II.Analysis of the Problem:
A.Company Background and History:
a.Starbucks began in 1971 when three scholars-English teacher Jerry Baldwin-history teacher Zev Siegel, and writer Gordon Bowker- opened a store called Starbucks Coffee, Tea and Spice in the touristy Pikes Place Market in Seattle.
b. The inspiration and mentor for the Starbucks venture in Seattle was a Dutch immigrant named Alfred Peet, who had opened Peet's Coffee and Tea, in Berkeley, California, in 1966.
c. Starbucks Coffee at this time stood for making top-quality, fresh-roasted, whole-bean coffee which was its differentiating feature.
d. The company was created to build clientele in Seattle that would appreciate the best coffees and teas.
e.Baldwin and Bowker key mission for their business was to maximize the quality of the coffee. The company purchased the finest Arabica coffees and put them through a meticulous dark-roasting process to bring out their full flavors.
f.In 2000, Howard Schultz transitions from chairman and CEO chief global strategist; Orrin Smith is promoted to president and CEO.
2. Starbucks and Howard Schultz.
a.In September 1992, Howard Schultz was hired at Starbucks. b.Schultz's 1983 trip showed him that there was much more to the coffee business than just providing quality beans. On his trip to Milan, Italy he had a revelation which made him see going to Starbucks should be an experience, a special treat, a place to meet friends and visit. c.Howard Schultz presented his great idea to expand Starbucks to a retail business. They feared that providing drinks would hurt them because it could hurt the integrity of Starbucks' mission as a purveyor of fine coffees. d.In April 1984 , Starbucks opened its sixth store which was the first of the company's stores designed to sell beverages, and it was the first one located in downtown Seattle. The sixth store did well with the espresso bars but Baldwin felt that they were coffee roasters and their debt was too high to divest into the restaurant business. e.Schultz left Starbucks left in 1985 to start his own company. f.In March 1987, Howard Schultz, president and CEO, took Il Giornale Coffee Company to form Starbucks Corporation. B. Overview of Retail Industry
1. Financial Situation and Performance.
a.Starbucks goal is to become the leading retailer and brand of coffee in each of its target markets by selling the finest coffee and related products, and by providing superior customer service.
b. Company-operated retail stores accounted for approximately 85% of net revenues during fiscal 2003.
c.Specialty Operations accounted for approximately 15% of net revenues in fiscal 2003.
d.Starbucks went public on June 26, 1992 at $17 per share, or a split adjusted price of $1.0625 for the company's four subsequent 2-for-1 stock splits (wwww.starbuckscoffee.com).
e.Comparing Starbucks financial ratios to that of the Industry can give us a general
perspective of Starbucks financial strength. This could also give some indication of stock price performance. Most of Starbucks ratios are in line with the industry average, but there are a few that could explain the poor stock performance recently experienced. Starbucks price to earnings ratio is well above the industry average, but this could be due to its relative high growth it has experienced. Return on equity is well below the average for the industry, and this could be an area of concern. This suggests that the investment made by shareholders in the firm has not produced a decent return when compared to the industry average. Starbucks gross margin is also below the average for the industry, suggesting that it is not able to cover its operating...