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I. Background of the Problem

Starbucks Corporation is an American global coffee company and coffeehouse chain based in Seattle, Washington. Operating with 20,366 stores in 61 countries, Starbucks serves hot and cold beverages, whole-bean coffee, micro ground instant coffee, full-leaf teas, pastries, and snacks. The company leads the industry offering comfort to complement products and has proved to be effective as more and more customers choose the company inculcating loyalty.

The 2008 recession struck Starbucks off guard as customers veer from their company to options far cheaper for coffee. This response led to a decrease in net income while service costs remain constant leading to closed underperforming stores to cut costs.

II. Statement of the Problem

* Starbucks continuously experiences a decline in net operating income.

III. Objective

* To increase net operating income to 8% by the fiscal year 2010.

IV. Industry Analysis

A. Macro-environment Analysis

1. Demographic

* Those who finished college bought 49% more gourmet coffee on average and those with some postgraduate education bought 71% more.

* Households with children and two working parents bought 28% more gourmet coffee.

* 16% of the U.S. adult population consumed specialty coffee on a daily basis whereas 63% indulged occasionally.

* Iced coffee has become a very popular drink in the United States, especially among women and teenage girls.

2. Social

* Lack of customer acceptance of new products or price increases necessary to cover costs of new products and/or higher input costs.

* The consuming public is concerned about the nutritional value of products offered by the specialty coffee sector and they challenged the correctness of labelling and calorie information posted on the products.

3. Economic

* Unfavourable general economic conditions in the market in which Starbucks operates that adversely affect consumer spending.

* Favourable foreign currency exchange rates, primarily on the Canadian dollar

B. Competitive Analysis (Five Forces Model)

1. Intensity of Rivalry (Low)

* Buyer switching cost is high

* Brand loyalty is significant

* There are few numbers of competitors

* Exit barriers are low

2. Bargaining Power of Suppliers (Low)

* The company acquires its raw materials from a number of different channels.

* The company uses a fixed-price and price-to-be-fixed purchase commitments to secure adequate supply of green coffee.

3. Bargaining Power of Buyers (Low)

* Buyer switching cost is high

* Buyers are fragmented – no buyer has any particular influence on the price

4. Threat of New Entrants (Low)

* Barriers to entry are high due to product differentiation and the relative size of existing players in the industry.

5. Threat of Product Substitute (Low)

* There is a high switching cost on the part of the buyers due to the perceived prestige of Starbucks’ products.

V. Environmental Analysis

A. External Audit

Threats

* Substitute products such as milk teas are gaining popularity (Philippines).

Opportunities

*

B. Internal Audit

Weaknesses

* The ratio of total cost and expenses to total revenue is high.

* Negative working capital (0.80:1.00)

Strengths

* Customer perceived product quality.

* Customer loyalty

Ratio Analysis

A. Profitability Ratios

Return on Sales 3.04%

Gross Profit Rate 55.26%

Return on Assets 5.73%

B. Liquidity Ratios

Inventory Turn Over 6.71

No. of Days in Inventory 54 days

Accounts Receivable Turnover 21.17

Average Collection Period 17 days

Working Capital ($441,700)

Current Ratio 0.80:1

Acid Test Ratio 0.40:1

C. Stability Ratios

Debt-Equity Ratio 1.28:1

Debt-Assets Ratio 0.56:1

VI. Generic Strategy

Starbucks employs the differentiation strategy. Despite higher prices that Starbucks charge to its products, customer patronage remains at a constant level...
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