coffee what is not going to be popular in Bangladesh because of the size. It is too big. So a smaller coffee would be a fraction cheaper, what could result in a price around BDT 320-360. This is a reasonable price for a location in Dhaka. It is still premium pricing, compared to the competition. We’ve chosen to pursue a premium pricing strategy because that is in line with the Starbucks’ ideology.
We can illustrate this best with the next anecdote:
“What's more, Starbucks already has a reputation for having the most expensive coffee in the marketplace. When I left Moneybox's New York headquarters to conduct research at the closest Starbucks (a block away), I passed a half-dozen other coffee vendors. There's the guy with the cart who sells the little Greek diner cups for 50 cents; the deli with the
Page | 10 scalding 75-cent generic joe and the thin paper cup; the convenience store with $1.00 faux gourmet stuff; and Cosi, where a latte costs $3.59. Only after running this gantlet could I enter Starbucks, where a java chip Frappuccino runs $4.75.” D. Gross, Oct. 5, 2004
Price Premium Value Based Pricing Competitors
Premium: Consumer perception > physiological approach strategy- the higher price products = higher quality. Value Based Pricing: Best Quality and service Competitors: Price is slightly higher than our competitors because Starbucks offers more benefits to blow away our customers.
Place
The first Starbucks in Bangladesh will be opened in Dhaka, the capital city. This choice is rather obvious for several reasons. We quote the Starbucks Marketing policy: 1 “Starbucks customers are people of diverse ethnic, income and age groups with varying tastes and interests”.
Dhaka is a very diverse, dynamic and busy city. The city where history and future meet each other, the city with approximately 60,000 students, 100 ethnicities, lots of large both global and local firms, thousands of small firms, ten million tourists per year, and a city without Starbucks. We see Dhaka as an opportunity for Starbucks, because of the striking similarity between the marketing policy of Starbucks, and the characteristics of Dhaka. Place Convenience Speed Responsibility Number
Convenience: Quick and efficient. 7- Eleven Supermarkets: Sells brewed and whole bean Starbucks coffee such as Shaw's, Peapod, Whole Foods. Discount Stores: Target > Starbucks mini café while also selling their products. Number: Intensive distribution (being able to shop at any convenient store and spend minimum time buying the product).
Page | 11 Whereas the decision of first city in Bangladesh to launch Starbucks was not a problem, it is a lot harder to decide where in the city we can place the first Starbucks. As you already may know, Dhaka is a segregated city in which different customer groups are divided throughout the city. The large amount of the tourists can of course be found in the center of Dhaka. In Banani, Gulshan and Dhanmondi, there some business firms offices and universities. The Gulshan area is known for its prime location, as most of the foreign officials are living in this area. At first sight, this looks the best area to place the first Starbucks. It is the most popular area, with alarge amount of people, and therefore a large amount of potential customers. But it is also an area with a lot of problems. Small (sometimes even criminal) groups create a lot of trouble here, and this could create a negative image for Starbucks. These groups are well-known and last thing a shop wants is such a group inside. This is especially important for coffee places such as Starbucks, because there is a strong chance these groups will tend to go inside.
Promotion Inner city Residents Promotional ads Emphasis.
Audience Target Market Channels
Response Sought Stock it Push it Recommend it
Message Point of difference Competitive advantage Message to consumer
Justification of Promotion Young inner city professionals Supermarkets Convenience stores Keep it in stock in convenience store (always available even if not in Starbucks store) Promotional sales, loyalty programs and free giveaways to push the Starbucks brand and products
Page | 12 Have popular users recommend it to potential and current users The message we want to get to the buyer is, “ Starbucks best suits your need, as Starbuck is the best”
Key Success Factors: We cannot iterate enough how much Starbucks strives for success. We believe there are a couple “Success Factors” that contribute to our accomplishments:
Key Success Factors Quality of the products Speed of the buying process Access of the Starbucks products
OUR OFFERINGS
Drinks: Never a dull sip
We will offer the new Vanilla Macchiato. This multi‐layered beverage offers a delightful combination of freshly steamed milk, rich espresso and Madagascar Bourbon vanilla. (It’s just as delicious iced.) Or indulge in one of our other signature beverages—Caramel Macchiato or Hazelnut Macchiato. We will also try to introduce some new flavors of coffee for Bangladeshi customers. Like in India, apart from the usual products offered internationally, Starbucks has some Indian style product offerings such as Tandoori Paneer Roll, Elaichi Mawa Croissant, Murg Tikka Panini and Chai Tea Latte to suit Indian customers.
1. Starbucks Iced tea Refreshers Beverages 2. Bottled drinks - you can take Starbucks with you wherever you go. 3. Brewed Coffee - Artfully roasted and brewed fresh all day long, every day. 4. Chocolate Beverages - Luxurious hot chocolate for the sophisticated palate. 5. Espresso Beverages - Lattes, cappuccinos, macchiatos, mochas and much more 6. Frappuccino Blended Beverages - the icy cold original 7. Kids drinks and others - some fun, favorable alternatives for anyone to enjoy
Page | 13 8. Smoothies - Nourishing blends made with real fruit and other good stuff. 9. Teas - Made from the world's most delicious teas and botanicals. 10. Iced Coffe
Foods: They will turn into anyone a morning person
From classic flavors to inspired combinations, we will introduce a variety of breakfast sandwiches to help you kick‐start your day. Discover our new Vegetable & Fontiago, Slow‐ Roasted Ham & Swiss, toasty Reduced‐Fat Turkey Bacon and melty Egg & Cheese.
1. Bakery - Muffins, scones and more were made to go with coffee. 2. Starbucks Petites - Petite‐sized treats. 3. Bistro Boxes - Hungry for lunch? Find the complete package here – all good stuff. 4. Hot breakfast - Hearty, hot and full of flavor ‐ that's how to start a morning. 5. Sandwiches and Salads - We've added a little gourmet flair to the menu. 6. Yogurt and fruits - Enjoy the goodness of real fruit.
PRICING, BREAK-EVEN, AND MARGIN ANALYSIS
Page | 14 Determining price is one of the most important marketing-mix decisions. The limiting factors are demand and costs. Demand factors, such as buyer-perceived value, set the price ceiling. The company’s costs set the price floor. In between these two factors, marketers must consider competitors’ prices and other factors such as reseller requirements, government regulations, and company objectives. Current competing coffee shop products sell at retail prices between BDT 60 and BDT 500. Starbucks plans to introduce its products at a premium price in order to expand the market and to gain market share rapidly.
Setting Price Based on Costs
We start with the cost-based approach to pricing. Cost-plus pricing (or markup pricing), simply adds a standard markup to the cost of the product. To use this method, however, we must specify expected unit sales so that total unit costs can be determined. Unit variable costs will remain constant regardless of the output, but average unit fixed costs will decrease as output increases. To illustrate this method, suppose Starbucks has fixed costs of BDT 20 million, variable costs of BDT 250 per unit, and expects unit sales of one million cups of coffee. Thus, the cost per unit is given by:
Unit cost = variable cost + (fixed costs/ unit sales) = BDT 250 + (BDT 20,000,000/BDT 1,000,000) = BDT 270
Note that we do not include the initial investment of BDT 10 million in the total fixed cost figure. It is not considered a fixed cost because it is not a relevant cost. Relevant costs are those that will occur in the future and that will vary across the alternatives being considered.
Also notice that if we sell its product for BDT 270, the price is equal to the total cost per unit. This is the break-even price, the price at which unit revenue (price) equals unit cost and profit is zero. Suppose Starbucks does not want to merely break-even but rather wants to earn a 25 percent markup on sales. Then the markup price will be:
Markup price = unit cost / (1-desired return on sales) = BDT 270 / (1-.25) =BDT 360
This is the price at which we would sell the product to customers to earn a 25 percent profit on sales. Another approach we could use is called return on investment (ROI) pricing (or target-return pricing). In this case, the company would consider the initial BDT10 million investment, but only to determine the dollar profit goal. Suppose the company wants a 30 percent return on its investment. The price necessary to satisfy this requirement can be determined by:
Page | 15 ROI Price = unit cost+ (ROI X investment) / unit sales
= BDT 270 + (0.3 X BDT 10,000,000) / 1,000,000 = BDT 273
That is, if we sell coffee product for BDT 273, it will realize a 30 percent return on its initial investment BDT BDT10 million.
Break-Even and Margin Analysis
The previous analyses derived a value-based price of BDT 360. Although this price is higher than the break-even price of BDT 270 and covers costs, that price assumed a demand of 1 million units. But how many units and what level of dollar sales must we achieve to break even at the BDT360 price? And what level of sales must be achieved to realize various profit goals? These questions can be answered through breakeven and margin analysis.
Determining Break-Even Unit Volume and Dollar Sales
Based on an understanding of costs, consumer value, the competitive environment, and reseller requirements, we have decided to set its price BDT 360. At that price, what sales level will be needed for us to break even or make a profit on its Coffee? Break-even analysis determines the unit volume and dollar sales needed to be profitable given a particular price and cost structure. At the break-even point, total revenue equals total costs and profit is zero. Above this point, the company will make a profit; below it, the company will lose money. We can calculate break-even volume using the following formula:
Break-even volume = fixed costs / (price - unit variable cost)
Our break-even unit volume is:
Break-even volume = fixed costs / (price - unit variable cost)
= BDT 20,000,000 / (BDT 360 – BDT 250) = 181,818.18 units Our break-even dollar sale is:
BE sales = BEvol X Price = 181,818.18 X BDT 360 = BDT 65,454,544.80
Such break-even analysis helps Starbucks by showing the unit volume needed to cover costs. If production capacity cannot attain this level of output, then the company should not launch this product. However, the unit break-even volume is well within Starbucks capacity.
“Breakeven” for Profit Goals
Page | 16 Although it is useful to know the break-even point, most companies are more interested in making a profit. Assume Starbucks would like to realize a BDT5 million profit in the first year. How many must it sell at the BDT360 price to cover fixed costs and produce this profit? To determine this, Starbucks can simply add the profit figure to fixed costs and again divide by the unit contribution to determine unit sales:
Unit volume = (fixed cost - profit goal) / (price - variable cost)
= (BDT 20,000,000 + BDT 5,000,000) / BDT 360 – BDT 250
= 227,272.73 units
Thus, to earn a BDT 5 million profit, we must sell 290,698 units. Multiply by price to determine dollar sales needed to achieve a BDT 5 million profit:
Dollar sales = 227,273 units X BDT 360 = BDT 81,818,280.00
THE PROFIT-AND-LOSS STATEMENT AND MARKETING BUDGET
All marketing managers must account for the profit impact of their marketing strategies. A major tool for projecting such profit impact is a pro forma (or projected) profit-and-loss statement (also called an income statement or operating statement). A pro forma statement shows projected revenues less budgeted expenses and estimates the projected net profit for an organization, product, or brand during a specific planning period, typically a year. It includes direct product production costs, marketing expenses budgeted to attain a given sales forecast, and overhead expenses assigned to the organization or product. A profit and- loss statement typically consists of several major components:
Net sales—gross sales revenue minus returns and allowances (for example, trade, cash, quantity, and promotion allowances). Our net sales for 2014 are estimated to be BDT 125 million, as determined in the previous analysis.
Cost of goods sold—(sometimes called cost of sales)—the actual cost of the merchandise sold by a manufacturer or reseller. It includes the cost of inventory, purchases, and other costs associated with making the goods. Starbucks cost of goods sold is estimated to be 50 percent of net sales, or BDT 62.5 million.
Gross margin (or gross profit)—the difference between net sales and cost of goods sold. Starbucks gross margin is estimated to be BDT 62.5 million.
Page | 17 Operating expenses—the expenses incurred while doing business. These include all other expenses beyond the cost of goods sold that are necessary to conduct business.
Operating expenses can be presented in total or broken down in detail. Here, Starbuck estimated operating expenses include marketing expenses and general and administrative expenses.
Marketing expenses include sales expenses, promotion expenses, and distribution expenses. The new product will be sold through Starbucks sales force, so the company budgets BDT 5 million for sales salaries. However, because sales representatives earn a 10 percent commission on sales, Starbucks must also add a variable component to sales expenses of BDT 12.5 million (10 percent of BDT 125 million net sales), for a total budgeted sales expense of BDT 17.5 million. Starbucks sets its advertising and promotion to launch this product at BDT 10 million. However, the company also budgets 4 percent of sales, or BDT 5 million, for cooperative advertising allowances to retailers who promote Starbuck in their advertising. Thus, the total budgeted advertising and promotion expenses are BDT 15 million (BDT 10 million for advertising plus BDT 5 million in co-op allowances). Finally, Starbucks budgets 10 percent of net sales, or BDT 12.5 million, for freight and delivery charges. In all, total marketing expenses are estimated to be BDT 17.5 million + BDT 15 million + BDT 12.5 million = BDT 45 million.
General and administrative expenses are estimated at BDT 5 million, broken down into BDT 2 million for managerial salaries and expenses for the marketing function and BDT 3 million of indirect overhead allocated to this product by the corporate accountants (such as depreciation, interest, maintenance, and insurance). Total expenses for the year, then, are estimated to be BDT 50 million (BDT 45 million marketing expenses + BDT 5 million in general and administrative expenses).
Net profit before taxes—profit earned after all costs are deducted. Our estimated net profit before taxes is BDT 12.5 million.
In all, as Table shows, Starbuck expects to earn a profit on its new product of BDT 12.5 million in 2011. Also note that the percentage of sales that each component of the profit and loss statement represents is given in the right-hand column. These percentages are determined by dividing the cost figure by net sales (that is, marketing expenses represent 36 percent of net sales determined by BDT 45 million / BDT 125 million). As can be seen, Starbucks projects a net profit return on sales of 10 percent in the first year after launching this product.
Pro Forma (Projected) Profit-and-Loss Statement for the 12-Month Period Ended
Page | 18 December 31, 2014
Net Sales BDT 125,000,000 Cost of Goods Sold 62,500,000 Gross Margin BDT 62,500,000 Marketing Expenses Sales expenses BDT 17,500,000 Promotion expenses 15,000,000 Freight 12,500,000 45,000,000 General and Administrative Expenses Managerial salaries and expenses BDT 2,000,000 Indirect overhead 3,000,000 5,000,000 Net Profit Before Income Tax BDT 12,500,000
Pro Forma (Projected) Balance Sheet for the 12-Month Period Ended December 31, 2014
ASSETS Current assets: Cash and cash equivalents BDT 9,167,00 Accounts receivable, net of allowances 7,348,00 Inventories 53,474,00 Total current assets 69,989,00 Long-term investments - Equity and other investments 10,432,00 Property, plant and equipment 59,564,00 Other assets 6,767,00 Other intangible assets 5,667,00 TOTAL ASSETS 152,419,00 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable 15,241,90 Short-term borrowings 18,243,00 Total current liabilities 33,484,90 Long-term debt 73,004,20 Other long-term liabilities Shareholders' equity: 9,213,00 Retained earnings - Other additional paid-in-capital 3,232,00 Total shareholders' equity - TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY BDT 152,419,00 MARKETING PERFORMANCE MEASURES
Now let’s fast-forward a year. Starbucks product has been on the market for one year and management wants to assess its sales and profit performance. One way to assess this performance is to compute performance ratios derived from Starbucks profit and loss statement
Page | 19 (or income statement or operating statement). Whereas the pro forma profit-and-loss statement shows projected financial performance, the statement given in Table below shows Starbucks actual financial performance based on actual sales, cost of goods sold, and expenses during the past year. By comparing the profit-and-loss statement from one period to the next, Starbucks can gauge performance against goals, spot favorable or unfavorable trends, and take appropriate corrective action. The profit-and-loss statement shows that our lost BDT 1 million rather than making the BDT 12.5 million profits projected in the pro forma statement. Why? One obvious reason is that net sales fell BDT 25 million short of estimated sales. Lower sales translated into lower variable costs associated with marketing the product. However, both fixed costs and the cost of goods sold as a percentage of sales exceeded expectations. Hence, the product’s contribution margin was 21 percent rather than the estimated 26 percent. That is, variable costs represented 79 percent of sales (55 percent for cost of goods sold, 10 percent for sales commissions, 10 percent for freight, and 4 percent for co-op allowances). Recall that contribution margin can be calculated by subtracting that fraction from one (1 – 0.79 = 0.21). Total fixed costs were BDT 22 million, BDT 2 million more than estimated. Thus, the sales that Starbucks needed to break even given this cost structure can be calculated as:
Break-even sales = fixed costs / contribution margin
= BDT 22,000,000 / 0.21
= BDT 104,761,905
If we had achieved another BDT 5 million in sales, it would have earned a profit.
Profit-and-Loss Statement for the 12-Month Period Ended December 31, 2014
Net Sales BDT 100,000,000 Cost of Goods Sold 55,000,000 Gross Margin BDT 45,000,000 Marketing Expenses Sales expenses BDT 15,000,000 Promotion expenses 14,000,000 Freight 10,000,000 39,000,000 General and Administrative Expenses Managerial salaries and expenses BDT 2,000,000 Indirect overhead 5,000,000 7,000,000 Net Profit Before Income Tax (BDT 1,000,000)
PROJECTED PROFIT AND LOSS INFORMATION
Page | 20 We projected 2015 and 2016 profit and loss information to show that, we may have incurred loss in initial stage, but our franchise will be profitable in future years.
Projected Profit and Loss Statement for the 12-Month Period Ended December 31, 2015
Net Sales BDT 400,000,000 Cost of Goods Sold 80,000,000 Gross Margin BDT 320,000,000 Marketing Expenses Sales expenses BDT 20,000,000 Promotion expenses 18,000,000 Freight 15,000,000 53,000,000 General and Administrative Expenses Managerial salaries and expenses BDT 3,000,000 Indirect overhead 6,000,000 9,000,000 Net Profit Before Income Tax BDT 258,000,000
Projected Profit and Loss Statement for the 12-Month Period Ended December 31, 2016
Net Sales BDT 500,000,000 Cost of Goods Sold 80,000,000 Gross Margin BDT 320,000,000 Marketing Expenses Sales expenses BDT 20,000,000 Promotion expenses 18,000,000 Freight 15,000,000 53,000,000 General and Administrative Expenses Managerial salaries and expenses BDT 3,000,000 Indirect overhead 6,000,000 9,000,000 Net Profit Before Income Tax BDT 358,000,000
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