18 Starbucks Corporation — 2011 Marlene M

OCD122

UNIVERSITY OF BOLTON

WESTERN INTERNATIONAL COLLEGE FZE

BUSINESS MANAGEMENT

TRIMESTER 3 EXAMINATION 2015/2016

STRATEGIC MANAGEMENT

MODULE NO. BAM6002

Date: Friday 19th August 2016 Time: 10:00am – 01:00pm

INSTRUCTIONS TO CANDIDATES: Answer ALL questions.

This is an open book examination and you are able to bring with you 2 x A4 pages (4 sides) of notes. Text books and reference materials are NOT allowed.

You must hand in your notes with your exam paper.

The examination questions are based on the pre-released case study (attached).

ANSWER ALL QUESTIONS

Page 2 of 2 Western International College FZE Business Management Trimester 3 Examination 2015/2016 Strategic Management Module No. BAM6002

1. Critically examine the strategies that Starbucks should implement by taking advantages of the opportunities that exist in the industry while utilizing its strengths? (25 marks)

2. Critically explain how the company can optimally manage its weaknesses while avoiding potential threats imposed by competitors and/or the industry. (25 marks)

3. Identify strategies that CEO of Starbucks should consider in order to continue surpassing its rivals in the industry. (25 marks)

4. Critically analyse various strategies currently implemented by P&G along with appropriate theoretical frameworks (25 marks)

END OF QUESTIONS

18 Starbucks Corporation — 2011 Marlene M. Reed and Rochelle R. Brunson Baylor University

SBUX http://www.starbucks.com In early 2011, it became apparent that Starbucks’ $9.1 billion in 2010 domestic sales had leap- frogged the company past Burger King ($8.7 billion) and Wendy’s ($8.3 billion), trailing only McDonald’s ($32.4 billion) and Subway ($10.5 billion) as the nation’s third-largest chain restaurant. Compared to the prior year, Starbucks’ 2010 sales were up 8.7 percent, versus 4.4 percent for McDonald’s, 6.0 percent for Subway, and declines of 2.5 percent for Burger King and 0.6 percent for Wendy’s. Headquartered in Seattle, Washington, and the world’s largest coffee company, Starbucks has entered into a strategic partnership with the maker of Keurig brewers, Green Mountain Coffee Roasters, to deliver coffee to the fast-growing single-serve coffee market. Given the success and popularity of Starbucks VIA instant coffee, the coffee companies are expanding VIA abroad. Starbucks now offers its VIA instant brew in its Chinese stores and other countries. Starbucks currently has locations in 35 cities in China, and CEO Howard Schultz said the company plans to double the number of cities soon. The success of VIA in those Chinese stores exceeded expectations. Starbucks plans to open nearly 1,500 stores in China in the next four years—more than tri- pling the number of stores there. Estimates project Chinese consumption of Arabica at 15 percent per year, making Starbucks a major player in the years to come, at least when it comes to coffee. Starbucks is aggressively expanding its coffee line in the United States, where it sees a potential $377 million market for flavored coffee. Starbucks already dominates the domestic coffee market, having a staggering coffee market share of about 75 percent. Along with expanding its instant coffee business, Starbucks has also started a mobile payment plan in about 6,800 Starbucks stores and close to 1,000 Starbucks at Target stores. Through this payment plan, Apple iPod touch and iPhone users and select Research In Motion BlackBerry users can make purchases at the stores through their smartphones. All users would have to do is to download the Starbucks app from the stores in order to use this service. It has been rumored that Starbucks might acquire rival coffee provider Peet’s Coffee & Tea Inc. Peet’s reported first quarter 2011 earnings per share was 41 cents, up 58 percent versus 2010. Peets says there has been a significant rise in the cost of coffee during the last three months. Peets’ net revenue for that first quarter climbed 9 percent to $88.5 million from $81.2 million for the corresponding period of fiscal 2010. With excellent overall cost management, Peets’ first quarter operating margin was 9.8 percent and its EPS growth was 58 percent. Peets expects its 2011 total revenue growth to be 9 percent. Starbucks recently ended its licensing agreements with Kraft wherein Kraft distributed Starbucks products. Starbucks is opening more than 100 new stores in 2011 in Brazil, the second-largest coffee-consuming country in the world. In early 2011, Starbucks has a total of 16,635 stores in 50 countries, including 500 stores in Tokyo and 500 in London. There is a Starbucks in Beijing’s Forbidden City and on the boulevards of Paris. Of the existing stores, 8,832 are company-operated stores, and 7,803 are licensed stores. History Starbucks was founded in Seattle in 1971 as a roaster and retailer of whole bean and ground coffee, tea, and spices in a single store in Seattle’s Pike Place Market. The company was named after the first mate in Herman Melville’s Moby Dick. The Starbuck logo was inspired by the sea and $"4& t 45"3#6$,4$03103"5*0/ 169 features a twin-tailed mermaid from Greek mythology. The company was incorporated under the laws of the State of Washington in Olympia, Washington, on November 4, 1985. Starbucks went public on June 26, 1992, at a price of $17 per share (or $0.53 per share, adjusted for subsequent stock splits) and closed trading that first day at $21.50 per share. In 2007, Starbucks’ shares fell 50 percent as its United States sales slowed as both Dunkin’ Donuts and McDonald’s marketed low price coffee. However, by 2011, Starbucks was again a boomingly successful business. In January 2011, Starbucks unveiled an alliance with India’s flagship conglomerate—Tata Group. Tata is a wide-ranging company that owns everything from Jaguar cars to steel mills and tea plantations. Its Tata Coffee Ltd. Unit owns the Eight O’Clock Coffee Company in the United States. Starbucks Chairman Howard Schultz, in commenting on this alliance, suggested that India could one day rival China. He said one of the reasons for the alliance is to raise the profile and use of Indian premium Arabica beans in Starbucks stores elsewhere. Internal Issues Vision/Mission Starbucks’ vision is: “Starbucks is committed to ethically sourcing and roasting the highest quality Arabica coffee in the world. With stores around the globe, we are the premier roaster and retailer of specialty coffee in the world.” Starbucks’ mission is: “To inspire and nurture the human spirit—one person, one cup, and one neighborhood at a time.” The principles by which Starbucks operates are found in Exhibit 1, entitled “Starbucks Principles.”

EXHIBIT 1 Starbucks Principles

Our Coffee It has always been, and will always be, about quality. We’re passionate about ethically sourcing the finest coffee beans, roasting them with great care, and improving the lives of people who grow them. We care deeply about all of this; our work is never done. Our Partners We’re called partners, because it’s not just a job, it’s our passion. Together, we embrace diversity to create a place where each of us can be ourselves. We always treat each other with respect and dignity. And we hold each other to that standard. Our Customers When we are fully engaged, We connect with, laugh with, and uplift the lives of our customers—even if just for a few moments. Sure, it starts with the promise of a perfectly made beverage, but our work goes far beyond that. It’s really about human connection. Our Stores When our customers feel this sense of belonging, our stores become a haven, a break from the worries outside, a place where you can meet with friends. It’s about enjoyment at the speed of life—sometimes slow and savored, sometimes faster. Always full of humanity. Our Neighborhood Every store is part of a community, and we take our responsibility to be good neighbors seriously. We want to be invited in wherever we do business. We can be a force for positive action—bringing together our partners, customers, and the community to contribute every day. Now we see that our responsibility—and our potential for good—is even larger. The world is looking to Starbucks to set the new standard, yet again. We will lead. Our Shareholders We know that as we deliver in each of these areas, we enjoy the kind of success that rewards our shareholders. We are fully accountable to get each of these elements right so that Starbucks—and everyone it touches—can endure and thrive. 170 ."3-&/&.3&&%"/%30$)&--&3#36/40/

Management The founder of Starbucks, Howard Schultz, serves as the chairman of the board, president, and chief executive officer of the company. Exhibit 2 provides an organizational chart for the company. Starbucks employees are called “partners” and they are considered to be the heart of the “Starbucks Experience.” Its store partners are committed to coffee knowledge, product expertise, and customer service.

Products Starbucks has as a primary goal—the delivery of the best coffee available. Operationally, that involves purchasing coffee grown under the highest standards of quality, using ethical trading and responsible growing practices. Starbucks’ coffee buyers personally travel to coffee farms in Latin America, Africa, and Asia to select the highest quality Arabica beans. These beans rep- resent 30 blends and single-origin premium Arabica coffees. When these beans arrive at their roasting plants, Starbucks experts bring out the balance and flavor of the beans through the trade- mark “Starbucks Roast.” Starbucks offers 100 percent Fair Trade Certified whole bean coffee from Rwanda as a lim- ited edition coffee across the United Kingdom Starbucks. Starbucks has an ongoing investment of nearly $9 million in loans to farmers in East Africa, which helps more than 85,000 farmers develop their businesses. Additional beverages served by Starbucks are hot and iced espresso beverages, coffee and noncoffee blended beverages, Vivanno Smoothies, and tea. The company’s brand portfolio of beverages consists of Tazo tea, Ethos water, Seattle’s Best coffee, and Torrefazione Italia coffee. Starbucks also sells related merchandise such as home espresso machines, coffee brewers and grinders, coffee mugs and accessories, packaged goods, music, books, and gift items. For customers desiring food items with their drinks, Starbucks provides baked pastries, sandwiches, salads, oatmeal, yogurt, parfaits, and fruit cups.

EXHIBIT 2 Starbucks Executives

Cliff Burrows, President, Starbucks Coffee U.S. Paula Boggs, John Culver, Executive V. P. , President General Counsel, Starbucks Coffee Secretary International

Troy Alstead, Howard Schultz, Jeff Hansberry, CFO, Chairman, President, Global Chief Administrative President, and Consumer Products, Officer CEO Foodservice

Annie Young Scrivner, Arthur Rubinfeld, Chief Marketing President, Global Director Development

Michelle Gass, Pres., Seattle’s Best Coffee $"4& t 45"3#6$,4$03103"5*0/ 171

On February 17, 2011, Starbucks signaled plans for further expansion in the single- serve coffee market by signing a deal with Courtesy Products, a provider of in-room coffee service to hotels. Starbucks had already made a foray into single-serve coffee in 2009 with the development of its VIA instant coffee. Because of the alliance with Courtesy Products, Starbucks coffee will now be available in as many as 500,000 luxury hotel rooms nation- wide. Single-serve coffee is seen as attractive because it is still a relatively new market with big growth potential. Single-serve coffee pods rang up $180 million in sales at supermarkets, drug stores, and mass merchandisers, excluding Wal-Mart, Inc., in the 52 weeks ending October 3, 2010. Analyst Mitchell Pinheiro in commenting on Starbucks’ chances of com- peting with Green Mountain’s Keurig division, which produces home-brewing machines, suggested:

While Starbucks could decide to launch its own brewer or partner with someone other than Keurig, the quickest and most effective way for Starbucks to gain traction in the single-cup coffee segment is through Keurig.1

Marketing A Morgan Stanley study of people drinking coffee at least once a week recently showed that the average Starbucks customer earns over $75,000 per year, but 17 percent make less than $30,000. On Starbucks’ 40th Anniversary in 2011, the company unveiled a new logo with no words entitled “Starbucks Logo.” The newest logo drops the green band that says “Starbucks Coffee” and leaves the iconic mermaid/sea nymph all alone. In explaining why Starbucks is eliminating its name from the logo, CEO Schultz explained:

This new evolution of the logo does two things that are very important: It embraces and respects our heritage, and at the same time evolves us to a point where we feel it’s more suitable for the future…. What I think we’ve done is we’ve allowed her (the mermaid) to come out of the circle in a way that I think gives us the freedom and flexibility to think beyond coffee.

Starbucks has a credit card program called My Starbucks Rewards Program. Gold Level members earn a free drink after 15 purchases at participating Starbucks stores. Starbucks’ cards are accepted at all company-owned stores and most licensed stores. Company-owned stores generate 84 percent of Starbucks’ revenues worldwide.

Finance Exhibits 3 and 4 provide Starbucks’ recent income statements and balance sheets, respectively. Note the dramatic improvement from 2009, when the company closed 600 unprofitable stores in the United States. The net effect was that it closed more stores than it opened that year. Founder Howard Schultz said this decision was part of a plan to revitalize the chain, which was struggling during the recession, when consumers cut back their spending on expensive coffee.

By-Segment Financials Starbucks operates within three segments or divisions: 1) USA, 2) International, and 3) Global Consumer Products Group. The company has both company-owned retail stores and licensed (called specialty) retail stores. Starbucks’ international specialty operations are in nearly 40 countries, with special emphasis in Canada, the United Kingdom, and Japan. The company’s Global Consumer Products Group includes packaged coffee and tea, Starbucks VIA Ready Brew, and other branded products sold in grocery stores and convenience stores. Starbucks’ by- segment financials are provided in Exhibits 5, 6, 7, and 8.

Claims of Water Waste Starbucks has been criticized by environmental experts for pouring millions of gallons of water down the drain at its coffee shops. The company has a policy of keeping a tap running nonstop at all of its outlets worldwide, which has been estimated to waste 6.2 million gallons a day. Critics suggest that amount would provide enough water for the entire two million population of 172 ."3-&/&.3&&%"/%30$)&--&3#36/40/

EXHIBIT 3 Starbucks’ Income Statements, 2008–2010 (in millions, except earnings per share)

Fiscal Year Ended 4FQ 4FQ 4FQ Net Revenues Company-operated retail $8,963.5 $8,180.1 $8,771.9 Specialty Licensing 1,340.9 1,222.3 1,171.6 Foodservice and other 403.0 372.2 439.5 Total specialty 1,743.9 1,594.5 1,611.1 Total net revenues 10,707.4 9,774.6 10,383.0 Cost of sales including occupancy 4,458.6 4,324.9 4,645.3 Store operating expenses 3,551.4 3,425.1 3,745.1 Other operating expenses 293.2 264.4 330.1 Depreciation & amortization 510.4 534.7 549.3 Gen. & admin. expenses 569.5 453.0 456.0 Restructuring charges 53.0 332.4 266.9 Total operating expenses 9,436.1 9,334.5 9,992.7 Income from equity investees 148.1 121.9 113.6 Operating income $1,419.4 562.0 503.9 Interest income and other, net 50.3 36.3 9.0 Interest expense (32.7) (39.1) (53.4) Earnings before income tax 1,437.0 559.2 459.5 Income taxes 488.7 168.4 144.0 Net Earnings $948.3 $390.8 $315.5 Per common share Net earnings—diluted $1.24 $0.52 $0.43

EXHIBIT 4 Starbucks’ Balance Sheets, 2008–2010 (in millions, except per share data)

4FQ 4FQ 4FQ ASSETS Current Assets Cash and cash equivalents $1,164.0 $599.8 $269.9 Accounts receivable, net 302.7 271.0 329.5 Inventories 543.3 664.9 692.8 Other current assets 746.4 500.1 455.9 Total current assets 2,756.4 2,035.8 1,748.0 Net fixed assets 2,416.5 2,536.4 2,956.4 Other noncurrent assets 1,213.0 1,004.6 968.2 TOTAL ASSETS $6,385.9 $5,576.8 $5,672.6 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Accounts payable $282.6 $267.1 $324.9 Short-term debt — 0.2 713.7 Other current liabilities 1,496.5 1,313.7 1,151.1 Total current liabs. 1,779.1 1,581.0 2,189.7 Long-term debt 549.4 549.3 549.6 Other noncurrent liabs. 382.7 400.8 442.4 TOTAL LIABILITIES $2,711.2 $2,531.1 $3,181.7 $"4& t 45"3#6$,4$03103"5*0/ 173

4FQ 4FQ 4FQ Shareholders’ equity Preferred stock equity — — — Common stock equity 3,674.7 3,045.7 2,490.9 TOTAL EQUITY 3,674.7 3,045.7 2,490.9 TOTAL LIABILITIES and SE $6,385.9 $5,576.8 $5,672.6 Shares outstanding (thousands) 740,100 742,900 730,600 Source: Company documents.

EXHIBIT 5 Starbucks’ Company-operated and Licensed Retail Store Summary as of Oct. 3, 2010

As a % As a AS a % of PG5PUBM % of 5PUBM64 *OUFSOBUJPOBM 5PUBM 64 4UPSFT *OUFSOBUJPOBM 4UPSFT 5PUBM 4UPSFT Company- 6,707 60% 2,126 37% 8,833 52% operated stores Licensed stores 4,424 40% 3,601 63% 8,025 48% Total 11,131 100% 5,727 100% 16,858 100% Source: Starbucks’ Form 10k, 2010, P.6.

EXHIBIT 6 Starbucks’ Total Company-operated Retail Store Data for the Periods Indicated

/FU4UPSFT0QFOFE $MPTFE %VSJOHUIF Financial Year Ended 4UPSFT0QFOFEBTPG Oct. 3, 2010 Sep. 27, 2009 Oct. 3, 2010 Sep. 27, 2009 (57) (474) 6,707 6,764 US International Canada 24 44 799 775 United Kingdom (65) 2 601 666 China 29 13 220 191 Germany (2) 13 142 144 Thialand 2 4 133 131 Others(2) (3) 27 231 234 Total International (15) 103 2,126 2,141 Total company-operated (72) (371) 8,833 8,905 Source: Starbucks’ Form 107, 2010, P.6. Store openings are reported net of closures. In the U.S., 13 and 121 Company-operated stores were opened during 2010 and 2009, respectively, and 70 and 595 stores were closed during 2010 and 2009 respectively.

EXHIBIT 7 Starbucks’ Retail Sales Mix by Product Type for Company-operated

Financial year ended 0DU 4FQ 4FQ Beverages 75% 76% 76% Food 19% 18% 17% Whole bean and soluble coffees 4% 3% 3% Coffee-making equipment and other 2% 3% 4% merchandise Total 100% 100% 100%

Source: Starbucks’ Form 10K, 2010, P. 7. 174 ."3-&/&.3&&%"/%30$)&--&3#36/40/

EXHIBIT 8 Starbucks’ Total Licensed Retail Stores by Region and Country at Fiscal Year End 2010

Asia pacific &VSPQF.JEEMF&BTU"GSJDB Americas Japan 892 Turkey 137 U.S. 4,424 Greater China 525 U.K. 102 Canada 274 South Korea 315 United Arab 95 Mexico 283 Emirates Philippines 168 Spain 75 other 63 Malaysia 117 Saudi Arabia 69 Indonesia 85 Knwait 66 New Zealand 39 Greece 60 Switzerland 47 Russia 37 Others 152 Total 2,141 Total 840 Total 5,044 Note: In the U.S., 166 and 286 licensed stores were opened during 2010 and 2009, respectively, and 106 and 251 stores were closed during 2010 and 2009, respectively. Internationally, 335 and 375 licensed stores were opened during 2010 and 2009, respectively, and 100 and 84 stores were closed during 2010 and 2009 respectively. Source: starbucks’ Form 10K, 2010, P.8.

drought-hit Namibia in Africa, or fill an Olympic-sized pool every 53 minutes. Every Starbucks branch has a cold tap behind the counter providing water for a sink called a “dipper well,” which is used for washing spoons and utensils. This practice has angered environmentalist groups, who have applauded many of Starbucks’ programs to protect the environment. In response to these criticisms, the Starbucks website suggests that in 2009 they began im- plementing new alternatives to the dipper well system, which include water-saving technology in its equipment specifications. For example, the company states that its mechanical dishwashers in the U.S. company-owned stores use less than one gallon of water per cycle through high- pressure spray arms. Starbucks’ stated goal is: “We’re committed to reducing our water usage by 15 percent in company-owned stores by 2012.”2 Competitors Starbucks competes against whole bean and ground packaged coffees sold through supermarkets, club stores, and specialty retailers. Starbucks specialty operations face significant competition from established wholesale and mail-order suppliers. The company states that some of these have greater financial and marketing resources than they do. Starbucks also faces competition from both restau- rants and other specialty retailers for prime retail locations and qualified personnel to operate both new and existing stores. Perhaps Starbucks’ major competitor is Dunkin’ Brands Group.

Dunkin’ Brands, Inc. Coffee, doughnuts, and ice cream are delicious at Dunkin’ Brands, Inc. The company is a quick- service restaurant franchisor that operates both the Dunkin’ Donuts and Baskin-Robbins chains. It has more than 16,000 franchise locations operating in about 55 countries. With some 9,800 units in about 30 countries (including approximately 6,800 in the United States), Dunkin’ Donuts is the world’s leading doughnut chain. Baskin-Robbins is a top ice cream and frozen snacks out- let with nearly 6,500 locations in 45 countries (2,500 in the United States). Dunkin’ Brands announced in May 2011 that the company will soon be going public. Dunkin’ has focused intently on expanding throughout the world, opening its first store in India in February 2011. It’s also expanded beyond the coffee-and-doughnuts menu in recent years, adding egg-white sandwiches to appeal to the health-conscious. Even though it was a private company, Dunkin’ Brands released 2010 financial statements as a prelude to the company going public. In fiscal 2010, Dunkin’ Brands reported operating income of $193.5 million on sales of $577.1 million—an operating margin of nearly 34 percent. Dunkin’ is a franchise-based business, which means that it doesn’t take on the kind of capital risk some retailers do. And the $"4& t 45"3#6$,4$03103"5*0/ 175 franchisee economics are excellent: new stores opened in 2010 generated annualized revenues of $855,000, with capital expenditure costs of just $474,000. The fact that 90 percent of 2010 openings were made by existing franchisees suggests that it not only treats its partners well, but the majority of those partners are expanding their number of owned stores. Dunkin’ has international growth plans—from China to Russia to India—but there’s still big opportunity in the United States. In New York and New England for example, there is a Dunkin’ restaurant for every 9,700 people. In the western United States, that ratio stands at just one for every 1,193,000 folks. For the first quarter of 2011, Dunkin’ Brands lost $1.7 million, a big difference from $5.9 million in net income the year before. About 60 percent of Dunkin’ Donuts stores’ revenue comes from coffee drinks, which offer high profit margins because they’re relatively cheap to make. Over the past several years, it has positioned itself as something of an “anti-Starbucks,” a place to get a good cup of coffee at a low price. Dunkin’ Brands is going public and will soon trade on the Nasdaq Global Select Market under the ticker “DNKN.” Future Starbucks’ second quarter 2011 earnings reached $261.6 million, or 34 cents per share. That was an increase of 20.4 percent over the $217.3 million, 28 cents per share, reported a year ago. Starbucks’ revenue rose 10.3 percent, to $2.79 billion, on a 7 percent increase in same-store sales. Starbucks says it expects full-year fiscal 2011 earnings-per-share in a range of $1.46 to $1.48. In that second quarter, Starbucks booked comparable same-store sales—or sales at stores open at least one year, a closely watched metric in the restaurant industry—with growth of 7 percent, driven by a 6 percent increase in traffic and a 1 percent increase in average ticket. Starbucks reported excellent fiscal third quarter 2011 results that ended July 3, 2011. Company earnings were $279.1 million for the quarter, up from $207.9 million in the same quarter last year. Company revenue rose 12 percent to $2.93 billion, beating analysts’ expectations. Starbucks is aggressively expanding abroad, reporting that revenue from its U.S. operations rose 9 percent to $2 billion while revenue from its international business rose 20 percent to $658.5 million in that fiscal third quarter. That quarter was the company’s first full quarter with com- plete control over distribution of its consumer products after ending a contract with Kraft Inc. Revenue from that business unit rose more than 25 perent to $218.4 million as a result of the change. Starbucks plans to add 800 stores in the 2012 fiscal year. Starbucks executives attributed the fiscal third quarter success to the company having upgraded the customer experience with new products and improved service. Fiscal third quarter revenue at Starbucks stores open at least a year rose 8 percent in North America and 5 percent internationally. This comparison is a key measure of a retailer’s performance because it ex- cludes stores that recently opened or closed. Also during the quarter, Starbucks announced it has acquired full ownership of its retail operations in Switzerland and Austria. This follows an agreement in May with joint-venture partner Maxim’s Caterers Ltd. to buy its stores in Central, South and Western China in a broader strategy in which China will be its largest market outside the U.S. According to Starbucks’ CEO Howard Schultz: “Starbucks has never been healthier, more connected to our customers and partners, or better positioned to go after the tremendous business opportunities that lie ahead.” Analysts are reminded however that Dunkin Brands and McDonald’s plan to gain and attract customers globally who otherwise may go to the pricier Starbucks stores. CEO Schultz at Starbucks needs a clear strategic plan for the future. Help Mr. Schultz out in light of the many opportunities, threats, strengths, and weaknesses that face the company.

Notes 1Julie Jargon. (February 17, 2011). “Starbucks Signs Deal for Hotel Coffee 2http://www.starbucks.com/responsibility/environment/water. Machines,” Wall Street Journal, p. B7.