STARBUCKS COFFEE COMPANY
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Starbucks Coffee Company is North America’s leading roaster and retailer of specialty coffees. Headquartered in Seattle, WA, Starbucks has 931 retails stores and 75 major airport locations. The Company’s objective is to establish Starbucks as the most recognized and respected brand of coffee in the world. To achieve this goal, the Company will continue to rapidly expand its retail operations, grow its mail order and specialty sales operations, and selectively pursue other opportunities to leverage and grow the Starbucks brand through the introduction of new products and the development of new distribution channels.
Employees are one of the most important resources for Starbucks. If the company is to prosper, the employees must be treated well. All employees are eligible for Starbucks’ health care and benefits package, as well as a starting wage above the minimum. Starbucks’ strong commitment to the environment is guided by an environment committee.
The Company endeavours to offer an environmentally safe product, as it believes that the welfare of people, plant and product are linked. Starbucks prides itself on being a “good citizen” locally and in the various coffee-producing countries. They make significant contributions to local charities that focus on children, the environment, the homeless, and AIDS research/support.
Financially, Starbucks has had solid earnings and returns. While still in the fast-growth stage, the Company has managed to continue healthy operations while generating enough public funds to finance store expansion. The company is expanding its empire overseas. Japan was Starbucks’ first expansion outside of North America. Starbucks also plans to open coffee bars in Singapore.
Although Starbucks expects same-store sales, which showed 20% increases in the past five years, to fall, overseas expansion and joint ventures promise to be major growth areas for Starbucks. Despite this potential problem, Starbucks remains excited about future growth and continues to be hopeful about the future.
STARBUCKS COFFEE COMPANY
Starbucks and its subsidiaries (“Starbucks” or the “Company”) include Starbucks Corporation and its wholly-owned subsidiaries: The Coffee Connection, Inc. (“The Coffee Connection”), Starbucks New Venture Company (“Starbucks New Venture”), Starbucks Coffee International, Inc. (“SBI”), and Starbucks Holding Company. In 1994, Starbucks acquired all of the capital stock of The Coffee Connection, a roaster/retailer of specialty coffee. Starbucks New Venture was created in fiscal 1994 to develop ready-to-drink coffee-based beverages in partnership with the Pepsi-Cola Company. In October 1995, SBI was created to pursue the development of Starbucks stores outside of North America, and Starbucks Holding Company was created to enter into a joint venture with Dreyer’s Grand Ice Cream, Inc. to develop and distribute Starbucks premium coffee ice creams.
Howard Schultz, 42, is the founder of the Company and has been chairman of the board and chief executive officer since its inception in 1987. The Company began with eleven Seattle stores and fewer than one hundred employees. It has since exploded to a half billion-dollar company serving three million cups of coffee per week in one thousand stores throughout the country. Schultz believes his company will succeed well into the twenty-first century. He states, “One of the things that you can’t measure on a balance sheet or on a financial statement is the soul of Starbucks.”
Mr. Schultz got his start with Starbucks Coffee & Tea, which doled out popular free samples of coffee brewed and sold at a shop in Seattle’s Pikes Place Market. Starbucks was founded in 1971 by three academics who had become enamored of the Berkeley, California food scene. The teachers moved into Seattle and opened a shop named Starbucks after Captain Starbuck, the coffee-loving first mate in Moby Dick. They picked a two-tailed siren for the logo, a creature of strength and power, common in medieval adventure tales.
Starbucks’ pioneers were enthusiastic but not very focused. Mr. Schultz more than made up for that lack of focus when he joined in 1982. In August 1987, Mr. Schultz and his investors bought the whole of Starbucks for $4 million. His marketing strategy was that customers “must recognize you do stand for something. What Starbucks was going to stand for was a good cup of fresh coffee….over and over…” The operation lost money for three straight years.
Starbucks Coffee Company is North America’s leading roaster and retailer of specialty coffees. Headquartered in Seattle, WA, Starbucks has 931 retail stores and 75 major airport locations. Store locations include at least 17 states; the District of Columbia; British Columbia, Canada; and Japan. They operate a national direct mail business and serve fine restaurants, Nordstroms, Barnes & Noble bookstores, ITT Sheraton Hotels, Delta Shuttle, and Horizon Airlines.
The Company holds approximately 39 federal trademark registrations in the United States. They have approximately 44 additional applications pending in the U.S. The Company currently owns one patent in the U.S. for its coffee on tap system and has several patent applications pending.
As of October 1, 1995, Starbucks employed approximately 11,500 individuals. None of the employees are unionized. Starbucks has never experienced a strike or work stoppage, and the Company believes that its relations with its employees are excellent.
Starbucks prides itself on being a “good citizen” locally and in the various coffee-producing countries. They make significant contributions to local charities that focus on children, the environment, the homeless, and AIDS research/support.
Starbucks is committed to selling only the finest whole bean coffees and coffee beverages. The Company purchases and roasts high-quality whole bean coffees and sells them, along with a variety of coffee beverages, pastries, confections, and coffee-related accessories and equipment, primarily through its Company-operated stores and licensed airport stores. To ensure compliance with its rigorous standards, Starbucks is vertically integrated, controlling its coffee sourcing, roasting, and distribution through its retail stores. In addition to its retail operations, the Company sells primarily whole bean coffees through a specialty sales group and a national mail-order operation. The Company purchases green coffee beans for its more than 50 blends and varieties from coffee-growing regions throughout the world and custom roasts them to its precise standards. The Company’s objective is to establish Starbucks as the most recognized and respected brand of coffee in the world.
Net Sales for fiscal year 1996 have rocketed to $696 million. This marks the ninth consecutive year that Starbucks revenue has increased by 50 percent or greater. Starbucks Coffee stock is publicly traded on the NASDAQ (Symbol: SBUX). Starbucks business is subject to seasonal fluctuations. A significant portion of the Company’s net sales and profits are made during the Christmas holiday season.
Starbucks retail stores have consistently over the last 3 fiscal years accounted for approximately 87% of net sales. The Company’s specialty sales and mail order operations account for the remainder of net sales. Starbucks has grown rapidly from 17 stores at the end of fiscal 1987 to 1006 stores at October 1, 1996. Starbucks retail expansion strategy is to increase its market share in existing markets and to open stores in new markets where it believes it can become the leading specialty coffee retailer. In addition to its 1,006 retail locations, Starbucks has a national direct response business and a specialty sales group, which serves fine dining, food services, travel and hotel accounts.
Establish Starbucks as the premier purveyor of the finest coffee in the world while maintaining our uncompromising principles as we grow. The following six guiding principles will help us measure the appropriateness of our decisions:
[i:604bd2c97f]Provide a great work environment and treat each other with respect and dignity.
Embrace diversity as an essential component in the way we do business.
Apply the highest standards of excellence to the purchasing, roasting and fresh delivery of our coffee.
Develop enthusiastically satisfied customers all of the time.
Contribute positively to our communities and our environment.
Recognize that profitability is essential to our future success. [/i:604bd2c97f]
RETAIL STORES: The Company’s retail objective is to become the leading retailer and brand of coffee in each of its target markets by selling the finest quality coffees and related products, and by providing a superior level of customer service, thereby building a high degree of customer loyalty. In addition to coffee beans and beverages, the Company’s stores offer a selection of coffee-making equipment, accessories, pastries, and confections.
Their goal in each store is to offer superior service to their customers while educating them about coffee quality. There is an information section in each store that provides customers with a good resource for becoming more knowledgeable about the world of coffee. Starbucks publishes a monthly newsletter, Coffee Matters, and carries a wide selection of brochures on the subject. Each store offers packaged goods, fresh-baked pastries and specialty merchandise from grinders to coffee makers.
Stores open at year end (52 weeks) 1996 1995 1994 1993 1992 1991
North American 929 627 399 260 162 114
Outside North America 2 — — — — —
Licensed airport stores 75 49 26 12 3 2
TOTAL STORES 1006 676 425 272 165 116
Starbucks stores are typically clustered in high-traffic, high-visibility locations in each market. Stores vary in size, with an average of approximately 1,500 square feet. All Starbucks stores are located in leased premises. Because the Company has the ability to vary the size of its stores, Starbucks stores are located in a variety of settings, including office buildings, downtown and suburban retail centres, and kiosks located generally in building lobbies, airport terminals, and supermarket foyers. While the Company selectively locates stores in suburban malls, its focus is on stores that are convenient for pedestrian street traffic.
As part of its expansion strategy of clustering stores in existing markets, Starbucks has experienced a certain amount of cannibalization of existing stores by new stores as the store concentration has increased, but management believes such cannibalization has been justified by the incremental sales and return on new store investment. The Company anticipates that this cannibalization, as well as increased competition and other factors, may continue to put downward pressure on its comparable stores sales growth in future periods.
The Company combines its merchandising strategy with its marketing programs to create and reinforce a distinctive brand image for its coffees. The Company’s merchandising strategy is reflected in its product mix, product pricing, and sales and educational materials. The product mix in each store varies and depends on the size of the store and its location. Larger stores carry a revolving selection that can include any of the Company’s more than 50 varieties of whole bean coffees and a range of coffee related products, including exclusive, high-quality coffee-making equipment as well as accessories bearing various Company trademarks, such as coffee mugs, coffee grinders, storage containers, coffee filters, and finely packaged gourmet food products. The smaller stores and kiosks usually sell a full line of coffee beverages, a limited selection of whole bean coffees and a few hardware items, mostly logo mugs and small equipment items.
Starbucks prices its coffees competitively with the prevailing high-end coffee prices, reflecting the high-quality of the Company’s coffees and its high level of customer service. Prices vary by market, including Canada, but as expressed in U. S. dollars, coffee beverage prices range from $0.80 for regular brew to $3.65 for the most expensive espresso beverages. Whole bean coffee prices range from $7.95 to $17.95 per pound.
The Company goal is to open 2000 stores by the year 2000. Management goals of future fiscal year openings have consistently been exceeded. Starbucks anticipated opening 275 stores in fiscal year 1996. During the 52 weeks ending September 29, 1996, the Company opened 307 stores (including four replacement stores), and licensees opened 26 stores, bringing the total number of company-owned and licensed stores opened in North America to 333. Looking forward to fiscal 1997, there are plans to open at least 325 new company-owned and licensed stores and to enter at least three major new markets in North America. If fiscal 1996 is indicative of future success, then their hopes will lead to fruition. Starbucks averaged opening one store every 26.5 hours.
SPECIALTY SALES: Specialty Sales include distribution to restaurants, wholesale warehouses, multi-unit retailers, hotels, and airlines. Starbucks is committed to expanding its specialty sales operations. During fiscal 1995, specialty sales accounted for 10% ($48.1M) of the Company’s net sales.
MAIL ORDER: The Company publishes a mail order catalog which offers its coffees, certain food items, and select coffee-making equipment and accessories. During fiscal 1995, mail order accounted for 3% ($14.4 M) of the Company’s net sales.
LICENSED AIRPORT STORES: Starbucks has entered into a development agreement that allows Host International, Inc. to operate Starbucks retail stores in multiple airport locations. Starbucks receives a license fee and a royalty from Host and sells coffee to Host for resale in the airport stores. All airport stores operated by Host must follow Starbucks’ store operating procedures and all Host managers and employees who work in these stores must receive the same core training given to Starbucks’ managers and employees. During fiscal 1995, sales from Host-operated licensed airport stores were less than one percent of the Company’s net sales.
JOINT VENTURES: The Company has entered into a 50-50 joint venture with Pepsi-Cola Company to develop and distribute ready -to drink coffee based products. An early product of this venture was Mazagran, a lightly carbonated coffee drink. It commenced test marketing in the spring of 1995 and failed late that same year. The most recent product is Frappuccino. A cold blend of ice, milk, and coffee which will be sold with soft drinks and iced teas, where Pepsi already commands prime shelf space. Other joint ventures include the following:
United Airlines has joined the ranks of Delta and Horizon Airlines in serving coffee on board.
Starbucks has also collaborated with Capitol Records Inc., on two Starbucks jazz CDs, available in Starbucks stores.
Redhook Brewery, part-owned by Anheuser-Busch uses Starbucks coffee extract in its Double Black Stout Beer.
In October 1995, SBI signed an agreement with SAZABY Inc., a Japanese retailer and restaurateur, to form a joint venture, which will primarily develop Starbucks retails stores in Japan.
In another 50-50 deal, Dreyer’s Grand Ice Cream Inc., is distributing five flavors of Starbucks coffee ice cream to grocery freezers across the country beginning August 1996.
In August, 1996, SBI signed an agreement with Bonvests Holdings Limited to open retail stores in Singapore.
Just announced, October 1996, Starbucks announced an agreement with U. S. Office Products Company (NASDAQ: OFIS) to distribute Starbucks fresh-roasted coffee and related products to the workplace through its distributorship. In addition to quality Starbucks coffee and serveware, distributors will furnish brewing equipment, condiments and other supplies, providing customers a full-service coffee experience.
The Company is interested in other joint ventures with partners that can extend the brand. Although Starbucks is present on both coasts, the Company figures only 1% to 2% of the U. S. population has tried its coffee. Their belief is that brand extension will gives access to new customers and channels of distribution.
Starbucks depends upon both its outside brokers and its direct contact with exporters for the supply of green coffee. Coffee is the world’s second largest traded commodity and its supply and price are subject to volatility. Coffee of the quality sought by Starbucks tends to trade on a negotiated basis substantially higher than commodity coffee pricing. Supply and price can be affected my multiple factors in the producing countries, including weather, political, and economic conditions.
To lessen the risks associated with the increases in coffee prices and to allow greater predictability in the prices the Company pays for its coffees over extended periods, the Company enters into fixed price purchase commitments in order to secure an adequate supply of quality green coffee and fix a cost for future periods. Starbucks believes that, based on relationships established with its suppliers in the past, the risk of non-delivery on such purchase commitments is remote.
Specialty foods, such as pastries, are generally purchased from local sources based on quality and price. Items bearing the Company’s logos and trademarks are purchased under contract. Hardware items, such as coffee makers, are generally purchased directly from manufacturers.
Starbucks realizes that one of their most important resources is their employees. The first guiding principle in their mission statement even refers to employees: “provide a great work environment and treat each other with respect and dignity.” Starbucks is attempting to imbed its values in the company culture. They use these values to give employees a sense of meaning to their work even if it is just pouring a cup of coffee.
The people at Starbucks realize that they must treat their employees well if their company is to prosper. At Starbucks, the employees are referred to as “partners.” Each partner (even part-time employees) is eligible to receive health care, participate in the Bean Stock program, and get a free pound of coffee each week. Under the Bean Stock program, employees are offered stock at 85% of the fair market value four times per year. Starbucks employees also participate in a 401(k) profit sharing plan. They may contribute to this plan on their own, and Starbucks will match 25% of each employees contribution up to 4% of the employees compensation.
Starbucks believes that they are in the “people development” business as well as in the coffee business. They have a non-discrimination policy with respect to age, race, sexual orientation, veteran status, or presence of handicap. They even hired a diversity manager in 1995 to improve the racial mix among their 11,500 employees. Each employee completes an extensive training program that includes product expertise, a commitment to customer service, and well-developed interpersonal skills. Starbucks professional baristas (coffee bartenders) complete up to 24 hours of training before entering their assigned store. This training gives them knowledge to answer any questions about coffee or the Company, and the knowledge to arrange tastings and demonstrations with any of the equipment in the store.
While the industry turnover rate is about 400 percent a year, Starbucks maintains a turnover rate of only 50 percent. Due to this low turnover, Starbucks has reduced their training time and costs.
Starbucks is profitable, and they believe that it is due to the value system of the Company. Schultz compared creating a company to raising children in that “values breed success.” The employees must be taught the values and then placed in the stores. When they falter, they must be helped back to their feet. After all, employees who are happy at their job will keep the customers “coming back for more.”
Peter Hopkins, a twenty-nine year old employee of Starbucks was shocked to learn that as an employee of Starbucks, he would receive health insurance, a stock plan, and be paid above minimum wage. After less than a year of working for the Company, Hopkins can attest that at Starbucks the employees “all share common goals. We all have this common belief in the product we sell.”
Starbucks’ strong commitment to the environment is guided by an environment committee. The company endeavors to offer an environmentally safe product, as it believes that the welfare of people, plant and product are linked. In the Starbucks Environmental Mission Statement: “Starbucks is committed to a role of environmental leadership in all facets of our business. We will fulfill this mission by a commitment to:
Understanding of environmental issues and sharing information with our partners (employees).
Developing innovative and flexible solutions to bring about change.
Striving to buy, sell and use environmentally friendly products.
Recognizing that fiscal responsibility is essential to our environmental future.
Instilling environmental responsibility as a corporate value.
Measuring and monitoring our progress for each project. [/i:604bd2c97f]
Encouraging all partners to share in our mission.”
Starbucks is constantly examining every aspect of their business by looking at ways to reduce, re-use and recycle. The following are some sampling of their environmental activities:
All stores are equipped with special water purification systems to insure your coffee is free of contaminants. They sell and encourage use of wear filters and constantly promote the use of brewing methods that avoid the use of paper filters: including French press, gold filters and espresso machines.
All company paper products are made of recycled paper wherever possible; including paper bags and boxes, all catalogues and brochures, publications and letterheads. Paper cups and coffee filters are made from oxygen-whitened (rather than chlorine-bleached) paper, which does not release dioxins into the environment.
A wide selection of re-usable, inexpensive thermal cups are offered at all stores, and a discount is offered to encourage their use. Re-use of coffee bags is also encouraged, and rewarded with the same discount.
Individual stores are encouraged to pursue recycling arrangements appropriate for their specific location. Many stores recycle milk cartons and waste paper, and several compost coffee grounds for the use of local gardeners.
They are currently exploring comprehensive, store-wide recycling programs that would include all paper goods, milk cartons, and spent coffee grounds. They are also testing bio-degradable coffee bag materials.
Starbucks’ policy to “recycle and conserve wherever possible” is exemplified by the 10 cent discount it provides to customers who reduce waste by using their own mugs or refillable coffee bags. Starbucks offers these discounts to help stimulate environmental responsibility amongst its customers. Inevitably, paper products are used, but Starbucks has insured that paper from their inert non-toxic, poly-lined paper cups are recyclable where state/city programs are in place.
Starbucks’ environmental conscience extends to its emphasis on and support of, sustainable, responsible and organic agricultural methods. Starbucks’ concern for avoidance of petro-chemical based insecticides and fertilizers is an example of how the company supports the “double bottom line” concept of stakeholder responsibility. Organic farming is not only beneficial for the environment, but protects the workers’ health, as well as the safety and quality of the coffee consumed here. So far, the company has yet to offer a line of organic coffee.
Starbucks buys from coffee-producing regions around the world, most of which are developing countries. According to Starbucks, their Vice President of coffee Dave Olsen has a personal relationship with the coffee plantation owners in an effort to support workers’ rights as well as maintain good water quality and support smaller farms.
SOCIAL RESPONSIBILITY AND ETHICS:
Social responsibility is more than simply charity. According to Mr. Milton Friedman, “The Social Responsibility of Business is to Increase Its Profits.” It may involve efforts to identify social needs as the basis for profitable activities. Most studies show that the corporation’s interests are served by its being socially responsible. Many benefits accrue to the socially responsible corporation. These include better motivated employees, more loyal customers, and more supportive communities. When these benefits are realized, one will agree that corporations should be socially responsible.
Starbucks is making significant efforts to be a socially responsible company. They make contributions to local charities that focus on children, the environment, and AIDS research/support. Starbucks donates time and materials to various children’s organizations and schools as well as The Children’s Orthopedic Hospital, Special Olympics, Northwest Harvest, Sound Keeper, Puget Sound Alliance, beach clean-ups and numerous organizations supporting AIDS research. In addition, Starbucks makes coffee donations to homeless shelters in every state where their retail stores are located.
Starbucks is also an active supporter of the arts and is involved in numerous events including the International Film Festivals in Washington DC, Vancouver, BC, and Seattle; Museum of Contemporary Art (in Los Angeles) benefits; Firs Night (a non-alcoholic New Year’s Eve party in Vancouver BC) and the Chicago Jazz Festival. Starbucks also supports Summer Jazz Cruises in Tacoma, WA. As Starbucks grows and reaches new markets, Starbucks Coffee has made a commitment to continue to be a strong supporter of local, non-profit organizations, and events in each community.
During 1994, Starbucks suffered embarrassing grassroots protests because it sources beans from export houses that pay Guatemalan workers below a living daily wage, about $2.50 a day. Starbucks is no worse than the average wholesaler, but it has a better-than-average reputation as a new breed, values-driven corporation. So when protesters leafletted Starbucks stores, and targeted its annual meeting, a peace plan was offered. In February 1995, Starbucks completed a code of conduct to do business abroad, thus becoming the first U.S. importer in the agricultural commodities sector, to try to improve working conditions in the world’s coffee-growing regions. On October 20, 1995, Starbucks Coffee Company released their “Framework for a Code of Conduct” in response to a grassroots campaign demanding that Starbucks set minimum standards for working conditions at the plantations from which they buy. In addition to pledging to limit child labor and support workers’ access to safe housing and healthy workplaces, Starbucks code states that “we believe in the importance of progressive environmental practices and conservation efforts,” “…wage and benefit levels should address the basic needs of workers and their families,” and “people have the right to freely associate with whichever organizations… they choose.”
However, there are important shortcomings to Starbucks’ new code. It lacks any reference to possible enforcement mechanisms such as discontinuing purchases from non-compliant suppliers. There is no explicit support for the right to collective bargaining nor opposition to discrimination, and there is no reference to consulting with unions to develop a plan for implementing the code in Guatemala.
The important next step will be to ensure that the Framework translates into concrete improvements for coffee workers. U.S./GLEP plans to monitor Starbucks’ efforts in Guatemala; ask other specialty coffee companies to make similar commitments; and explore ways to increase the awareness of these new industry standards.
In Guatemala, Starbucks will research coffee worker conditions and discuss the development of industry standards with Anacafe, the Guatemalan coffee producer organization. Also, the company will continue to support a rural water and sanitation services program in the country.
In Indonesia, Starbucks will work with the Nature Conservancy and CARE to promote sustainable agricultural environments in communities adjacent to Lore Lindu National Park.
In Sulawesi, an island of Indonesia, Starbucks will continue work to provide children with shoes for school.
In Kenya, Starbucks will continue to sponsor publication of the comic book style Pied Crow Magazine, which focuses on improving health, agriculture, employment, family planning, and environmental education.
In Ethiopia, Starbucks plans to help restore coffee growing in northwestern Ethiopia.
FINANCIAL PLAN AND DATA:
In order to fully recognize the impact of the tremendous growth of the Starbucks business, a brief re-look at the history and growth of the business is necessary. The Company was started in 1971 with the opening of its first store in Seattle’s Pike Place Market, selling roasted coffee by the pound. Early growth of the company was slow, and by 1987, the company had less than 100 employees and only 11 stores. In 1984, Howard Schultz convinced the owners of Starbucks to open their first coffee bar in downtown Seattle and it became overwhelmingly successful, and in 1987 Schultz purchased Starbucks, which he renamed the Starbucks Corporation..
Since that time, the Starbucks Corporation has grown by leaps and bounds, growing over 50% in most categories in each year since 1987. The table below illustrates their phenomenal achievements.
1996 1995 1994 1993 1992 1991
(in millions) 696.4 465.2 284.9 176.5 103.2 65.3
(in millions) 42.1 26.1 10.2 8.3 4.5 2.7
While the corporate headquarters has remained in Seattle, Washington, Starbucks now has approximately 1,004 stores in North America. In addition, the Company has roasting plants in Seattle; Kent, WA; and York, PA., and a mail-order catalog through which it sells coffee and related products all over the United States. Starbucks is also beginning to spread outside the United States with stores in Canada, and with a joint venture with a Japanese company called Sazaby, to spread its products in Japan. Starbucks has also entered into agreements with food, hotel, and other chains to exclusively sell its products with them and to develop joint projects, such as its venture with Pepsi-Cola. Starbucks has had two public stock offerings and are traded on the NASDAQ National Market System under the trading symbol “SBUX”, and has sold convertible debentures which are traded on the NASDAQ System under the trading symbol “SBUXG”.
Most of the data presented here is from the Company’s 1995 Annual Report, which is the latest available. Starbucks’ fiscal year runs from the first of October to the last day in September, so that references to the year 1995 mean 1 October, 1994 through 31 September 1995. In addition, a short summary of how the Company did as of June 30, 1996 is presented at the end and is taken from a Securities and Exchange Commission quarterly report.
Overall, Starbucks has had phenomenal growth, and it continues to expand and serve more markets. Based on the 1995 Annual Report, Starbucks has below-average return on assets (5.5%) and return on equity (8.4%). However, this is consistent with a relatively new company that is in the fast growth stages because much of its income is going to expand retail and distribution networks and to advertise to its new customer base. Its profit margin on sales is a healthy 5.6% and its general and administrative expenses as a percentage of net sales continue to fall, which shows that when the Company ends its torrid growth pace, it has the potential for solid earnings and returns.
Starbucks’ retail stores accounted for approximately 87% of net sales during the fiscal year ended October 1, 1995. In these stores, sales continue to grow at a healthy pace. In 1991, sales increased by 17%, and in 1992 and 1993, sales increased by 19% each year. 1994 and 1995 saw increases of only 9%, but this is high relative to the number of stores open by this time. In 1995, net sales totaled $465,213,000.00 generated by $402,665,000 in retail sales, an increase of 62% over 1994 levels, $48,143,000 in specialty sales, an increase of 81%, and $14,415,000 in mail-order sales, a 46% increase. The total sales figure of $465,213,000 compares quite well with the 1994 sales figure of $284,923,000 and 1993’s sales figure of $176,541,000. The sales figure for 1995 represents a 63% increase in sales over 1994’s level and a whopping 164% increase in sales over 1993’s level. These numbers alone show the astounding growth of Starbucks over just the last two years.
Another good indication of how well Starbucks is growing is the net earnings. The net earnings for 1995 came in at $26,102,000, which is 156% above the net earnings figure for 1994 of $10,206,000, and 215% above 1993’s figure of $8,282,000. The net earnings per share (EPS) in 1995 was $0.36, which was well above 1994’s EPS of $0.17 and 1993’s EPS of $0.14. The total shareholders’ equity in the Company in 1995 was $312,231,000, a 184% increase in total shareholders’ equity of $109,898,000 in 1993.
Starbucks has also managed to hold down costs while undertaking this tremendous growth. Cost of sales and related occupancy costs as a percentage of net sales decreased to 44% for 1995 compared to 44.7% for 1994. This decrease was due to increased prices on coffee beverages and whole bean coffees and lower distribution and packaging costs as a percentage of net sales, but the Company expects higher costs this year due to higher coffee bean prices. Store operating expenses as a percentage of retail sales increased to 38.6% for 1995 from 37.5% for 1994 as a result of higher retail advertising expense and a higher provision for store remodels.
However, general and administrative expenses as a percentage of net sales was 6.2% for 1995 compared to 7% for 1994. This decrease as a percentage of sales was due to the company’s ability to increase sales without proportionally increasing overhead expenses. Interest expense for fiscal 1995 was $3,800,000, unchanged from 1994 numbers.
Operating income for 1995 increased to $40,100,000 or 8.6% of net sales, up from $23,300,000 or 8.2% of net sales for 1994. Operating income as a percentage of net sales improved due to higher gross margin and lower general and administrative expenses as a percentage of sales, partially offset by an increase in store operating expenses and depreciation and amortization as a percentage of sales. Interest income for 1995 was $6,800,000 compared to $2,100,000 for 1994. The increase in interest income was due to higher average investment balances resulting from the Company’s public offering of common stock in November 1994.
The Company ended 1995 with $62,000,000 in total cash and investments. Working capital as of October 1, 1995 totaled $134,000,000 compared to $44,200,000 on October 2, 1994. Higher green coffee and merchandise inventories, as well as higher cash and investment balances, were the primary reasons for the improved working capital position at the end of 1995. Cash provided by operating activities totalled $11,400,00 for 1995. Cash used by investing activities for 1995 totalled $175,600,000.
This included capital expenditures of $129,400,000 to open 230 new Company-operated stores, remodel certain existing stores, expand existing office space, enhance existing information systems, and purchase equipment for the company’s roasting plants and distribution facilities, including the new facility in York, PA. Cash was also invested in equity investments and joint ventures including an $11,300,000 investment in newly-issued shares of Series B Preferred Stock of Noah’s New York Bagels, Inc., and 1,200,000 in its joint venture with Pepsi-Cola.
Cash provided from financing activities for 1995 totalled $176,800,000. In November 1994, the Company completed a secondary public offering of 12,050,000 shares of newly-issued common stock which generated net proceeds of approximately $164,000,000. Of note is that Starbucks has had two, two-for-one stock splits so far in its history, one on September 29, 1993 and one on December 1, 1995, to holders of record on November 1, 1995. Approximately $3,700,000 in cash was received in repayment of stock subscription notes receivable. Cash provided from financing activities also included cash proceeds from, and repayment on, the Company’s $30,000,000 line of credit, as well as cash generated in connection with the exercise of options to purchase shares of the company’s common stock and the related income tax benefit available to the Company upon exercise of such options.
Excess cash was invested primarily in investment-grade marketable debt securities. In order to meet its planned capital expansion goals, the Company completed a public offering of $165,000,000 in principal amount of its 4 1/4% Convertible Subordinated Debentures Due 2002 during the first quarter of 1996. Proceeds to the Company were approximately $161,000,000. The Company’s rapid expansion requires more cash than it currently generates from its operations, which has forced it to seek outside funds in order to pay for the capital improvements.
In a quarterly report to the Securities and Exchange Commission for the period ended June 30, 1996, the Starbucks Corporation reported continued explosive growth in earnings and operations. For the 39 weeks ended June 30, 1996, as compared to the 39 weeks ended July 2, 1995, net sales increased 49% to $500,095,000, up from $335,833,000. Retail sales increased by 49% to $431,243,000 from $288,726,000, due to the addition of new retail stores combined with an increase in comparable-store sales of 6%. Specialty sales increased 54% to $54,495,000 as compared to $35,356,000 for the corresponding period last year. During the 39 weeks ended June 30, 1996, the company opened 211 new stores, converted six Coffee connections stores to Starbucks stores, and closed one store. Licensees opened 17 new stores.
A summary of the financial data on the Starbucks Corporation shows that the Company is in the fast growth stage, but it continues to produce good numbers and has unlimited potential for growth and earnings. The Company had the resources for its growth for 1996, but it may need additional public funds for any other expansion beyond that. Also, the Company is struggling under the coffee bean shortage and resulting in higher bean prices which have resulted in less operating profit than expected. But overall, the company has the strength to overcome these minor setbacks and is set to continue to expand and grow, both in the U.S. and overseas.
Starbucks, the world’s largest gourmet coffee retailer, is hesitant to enter international markets. Starbucks Corporation has rapidly become the United States’ top coffee retailer, roaster, and brand of specialty coffee. After thrilling Vancouver coffee lovers for nearly a decade, the Company opened several retail locations in southern Ontario last winter. The company hired more than 100 Torontonians to staff its first five locations. The company enlisted area residents who bring a wealth of enthusiasm, community involvement, and dedication to Starbucks, comments Zone Vice President Roly Morris, a native of Toronto.
Over the past 25 years, Starbucks has become a staple of daily life in major cities throughout North America. The company offers more than 30 varieties of the finest arabica coffee beans from growers around the world, presenting them in a cozy, welcoming setting. In addition to whole beans, Torontonians can look forward to enjoying the finest coffee and espresso beverages, expertly prepared by Starbucks professional baristas (coffee bartenders), each of whom partakes in 24 hours of classroom training before stepping into his or her respective store.
Starbucks has been interested in expanding into Hawaii for a few years. Hawaii fit into Starbucks’ strategy to expand internationally as a “cross-over market” that reaches customers from both sides of the Pacific. Starbucks Coffee Company signed an agreement on Saturday, August 3, 1996 with The MacNaughton Group to form a joint venture partnership that will develop Starbucks retail locations in Hawaii. The partnership is scheduled to open its first store on the island of Oahu by the end of calendar 1996. The joint venture plans to develop approximately 30 stores throughout the Hawaiian Islands over the next three to four years.
The company is gearing up to expand its empire overseas and is now poised to expand to the Far East. Since the Company’s initial announcement last year of its plan to move into Asia. Starbucks Coffee Company has been quietly brewing a strategy to develop latte culture in Japan. Japan will be Starbucks’ first expansion outside of North America. The store is similar to other Starbucks Coffee locations. At this new store, well-trained, friendly baristas customize and serve a variety of Starbucks Coffee drinks to every patron, just like the stores in North America.
In addition, Japanese customers are able to purchase Starbucks Coffee beans, packaged food, serving and brewing equipment as well as fresh pastries and sandwiches. The company plans to offer the same menu as it does in its U.S. stores although the portions may be smaller. The names of items–many of which are Italian–such as coffee latte, will not change. The company has picked a country that loves coffee–Japan is the third-largest coffee consuming country in the world, behind the U.S. and Germany.
Starbucks opened an outlet in Tokyo in the Ginza shopping district on August 2, 1996 under a joint venture with Sazaby, Inc.–Sazaby has more than 180 stores in Japan that sell a wide range of products it manufactures, including furniture, interior decorations, clothing and handbags. The new company will be called Starbucks Coffee Japan Ltd.
A second Starbucks store was opened in Ochanomizu, a less glitzy district of Tokyo than Ginza, in September 1996. The Company hopes to continue to roll out stores elsewhere in Tokyo and in other Japanese cities if the operation proves successful. It will open as many as 12 stores in Japan within the next 18 months under a new partnership with the Japanese company. The company will not say how much money its foray into Tokyo has cost the company. But officials said they do not expect to earn a profit from the Japanese venture for several years.
Operating costs are double tall. Starbucks will have to pay to ship coffee to Japan from its roasting facility in Kent, PA and retail space in downtown Tokyo is two to three times as expensive as in Seattle. The flagship Tokyo store will occupy 1,500 square feet on two floors. Starbucks plans to open four more Japanese locations by the end of the year and 10 additional stores in 1997. The company hopes to have 100 coffee bars in major Japanese cities in five years. If Starbucks succeeds in Japan, the company will consider opening stores in other Asian countries.
Japanese consumers do not buy coffee to go. Unlike Americans, the Japanese rarely eat or drink as they walk down the street or drive to work. And Tokyo already has lots of coffee bars. Demand for coffee blends in Japan has doubled in the past five years and speciality blends are the fastest-growing segment of the industry. Gourmet coffee accounts for 2.5% of 1.2 billion pounds of coffee bought by Japan each year. The average per capita consumption among gourmet drinkers in 1995, the National Coffee Association reported in its latest consumption survey. Japanese have not developed a taste. They drink a lot of instant coffee or ready-to-drink coffee in cans, as well as American-style hot coffee. Iced coffee in a can is actually quite popular in Japan. Bottle Frappuccino, an iced coffee product Starbucks has been test marketing in stores, could do well in Japan.
Faced with strong competition at home, the Seattle coffee giant’s closest competitor in Japan will be Doutor Coffee Company, Japan’s No. 1 coffee-bar chain, with 453 shops. Other Japanese coffee bars now hawk “Seattle Coffee,” remodel their shops to look like those of Starbucks and go on intelligence missions to the U.S. to study its secrets. Starbucks has a reputation for knowing how to create a thirst. And Japanese coffee purveyors fear it may be able to create new coffee markets in Japan where they have failed. Mr. Honna, president of Pronto Corp.–a big bar coffee-bar chain with 94 stores, traveled to the U.S. last year to gather intelligence on Starbucks’ methods, visiting incognito more than 20 Starbucks coffee shops along the West Coast. Mr. Honna said that “If they really mean business, I think they will probably put some of us out of business.” However, Starbucks’ path is not free of obstacles, rents and labor costs are high. Starbucks must keep prices relatively low-under $3 for a caffe latte. It should offer light food to raise per-customer spending. The land of the rising sun is Starbucks’ first step toward realizing a lofty vision to be a global brand with 2,000 stores by the year 2000.
Hot on the heels of opening its first international outlet in Tokyo, Starbucks announced its plans to open coffee bars in Singapore. Starting to open retail locations in December 1996, the Starbucks Coffee locations will be operated by Bonvests Holdings Limited which has signed a licensing agreement with Starbucks Coffee International. Singapore is the first country involved in Starbucks’ expansion into Southeast Asia.
The agreement makes Starbucks one of the rare U.S. companies to enter the Asian market in a serious way before trying out Europe. Approximately ten Starbucks Coffee stores are expected to be opened within the first 12 to 15 months. The first retail location is scheduled to open at Liat Towers, which is owned by the Bonvests Group, and the remaining locations are expected to be primarily located in the Orchard Road belt, the Civic District, and the Central Business District.
Singapore, likewise, has seen a proliferation of gourmet-coffee outlets in the past few years, many of them based on U.S. style operations like Starbucks, that have crowded the market. Singapore still has no clear leader in the field, which should make Starbucks’ task easier. And the spread of high-end coffee shops has raised the level of sophistication among consumers, which is good for Starbucks.
Starbucks will also face a challenge as it enters Singapore amid a prolonged and still-deepening crisis in the retail industry that has seen department stores such as K-Mart of the U.S. and France’s Galleries Lafayette abandon the island this year. Starbucks is betting that Singaporeans, who have continued to window-shop even if they are not buying, will at least fork out the cash for a cup of coffee.
Starbucks whole bean coffees compete directly against specialty coffees sold at retail through supermarkets, specialty retails, and a growing number of other specialty coffee stores. The coffee beverages compete against all restaurant and beverage outlets that serve coffee and a growing number of espresso stands, carts, and stores. They both compete indirectly against all other coffees on the market. Starbucks believes that its customers choose among retailers primarily on a basis of quality and convenience, and to a lesser extent, on price.
Management believes that supermarkets pose the greatest competitive challenge in the whole bean coffee market. Mostly because they offer customers the convenience of one stop shopping. A number of nationwide coffee manufacturers are now selling premium coffee products through supermarkets, which may serve as substitutes for Starbucks coffee.
In addition, Starbucks competes for whole bean coffee sales with franchise operators and independent specialty coffee stores. In virtually every major metropolitan area where Starbucks operates and expects to expand there are local or regional competitors with substantial market presence in the specialty coffee business. As a result, Starbucks has developed a shark-like reputation for putting competing mom-and-pop coffee shops out of business.
The primary competitors for beverage sales are restaurants, shops, and street carts. There has been a significant increase in competition in the specialty coffee beverage business and this trend is expected to continue.
Starbucks also expects that competition for suitable sites for new stores to support the Company’s planned growth will be intense. There can be no assurance that they will be able to continue to secure adequate sites at acceptable rent levels.
Starbucks announced June 1996 that it has assembled a team including three leading digital media companies to develop a digital strategy. They will produce a multi-faceted digital marketing project, including alliances with on-line service providers and telecommunications companies. This will provide Starbucks and its customers new ways to communicate and do business interactively.
Competition among coffee stores is intense. Starbucks is the only one out there that has a national level of recognition and awareness. Starbucks, which pioneered upscale coffee bars, is still in a fast-growth phase as every city in America must get its much-anticipated espresso bar. Not all of them will belong to Starbucks. But the more people become accustomed to spending $3 on a cup of coffee, the more Starbucks, the dominant player, benefits.
In any event, the national push presents ad challenges, and even Starbucks expects same-store sales, which showed 20% increases in the past five years, to fall. They have established a major presence all through word-of-mouth. “The window is closing,” cautions Matthew Patsky, VP of a San Francisco investment company. “There’s no secret sauce here. Anyone can do it.” Mr. Schultz says. That explains Starbucks’ sense of urgency about expansion. However, Starbucks believes there is huge potential in the international market. Overseas expansion and joint ventures promise to be major growth areas for Starbucks.
Starbucks’ expansion carries inherent risks. Many brands cannot do both retail and packaged goods. Too many extensions can erode a brand’s identity. Wall Streeters say Starbucks should move onto supermarket shelves under a dual-brand strategy, but Mr. Schultz says that will not happen because the brand might suffer.
In addition to fluctuating coffee prices, management believes that in the future, the Company’s results of operations and earnings could be significantly impacted by other factors such as increased competition within the specialty coffee industry, the Company’s ability to find optimal store locations at favorable lease rates, the increased costs associated with opening and operating retail stores in new markets, the Company’s continued ability to hire, train and retain qualified personnel, and the Company’s ability to obtain adequate capital to finance its planned expansion. Despite these potential problems, Starbucks remains excited about future growth and continues to be hopeful about the future.