STARBUCKS CORPORATION

PART I: COMPANY REPORT

Contents
I. Executive summary ................................................................................................. 3

II. The company ........................................................................................................ 3

III. Situational analysis on Starbucks Corporation .................................................... 3

1. Current status of Starbucks .............................................................................. 4

2. Risk management assessment .......................................................................... 8

3. Corporate governance assessment .................................................................... 9

4. Starbucks Corporation under the economic index ......................................... 11

5. Proposals for improved value management ................................................... 16

6. Risks to Starbucks Corporation on not implementing proposals ................... 18

IV. Conclusions ........................................................................................................ 19

Bibliography................................................................................................................. 29

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Table of figures

Figure 1: Starbucks under PESTEL analysis.................................................. 5

Figure 2: Under expectation of Starbucks sales growth ............................... 11
Figure 3: The global sales growth of Starbucks in the same-store............... 11

Table 1: Profitability ratios of SBUX, MCD, and DNKN (%) .................... 12

Table 2: The liquidity ratios of SBUX, MCD, and DNKN (%)................... 13
Table 3: Gearing and activity ratios of SBUX, MCD, and DNKN (%) ....... 14
Table 4: Investor ratios of SBUX, MCD, and DNKN ................................. 15

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I. Executive summary

This report aims at analysing the current problems of the selected company
and its value management. Data collection has been gathered by both online and
offline methods from staff, managers, and Starbucks customers in its outlets in the UK
and some Asian countries. Online methods include survey Monkeys and Facebook.
As for offline one, many structured interviews, group discussions, and questionnaires
have been carried. Results of those studies reveal that value management of Starbucks
has been not changed much in three recent years (2013-2016). Furthermore, it has
shown many other problems such as quality of product, high price, labour cost, and
other economic effects as well as inefficiency in managing revenue, liabilities, and
return.

The study recommends some suitable solutions to improve those difficulties to

set reasonable price with its best quality and limit in maximum the effects of economy
changes. Moreover, some resolutions have been introduced to deal with its market
share and share price. Finally, few key recommendations have been given aiming at
increasing value management of this company.
II. The company

Starbucks Corporation is headquartered in Seattle, Washington, US and

operating in 68 countries. It is known as a roaster, marketer and retailer of coffee
around the world, trading in the NASDAQ under the symbol “SBUX”. Starbucks
serves different types of coffee tastes, tea, other beverages and quick food as well.

Goal of Starbucks is to maintain it as one of the most prestigious brands in the

world. Thus, it is continuing its store expansion in both existing and developed
markets. In addition, variety of coffee formulas have been developed to serve different
types of customers in many channels.

III. Situational analysis on Starbucks Corporation

Questionnaires, group interviews and online academic researches with
customers, staff and managers of Starbucks revealed that the company has many
restrictions in terms of value management. It mainly relates to price, market share,
and economic effects. Those problems or the current status of value management of
Starbucks have been analysed under qualitative and quantitative sides. In terms of

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qualitative aspect, the report assesses company situation, risk management, and
corporate governance. As for quantitative one, the report looks at market metric
analysis and financial analysis in comparison to its competitors including MC Donald
and Dunkin’ Brand.
1. Current status of Starbucks
This part focuses on analysing Starbucks under five things: company,
customers, competitors, collaborators, and climate with PESTLE model.
First of all, Starbucks is the world recognised and respected Coffee
Corporation and its main objective is to maintain this position by serving the finest
coffee, tea and food to every customer. Moreover, it also targets at increasing its
market share in both existing and new markets. Thus, Starbucks will expand its
business in some specific markets after analysing factors of market changes,
economic problems and customer behaviour as well as local culture. It also builds up
a high level of loyal customers through good customer service and cleans stores which
become Starbucks culture to all loyal customers. Its primary product is coffee
beverages, accompanying with tea, ready-to-serve food, and packaged goods.
Its primary audience is adults from 25 to 40 years old. The growing rate of this
market segment is 3% per year. They have got high income with professional careers.
49% of Starbucks’ sales come from them. In addition, 40% of Starbucks’ business is
contributed by young aldults (18-24). Starbucks coffee shops are convenient places
for students to study, meet people. This percentage has been rising at 4.6% annually.
Both audiences has been attracted due to not only Starbucks’ contemporary design in
shop or on cup but the availability of internet which helps them relax by surfing social
networks as well as doing their work outside office. Starbucks has not only served its
coffee indoor but also being ready to order online, in supermarket and “offered select
food service outlet” (O'Farrell, n.d.).
According to Statista (2016), although market share of Starbucks corp (42.4%)
is much higher than its competitor Dunkin’ Brands Inc (25.5), and others with 32.1%,
Starbucks still have to pay heed attention its competitors because of price and quality
of product. Price of Starbucks coffee is higher than its rivals, but when the global
economy goes into recession, customers could reconsider their coffee choice toward
costa coffee, beverages of Mc Donald or Dunkin’Brands. Although quality of
Starbuck beverages has recognised higher than others, some customers suppose that
its quality is not good as its brand recently. To sum up, there are two kinds of rivals
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including coffee shops and quick-service cafeterias which Starbucks need to give
more consideration to. In the aspect of coffee shops, Dunkin’Brand is considered as
one of the biggest competitors for decades. The biggest ready-to-eat restaurant, MC
Donald, is highly competing with Starbucks. It has been known as a fast food
restaurant. However, it has declared coffee war with Starbucks and Dunkin’Brand
with the introduction of flavoured and iced coffees in the mid-2000s. Tea, coffee, and
quick food of Starbuck also have to compete with many US restaurant, coffee market,
and large international companies such as café Nero, Gloria Jean’s coffee, Caribou,
and so forth.
At the moment, suppliers of Starbuck is around the world with over 50% from
Latin America, 35% from the Pacific Rim, 15 % from East Africa. African countries
are the main coffee bean producers of the company. According to Phaozea (n.d.),
there are three main distributors of Starbucks including retail business organisation
(stores of Starbucks), specialty sales and marketing selling its products to restaurants,
and online distributor. However, it has traded ready-to-drink 3 in 1 coffees in large
supermarkets. It can be said that Starbucks cut intermediates as many as it can to
reduce expenses for medium parties.
At last, the climate of the Starbucks is valuated with PESTEL model.

Figure 1: Starbucks under PESTEL analysis

Political Technological
- Tax policy => higher/ lower price - Rising in mobile purchases
- Employment law - Wifi use in stores
- Bureaucratic red tape in - Supply chain improvement
developing countries - Coffee machine for home use

Economic
- High growth of developing
countries
- Decline in unemployment rates
- Global economic recession
Environmental
- Environmental issues in countries
which produce coffee bean
- Using environmentally friendly
products

Social
Legal
- Increase in coffee demand
- Product safety regulations
- Health concern
- Changes in employment
- Age distribution
regulation
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There are three main problems which Starbucks should take notice of in terms
of political problem. First, tax policy in different countries where it sources coffee
bean. When the government in those countries imposes high taxation on farmers, it
means Starbucks has to purchase the coffee at the higher price resulting in higher
price per cup of Starbuck coffee. In converse, government taxation policy is easy and
harmonised to encourage coffee bean production like Tanzania (Anon., n.d.). Then,
buyers like Starbucks could have chance to make the finest coffee with cheaper price.
Second, the coffee bean could be lower in the countries where the government reduces
cost of licencing and permit. This is second opportunity for Starbucks to purchase the
cheaper coffee. However, bureaucratic red tape in developing countries is one of the
biggest threats to this company to expand their stores. Time and money could be
consumed a lot, which none of company wants, including Starbucks.

Three economic problems must be brought into consideration as it can reverse

sales of Starbucks. Although high growth and decline in unemployment rate in
developing countries could be an opportunity for this corporation to open new stores
and to increase the number of consumers, Starbucks still needs to prepare for the
phrase of global economic recession like in 2017. This event could happen
unexpectedly and drag down a bunch of customers because Starbucks could be
consider as an expensive choice at that time and Costa or coffee of MC Donald or
Nero could be more reasonable alternative.

Social lifestyle is another factor Starbucks should pay heed attention to. The
increase in demand of coffee in office, school, and public places is becoming the
largest advantage of Starbuck. This states that coffee industry is potentially
developing and creating much more change to expand. Health concern is the second
problem of this aspect. This is good news to this corporation because it is doing a
really good job in supplying the finest quality of specialty coffee to every customer as
its international brand tells us. Last but not least, age distribution must be brought into
consideration. Target customers of this corporation are young people and adult, but
the baby booming period is falling into stagnation and the world population is ageing.
Thus, the number of the target customers could be diminished in the long term, and
then widening the range of customer age could be the most profitable way to adapt to
this change.

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Technological advance is one of the most important problems which should be

brought into its concern. To update the rising in mobile purchase, Starbucks has made
cooperation with Apple – one of the most internationally popular smartphone
company to bring app based discount coupons. Additionally, free Wi-Fi has been
introduced in every store to serve technology demand of customers to solve their work
or study when drinking coffee. This step reveals that the company value of the brand
has been increasing, along with rise in customer experience in its stores. Besides, its
supply chain has been also improved with high technology. It means quickness,
quality guarantee, and reasonable price. However, technology has brought unexpected
things to the company like coffee machine for home use. This machine helps
customer save time and money for a cup of coffee at home, while quality of coffee is
still good, even better.

Environmental effects could be both opportunity and threats to this company.

If environmental problem is poor in coffee-producing countries, this could cause
downturn effects on quality of coffee bean which directly results in losing brand of
Starbucks coffee. Hence, the company should pay more attention to environmental
issues in its supplier’s countries to control quality of coffee bean. On the contrary, the
corporation has been very successful in using environmentally friendly products. It
uses reusable cups and greener cups in stores. Its energy consumption has been
decreased by 25% and renewable energy equipment has been purchased to use 50% of
the electricity in 2010. Starbucks also uses water-saving equipment to reduce usage of
water by 25% in 2015. When global warming matters has been warned to every
business and person, Starbucks performs well in protecting environment to build up
trust of customers.

In terms of legal aspect, the company has satisfied regulations on product

safety and on ingredients from genetically modified organisms. It verifies that quality
of Starbucks products have got high standard as its international brand. However, it
has to face with difficulties in employment regulations. Labour cost has been
increasing, which results in rise in spend of Starbucks on human resource.

To conclude, Starbucks development has been supported from many aspects

from political, economic one to social one. It also knows how to catch the
opportunities and update social life to give best service to customers. It takes

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advantages of technology change to improve its supply chain and expand its customer
range by being partnership of Apple. Moreover, it has conformed well to safety and
environmental regulations. However, it must be taken into account some threats such
as coffee machine for home use, increase in employment cost, age distribution and
global economic recession over the long haul.

2. Risk management assessment

This section concentrates on analysing risk management of the Starbucks,

specifically its management in controlling financial risks.

Starbucks is successful in combining things together to take advantages of

good sides and minimising its possible risks. For example, to diminish commodity
price risk it combines fixed pricing structures in supply contract like “fixed-price and
price-to-be-fixed contracts for coffee purchases, and financial derivatives to manage
our commodity” (Robinson et al., 2009). Also, this international company has
lessened its foreign currency exchange risk by entering into “derivative instruments to
hedge portions of cash flows of anticipated intercompany royalty payments, inventory
purchases, and certain other transactions in currencies other than the functional
currency of the entity that enters into the arrangements, as well as the translation risk
of certain balance sheet items” (Robinson et al., 2009). As for reducing interest rate
risk, it uses both “short term and long term financing and may use interest rate hedges
to manage our overall interest expense related to our existing fixed-rate debt, as well
as to hedge the variability in cash flows due to changes in the benchmark interest rate
related to anticipated debt issuances”, according to Robinson et al. (2009).

Starbucks managers also accept taking lower risk to get lower return. In case
of equity security price risk, it has minimal part to “price fluctuations on equity
mutual funds and equity exchange-traded funds within our trading securities
portfolio” (Robinson et al., 2009). Those exposures are operating at fair value with
“unrealised holding gains and losses recorded in net interest income and other in the
consolidated statements of earnings” (Robinson et al., 2009). It only has 10% changes
in the underlying equity prices of its investments since 2015 and has slight impacts on
its fair value.

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To sum up, Starbucks has done such a good job in managing and minimising
financial risks. However, the company should step out the comfort zone and taking
more risk to improve its financial performance in the future.

3. Corporate governance assessment

This part aims at assessing corporate governance of Starbucks. There are nine
points of corporate governance which should be looked at.

First of all, board mission and responsibilities of directors are clearly drawn. It
states that our mission is to “inspire and nurture the human spirit – one person-one
cup- and one neighbourhood at a time”, according to company profile. Likewise, its
main goals aim at global responsibility about ethical, environmental and community
problems. It also clarifies that responsibility of the Board is to oversee corporate
powers, ensure business management, and select potential nominees for the Board if
necessary (Anon., 2011). All results of company performance have been announced
quarterly to see how it changes and give necessary alternations. Its integrity also
exposed in its compensation decisions to each position based upon attracting and
maintaining top talent, paying for performance, and being true to its values. Those
criteria are really essential because the right statement would be given by right person
in each situation which helps the company heading in the right directions. Moreover,
it helps everything under the control of the company. Integrity of each policy to
employees and shareholders is rather important to maintain talent pool and company
development. Shareholders are easy to make investment decisions.

Secondly, all factors of production are evaluated legally and ethically. It

follows all labour regulations and meets the international Labour standard in all
factors of foreign production. It has also done well the ILO guidelines that it only
buys products from suppliers conforming to this guideline and does not use people
under working age and pay under minimum wage. Those things are really important
in building up company brand as well as customers’ trust, and because violation in
ethical problems in any sector could result in legal complications in the long run.
Moreover, shareholders are saved from legal troubles which is one of factors giving
investors confidence on their investment.

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Next, its rules on human resource are quite transparent, reasonable and no
discrimination. All employees both men and women have equal time and chance to
work and be promoted after a certain period of time. Wage levels are the same for
both and even immigrants could be worked there like local persons. This is crucial to
create equal working environment which could encourage staff work more productive
and create more profit for company in long term whatever the front difficulties are.

Auditing procedures has been checked regularly. It is easier for the internal
control of the company. This regular evaluation helps the company find out threats,
economic productivity, efficacy and quality, then financial data are clearly and
necessary improvements has been conducted.

The opinions of customers play an important role in daily improvement of the

company. Every suggestion of customers has been taken into consideration because
this is foundation to build up their loyalty which increases in sales. They could be
potential investors, so it complains could help to improve management of the
company. Thus, Starbucks have done many things to protect benefits of customers
such as reward card, recycled-content cup to protect them from hot beverages, 10%
discount with reusable cup of customers, extra ingredients counters, Wi-Fi free, and
friendly customer service.

All shareholders have equal rights and responsibilities. All of them are invited
to annual meetings to present their proposals. They are owners of the company who
have right to vote.

As mentioned above, environmental sustainability has been worked well under

the control of Starbucks management. Most things could be recycled in Starbucks
stores; water and energy have been saved in maximum but still ensuring quality. For
example, water consumption slightly dropped in 2012 which makes total decrease of
17.7% since 2008.

The most important is charity activities. The company has donated at least 2%
annual net profit to charity, it also establish the Starbucks Foundation to commit to the
community charity activities. This commitment is really good for international image
of Starbucks as well as promotion sales.

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To summarise, Starbucks is rather successful in its corporate governance.

Inside company, it makes sure every member from high-ranked positions to part-time
staff has equal chance to work and be promoted. Most regulation is transparent and
legal to support it build up an international prestigious image with high quality in all
products and safe and equality for all employees, and environmentally friendly
company as well as good intention to public.

4. Starbucks Corporation under the economic index

This section emphases on quantitative data of Starbucks Corp in the period of
2013 to 2015 in comparison with its competitors of MC Donald and Dunkin’ Brand
company. Those data are sales growth, profitability, liquidity, activity, gearing, and
investor. A big picture of sales growth Starbucks is shown as below.

Figure 2: Under expectation of Starbucks sales growth

7
6
5
4
3 Estimate
2 Actual
1
0
Americas EMEA China/Asia Pacific
-1
-2
Source: CNBC (2016)

It can be said that Starbucks has been underestimated in most market. In its
home country – Americas, it misses over 2% and nearly 2% in China/ Asia Pacific. Its
performance is worst in Europe, the Middle East and Africa with the actual sales
growth of -1%.

Another statistics of the global same-store sales growth of Starbuck is not

much better as well.

Figure 3: The global sales growth of Starbucks in the same-store

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10
9
8
7
6
5
4
3
2
1
0

Source: CNBC (2016)

From 2013 to 2015, sales growth of the company has fluctuated from 5 % in
the first quarter of 2014 and 2015, and the fourth quarter of 2014 to the peak of 9 % in
the first three months of 2016. However, it plummeted to the record low at 4% in the
third quarter of this year. To sum up, this company needs new strategies to increase its
value management or sales growth, although many factors as mentioned above are
quite positive for its development.

Some data of profitability of Starbucks, MC Donald, and Dunking’ Brands has

been looked at as follow.

Table 1: Profitability ratios of SBUX, MCD, and DNKN (%)

Starbucks Corp.(SBUX) MC Donald (MCD) Dunkin’Brands (DNKN)

2013 2014 2015 2013 2014 2015 2013 2014 2015
Gross 57 58 59 39 38 39 82 82 84
margin
Operating 2 19 19 31 29 28 43 45 39
margin
Net 0 13 14 20 17 18 21 24 13
margin
Source: NASDAQ (2016)

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As can be seen, gross margin of Starbucks has been increasing 1% annually at

57% in 2013, 58% in 2014 and 59% in 2015. It means that Starbucks could retain
average of $0.58 from each dollar of revenue generated or to devote to operating
expenses. In comparison to its two competitors, this figure was lower than DNKN, but
higher than MCD. Although the range of MCD product is larger than SBUX, the
amount of money it could spend on the remainder on cost of goods sold was lower
than that of SBUX.

As for operating margin, the situation has been changed. Operating margin of
SBUX was lower than its competitors from, but it was increasing from 2% in 2013 to
19% in 2015. It indicates that its competitors MCD and DNKN have less financial
risks than the Starbucks as well as it has been trying its best to manage those risks.

In terms of net margin, the Starbucks has kept lower than its competitors, but it
has been rising. In 2013, this company has net margin of 0% which reveals that the
Starbucks has been not quite performed well in converting its revenue into actual
profit in comparison to its competitors. However, this state has been improving with
the increase to 14% in 2015 while MCD was falling from 20% to 18% and DNKN
was going down from 21% to 13% in the period of 2013 and 2015.

To conclude, the profitability of the Starbucks has been lower than its rivals,
but it has been improving year by year. It could be said that management of Starbucks
to surge its profitability is getting better comparing to Starbucks of many years ago
and could be over its competitors in the long run.

Next, two liquidity ratios has been cited assess the ability of Starbucks and its
contenders in converting assets into cask quickly and at low cost as below.

Table 2: The liquidity ratios of SBUX, MCD, and DNKN (%)

Starbucks Corp. MC Donald Dunkin’Brands

2013 2014 2015 2013 2014 2015 2013 2014 2015
Current 102 137 119 159 152 327 134 111 133
ratio
Quick 81 101 83 155 148 323 134 111 133
ratio
Source: NASDAQ (2016)
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Both current ratios and quick ratios of Starbucks were lower than MC Donald
and Dunkin’ Brands. Current ratios of Starbucks have been increasing from 102 to
119 from 2013 to 2015. This means that every $1 in current liabilities, this company
had $1.02 in 2013 and $1.19 in 2015. MC Donald was much better when its each
dollar in current liabilities could generate 3.27 dollar in current assets, and DNKN got
1.33 dollar in 2015. Quick ratios of Starbuck were much lower than its competitors. In
2015, quick ratio of SBUX was 83%, but MCD was 323% and DNKN was 133%. It is
shown that its rivals could repay their liabilities more easily than that of Starbucks.

In summary, although Starbucks is the world brand about quality and high
price than its rivals, its liquidity is slower than its competitors. This could be due to
the range of products, so some solutions related to this aspect should be planned.

Then, gearing and activity ratios have been presented as follows.

Table 3: Gearing and activity ratios of SBUX, MCD, and DNKN (%)

Starbucks Corp. MC Donald Dunkin’Brands

2013 2014 2015 2013 2014 2015 2013 2014 2015
Gearing 0.29 0.39 0.40 0.88 1.17 3.40 4.50 4.91 -11.11
Total 1.29 1.53 1.54 0.77 0.80 0.67 0.22 0.24 0.26
asset
turnover
Source: NASDAQ (2016)

In general, gearing ratios of SBUX was higher than the others indicating that
this corporation was in a lower degree of leverage in comparison to its rivals from
2013 to 2015. Likewise, this figure expresses that MCD and DNKN had riskier
financing structure than that of SBUX. However, this percentage of SBUX was
increasing from 0.29% in 2013 to 0.40% in 2015, when its competitor of DNKN was
tending to fall this portion down to -11.11% in 2015. Those changes demonstrate that
SBUX should keep its gearing ratio at average because high risk or without risk is
both not good movement of any business.

From perspective of activity ratio, total asset turnover of three had tendency of
rising, while SBUX kept the higher ratios comparing to its competitors at 1.29% in

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2013 and 1.54% in 2015. This articulates that $1 of assets of SBUX produced $1.54
of sales in 2015, which was higher than that of MCD and DNKN.

In conclusion, SBUX is quite safe from risks in which it is operating and its
performance in term of activity ratio has been much better than its competitor so far.

Finally, some percentages are important to investors to refer before making

decision as presented below.

Table 4: Investor ratios of SBUX, MCD, and DNKN

Starbucks Corp. MC Donald Dunkin’Brands

2013 2014 2015 2013 2014 2015 2013 2014 2015
EPS 0.01 1.35 1.82 5.55 4.82 4.80 1.36 1.65 1.08
ROE 0 39 47 35 37 64 36 48 48
P/E 3,849 27.85 31.23 17.48 19.40 24.56 35.44 25.85 39.07
Source: NASDAQ (2016)

It could be said that earnings per share of MCD was highest with 4.80% in
2015, followed by SBUX with 1.82% and DNKN with 1.08 in the same year.
However, according to NASDAQ (2016), these portions of both SBUX and DNKN
were going down to 1.35% and 0.94 in 2016 respectively. From perspective of return
on equity (ROE), the rivals of SBUX performed better in using equity base and return
for investors. Last year, investors of MCD got highest return with 64%, followed by
DNKN with 48%, and SBUX with 47%. Hence, managers of SBUX should find ways
to utilise its equity base more profitable. In other word, they should learn some from
MCD. At last, although EPS and ROE percentages of SBUX were rather normal
compared to its rivals, price-earnings ratio of SBUX was higher than them a bit.
Especially, it was 3,849.00% which was much higher than MCD of 17.48% and
DNKN of 35.44% in 2013. It can be said that investors had high expectation on
earnings growth of SBUX three years ago. However, it went down to 31.23% last
year. Then, management of SBUX should be improved to get back the trust of
investor.

To conclude, most financial data determine that Starbucks Corporation has

been placed in safe zone. On the one hand, Starbucks is good at using its assets to
generate more sales, and not taking much risk in coffee industry, as well as used to get
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high expectation from investors. However, its point in the eye of investors has been
lost too much. It is also not well at utilising liabilities and revenues to create profit and
asset respectively in comparison to its competitors. Hence, the following part suggests
some solutions to improve these above inefficiencies of Starbucks Corporation.

5. Proposals for improved value management

Starbucks has been facing many problems in managing revenue and using
liabilities or satisfying creditors. It created less value for shareholders by generating
operating cash flow. Further, many changes of external environment have brought
difficulties to this company such as economic recession, customer range, and
technology. Thus, the following presents some recommendations on financial
management and strategic management system of Starbucks.

To deal with internal difficulties, financial management firstly should be

changed in net revenue growth. First, the company should create new products to
expand its product range. Both MC Donald and DNKN are doing business on more
fast food, snack, and cupcake beside coffee beverages, while Starbucks mainly
focuses on drinks. This is one of the reasons making its competitors get higher
revenue growth. Second, price adjustments should be made because some rumours
that its current coffee quality is not compatible to its high price which many lower-
income people do not want to afford. Third, online channels should be more
developed. Online products are relatively popular at the moment, so people prefer
online shopping which can save their time and money. Thus, developing this channel
could help increase revenue of the company. Moreover, operating cost should be
reduced by cut human resource cost and improvement on supplier relationship
management. In the future, human resource cost is tending to rise, so the company
could expand its store in Asia countries and Africa where labour cost is lower than
western countries. They should work well with suppliers to avoid problems that they
supply low quality coffee bean because of environmental problems in their countries
as an example. Lastly, the company should manage debt to equity relationship. As
mentioned above, this ratio of Starbucks is quite low, but it keeps the company away
from financial risks. However, as a role of a business, when it takes higher risk, it can
get higher profit. Thus, the company should increase gearing ratio at a control level.

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To improve strategic management system, there are some points which should
be recommended. First of all, financial performance could be improved by increase
quality of coffee, expand new products which could go with coffee, promotion in
special occasion like couple in Valentine and family in Christmas. Customers’
perception could be improved by better coffee quality, and professional and friendly
customer service. Internal business process should be excelling at advancing at coffee
production process, key human resource to find out new formula for coffee beverages,
and increasing management work. Finally, the company could improve and create
value by learning lessons from itself and its competitors in managing assets,
investment, and using liabilities to avoid the same mistakes, getting regular feedbacks
from customers.

As for managing strategy, Starbucks should have many promotion programs

for customers to rebuild their loyalty in Starbucks coffee quality in short term, and
expand its operation outside US like Asia market to take advantage of low labour cost
and cheap ingredient cost as well as developing new formula for its coffee beverage in
the long term. Every movement should consensus on its future vision and certain
strategy for each market and different customers group. As for business planning, it
should properly allocating coffee bean and other investment in different market. For
example, more coffee and investment in hot drinks should be invested in western and
American market because winter in those markets is longer, so people prefer hot
beverages around year. In contrast, in Asia countries summer is quite long which
make cold drinks become its preference. The most important thing is feedback and
learning. Every comment and feedback from regular and un-regular customers should
be taken into serious consideration. They should be analysed carefully and plan
suitable strategies to amend it. For instance, customers give comment that Starbucks
coffee in one store in New York has not good quality and more ice than he/she
expects. Manager of Starbucks should send someone to that store to carry out
investigation about it quality and content of ingredient in its coffee. If the truth is like
customer comment, they should adjust standard of coffee in that store to be better as
they did, some warnings to staff there as well as reward for the customer should be
given. If the problem is not serious like that comment, Starbucks should take this as a
warning about its quality or this could be trick of its competitors. Moreover, some
other investigation in other store should be carried out as well to not only comfort

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rumours but also find out new solutions to update market trend and customers
preference.

To conclude, strategies for both inside and outside company should be

planned. Those are solutions to not only increase financial data about asset utilisation
efficiency, proper investment, or return for shareholders, but also customer trust and
environmental sustainability, and so forth. Value management only increases when
people can see better results in both financial data and practical changes in each store
and less affect to environment.

6. Risks to Starbucks Corporation on not implementing proposals

Those above solutions are not all things that Starbucks needs to completely
improve its value management, but it is necessary to minimising its internal and
external downturns as presented in situational analysis section. Therefore, many risks
could happen to the company, if those solutions have not been applied.

First of all, decline in accounting performance is unavoidable. There is no new

product developed resulting in unchanged revenue, while its competitors keep
diversifying their products to increase return and utilise their investment more
efficient and be easy for them to repay liabilities like MC Donald.

Moreover, it can lose market share because customers could not find new
things in Starbucks which can attract them. For example, if the proper investments
have not conducted such as expansions in cold drinks in Asian countries, and more
hot drinks in cold countries, there is no one who wants to enjoy its coffee anymore.
Thus, loss of market share is normal when its stores have to close day by day in
different markets.

When accounting performance keeps falling and its market share falls into its
competitors with products of cheaper price and more choice, its share price can go
down as the result. Let take Apple as an example, its originals was used to an
international icon and a unbeatable brand, but there has been not much change in
Apple products, improvement in its quality which results in losing market share in
China and US into Samsung, or ever new entrants like Huawei. Its stock value has
been currently reduced from growth stock to value stock in the eye of investors.

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To conclude, changes are important for any business to develop and maintain
its brand. To Starbucks, taking more risk with new product innovation and new
market is the most important changes to develop the company. Its quality of products
must be ensured from every coffee bean from its suppliers. Those are the first things
Starbucks needs to do to get more trust from investors and keep it safe from loss of
market share and fall in share price.

IV. Conclusions
This report analyses all qualitative and quantitative data on the Starbucks
Corporation. By doing so, it has revealed many complications such as poor results in
using revenue and liabilities, creating less return for shareholders, and slower than its
competitors in repaying debts. Then, some solutions have been recommended to
improve the situation.
In term of financial management, new product innovation, price adjustment,
sales promotion, and online channels development are necessary to increase net
revenue growth. Besides, it could reduce operating cost by enhancing in supplier
relationship management.
As for strategic management system, managers have to control quality of its
products in each shop and excelling at developing new formula for its products as
well as increasing perception of customers. Furthermore, proper investment plans for
both long-term and short-term strategies should be conducted based on deliberate
analyses on customer feedbacks.
If those changes have not been deployed properly and rightly, the world brand
of Starbucks could be illuminated as the result of loss of market share and fall in share
price when its financial performance has not been improved.

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PART II: EVIDENCE REVIEW

I. Introduction ........................................................................................................... 21

II. Research methodology ....................................................................................... 21

III. Data analysis, reliability, and validity................................................................ 21

IV. Literature review ................................................................................................ 22

1. Value management ......................................................................................... 22

2. The ways to improve shareholders value ....................................................... 22

3. Analysis models ............................................................................................. 22

3.1. PESTEL model ......................................................................................... 22

3.2. Risk management ..................................................................................... 23

3.3. Corporate governance ............................................................................... 23

3.4. Interpretations of financial ratios.............................................................. 23

V. Further DBA research perspectives ................................................................... 26

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I. Introduction

This section focuses on showing relationship between economic theories and

its application in business to improve value management for shareholders. Besides,
research methodology and data collection are presented as well.

II. Research methodology

The research on Starbuck Corporation has been carried out based upon
qualitative and quantitative methods. Qualitative tool has applied focus groups and
face-to-face interview to get data and then analysing five general factors of Starbucks
through. They are company things (objectives, strategies, products and services, and
technology), customers (target audience, characteristics, distribution channels, and
market size and growth), competitors (products & services, characteristics, and market
share), collaborators (agencies, suppliers, business partners, and distributors), and
climate in which external factors have been evaluated with PESTLE model.
Quantitative way has looked at price earnings ratio and financial data. All of those
figures could be used to find out value management problems of Starbucks and
improvement for them.

To avoid prejudice in favour of Starbucks Corporation, the questionnaire has

been designed and delivered to random staff, managers and customers in Starbucks
stores. They are multiple choices and writing questions. Fifty copies have been
handed and most of the open-ended questions have been left blank.

To pre-test the reliability and validity of those questions, pilots have been
conducted with 10 hand-outs. Feedbacks on format, concept, and wordiness of the
questionnaire have been given and then any mistake could be excluded.

III. Data analysis, reliability, and validity

Morningstar and Starbucks annual report are two main sources to get
quantitative data for this report.

Value of this report has been identified through reliability and validity. Its
reliability is to check how similar the approach method is about repeating, and
stabilising. The validity of the data is to ensure the degree of truth of this report.

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IV. Literature review

1. Value management

Value management is to manage the sustainable value as a structured process

for all stakeholders through continuous development of competence and solutions to
multifaceted issues (NSW-Treasury, 2014).

2. The ways to improve shareholders value

Wasmer (n.d.) mentions that shareholder value has been created by generating
more income and using less cost of capital. Thus, there are two main methods to
maximise shareholders value including increasing profit and reducing cost of capital.

To create more profit, business should have smart marketing and sales
strategy. For example, it can sell more units by promotion strategies. Also, developing
new products bases upon the available materials and updating high technology trend.
On the other hand, it must do some strategies to reduce cost of capital. For instance,
convincing suppliers to cut price of ingredients is one way. Another method is debt
cost reduction by reviewing the debt profile, creditor management and cost structure
as well as financial management controls.

3. Analysis models
3.1. PESTEL model

PESTEL stands for the political, economic, social, technological,

environmental, and legal terms in the industry of the company. According to
Carpenter and Dunung (2012), this is a key model for long-standing and new
businesses to assess microenvironments to make sure that they are going in the right
direction and identify their opportunities and threats in which they operate. This is
important toll for new entrants who would like to open and expand their business in
foreign countries. However, the company has to consume a lot of time and money to
get high quality data.

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3.2. Risk management

According to Financial Times (n.d.), Risk Management is the process aiming

at identifying, quantifying, and taking actions on the risks based upon maximising the
possibility of success and mitigating the chance of failure. There are many types of
risk such as business risk, financial risk, transaction risk, liquidity risk, market risk,
credit risk. However, only financial risk management is focused in the range of this
report. It is impossible for any company to eradicate all risk. The thing is they have to
understand and accept them in the whole context. There are some ways to manage the
risk like buying insurance, sharing risks, or avoiding risky positions.

3.3. Corporate governance

Corporate governance is a system of regulations in which company bases upon

to balance the interest for all stakeholders of the company such as shareholders,
managers, and financiers and is a tool for company to accomplish its objectives
(Wong, 2013).

This framework is very important to justify how transparent and responsible

corporation is. It is also a ruler for the company to follow and create a fair
environment in the corporation.

3.4. Interpretations of financial ratios

There are five groups of financial ratios used in this report to analyse firm
performance comprising of profitability, liquidity, activity, solvency, and investor.
Profitability ratios are used to calculate return of the firm on its investment by using
gross margin, operating margin, and net margin.

𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡
Gross Margin (GM) =
𝑆𝑎𝑙𝑒𝑠

Gross margin denotes “the percentage of revenue available to cover operating

and other expenditure. Higher gross margin indicates some combination of higher
product pricing and lower product costs” (Robinson et al., 2009). Competitors’ power
has strong influence on this number, so higher or lower price is controlled by
competition.

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Operating margin can be shown in sales strategy. A high-price and high-

margin strategy results in lower sales. A low-margin but high-volume strategy can be
relatively successful.

𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑝𝑟𝑜𝑓𝑖𝑡
Operating Margin (OM) =
𝑆𝑎𝑙𝑒𝑠

For start-up companies, this portion does not count on investment capital at the
first place. It is also used to compare different companies in the same industry, and
even better if they have the similar business models and revenue figures.
Net margin indicates how effective a company converts its revenue into actual
profit.

𝑛𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒
Net margin (NM) =
𝑠𝑎𝑙𝑒𝑠

The higher the net margin is, the more effective the company is at cost control.
This figure is a useful way to compare companies in the same industry. In case of
different industry, it can articulate which industries are more profitable.

In terms of liquidity, three primary ratios has been used which are current
ratio, quick ratio, and WC/sales. They are used to show the easiness of a firm in
transferring it assets into cash. Current ratio is relation between current assets and
current liability.

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠
Current ratio (CR) =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

If this ratio equals 1.0, there is equality in book value of currents assets and
book value of current liability. The higher ratio is, the higher the liquidity is to deal
with short-term obligations.

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠−𝑆𝑡𝑜𝑐𝑘
Quick ratio (QR) =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

This ratio also refers the higher ratio, the greater liquidity. According to
Robinson et al. (2009), when inventories of a company fall into illiquid situations, this
ratio indicates liquidity level better than current ratio.
Activity ratios show daily efficiency of a company like inventories
management and collection period (Thomas R. Robinson, Hennie and Greuning,

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STARBUCKS CORPORATION

Elaine Henry, Michael A. Broihahn, 2009). This ratio is relatively useful to compare
to competitor or industry.

Asset turnover ratio = Sales/average total assets

Solvency ratios measure how to meet long-term obligations of a business.
Gearing=debt/equity = all loans/ shareholder funds
The high percentage means high leverage, but it does not denote poor financial
condition. Instead, a company is taking a riskier financing structure with high ratio.
The company usually operates in monopolistic situations and sectors using high-cost
fixed assets.
Investors must use the three following ratios to evaluate a business, and then
making investment decisions.
𝑃𝑟𝑜𝑓𝑖𝑡 𝑎𝑓𝑡𝑒𝑟 𝑡𝑎𝑥
Earnings per Share (EPS) =
𝑁𝑜 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠

Earnings per share indicate as an indicator of profitability of a company or

profit the company on each outstanding share of common stock. But, it does not have
feature of comparison among companies because it often ignores the required capital
to generate the earnings in the calculation (Robinson et al., 2009).
𝑃𝑟𝑜𝑓𝑖𝑡 𝑎𝑓𝑡𝑒𝑟 𝑡𝑎𝑥
Return on equity (ROE) =
𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠 𝑓𝑢𝑛𝑑𝑠

This denominator measure how much shareholders earned for their investment
in the company. The higher figures means the company is efficient in using its equity
and investors have got good return. Investors usually calculate both beginning ROE
and the ending ROE to ascertain profitability change over the period.
𝑆ℎ𝑎𝑟𝑒 𝑝𝑟𝑖𝑐𝑒
Price earnings ratio (P/E) =
𝐸𝑃𝑆

The P/E ratio is to show the price per share in relation to the amount of earning
to every share (Robinson et al., 2009). A higher P/E means higher future earnings
growth, and a low P/E specifies a company is undervalued. Like EPS, this is not a
good indicator to compare among different companies.

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V. Further DBA research perspectives

Many other economic quantitative data could be used to evaluate the situations
such as market value, economic value added which measures profitability of a
business and could initially replace accounting earnings or profit measures.
Correspondingly, some other indicators of activity could be calculated to measure the
efficiency of a business such as average collection period, inventory turnover, and
days’ sales in inventories. Hence, the larger scope of DBA research those indexes
could be used to give deeper and more detailed information about any selected
company. Then, the more practical and effective solution could be outlined to
recommend to the Board.

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PART III: REFLECTION FOR EMPLOYABILITY ENHANCEMENT

I. Critical thinking and core capabilities for the consultancy task ............................ 28

II. Evaluation of current knowledge, skills and competences ................................ 28

III. Requirement of leadership skills for future personal development and career
succession..................................................................................................................... 28

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I. Critical thinking and core capabilities for the consultancy task

1. Knowledge about the Starbucks: a consultant should have most knowledge
about qualitative and quantitative data of the company to see what the company done
well and which one is not good. Then, the suitable resolutions for each situation could
be given
2. Economic ratios: each ratio has strong and weak points, thus consultant
should understand both sides to apply the right ratios for the specific management
problems. This is really important to give good suggestions for each investment
decision and financing decision.
II. Evaluation of current knowledge, skills and competences

Although most knowledge about financial ratio from master degree help writer
a lot in analysing the selected company problem in term of value management, all are
theories. Moreover, the writer has been not experiencing any job to understand the
complications of real economic problems in any specific company and has no chance
to work with managers of Starbucks, thus suggestions without considerations about
financial and hands-on calculation are unavoidable.

Some data about SBUX, MCD, and DNKN in 2016 has been missing because
fiscal year 2016 has not come to some of them and then the official data have been not
released. The writer once again has not updated data to give better current situation of
the selected companies.

III. Requirement of leadership skills for future personal development and

career succession

Load of skills which a leader needs to be trained are as follows

Analysing: leader should know the meaning of every financial ratio to

recognise the book value and the real value of a company. Also, understanding them
and analysing them in the specific economic states could help leaders giving right
financial decisions and investment decisions.

Enterprising: a future leader should have or show the ability to think of new
projects or new ways of doing things and make them successful. At the moment, this
is my biggest weakness which needs to be trained and developed as soon as possible.

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Bibliography
Anon., 2011. STARBUCKS CORPORATION CORPORATE GOVERNANCE
PRINCIPLES AND PRACTICES FOR THE BOARD OF DIRECTORS. [Online]
Available at:
http://globalassets.starbucks.com/assets/c5549e52e77f4cfaad04b09303df67a2.pdf

Anon., n.d. The PESTLE analysis of Starbucks. [Online]

Available at: https://www.scribd.com/doc/48810809/The-PESTLE-analysis-of-
Starbucks

Mason A.Carpenter, Sanjyot P. Dunung, 2012. Challenges and opportunities

in international business. s.l.:s.n.

NASDAQ, 2016. DNKN Company Financials. [Online]

Available at: http://www.nasdaq.com/symbol/dnkn/financials?query=ratios

NASDAQ, 2016. MCD Company Financials. [Online]

Available at: http://www.nasdaq.com/symbol/mcd/financials?query=ratios

NASDAQ, 2016. SBUX Company Financials. [Online]

Available at: http://www.nasdaq.com/symbol/sbux/financials?query=ratios

NSW-Treasury, 2014. Value Management Guideline, s.l.: s.n.

O'Farrell, R., n.d. Who Is Starbucks' Target Audience?. [Online]

Available at: http://smallbusiness.chron.com/starbucks-target-audience-10553.html

Phaozea, B., n.d. VALUE CHAIN STARBUCKS. [Online]

Available at:
http://www.academia.edu/5730446/VALUE_CHAIN_STARBUCKS_wrkshp

Statista, 2016. Market share of the leading coffee chains in the United States in
2014. [Online]
Available at: https://www.statista.com/statistics/250166/market-share-of-major-us-
coffee-shops/

The-Financial-Times, n.d. Definition of risk management. [Online]

Available at: http://lexicon.ft.com/Term?term=risk-management

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Thomas R. Robinson, Hennie and Greuning, Elaine Henry, Michael A.

Broihahn, 2009. International Financial Statement Ananlysis. s.l.:s.n.

Wang, C., 2016. Starbucks stock drops after key metric disappoints Street.
[Online]
Available at: http://www.cnbc.com/2016/07/21/starbucks-reporting-third-quarter-
2016-earnings.html

Wasmer, K. J., n.d. INCREASING SHAREHOLDER VALUE. [Online]

Available at: http://www.wasmer.com/consulting_shareholder.asp

Wong, S., 2013. Starbucks: Corporate Governance. [Online]

Available at: https://prezi.com/ltvkz0k0boom/starbucks-corporate-governance/

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Appendix

1. Where do your come from? Asia, American, Western people, and

others
2. What type of beverage did you offer?
a. Hot => Asian people
b. Cold => western and American people
3. What are the main customers of Starbucks?
Adults
4. Please rate the variety of Starbucks products?
a. Average 1%
b. Satisfactory 10%
c. Good 21%
d. Excellent 68%
5. What are the main competitors of Starbucks?
MC Donald, Dunkin’Brand, Costa coffee, and Nero
6. Why do you choose Starbucks? (choose one or more)
a. Environment 60%
b. High quality goods 89%
c. Convenient 35%
d. Brand name 72%
e. Customer service 56%
f. Happy mood after relaxing here 25%
7. What external factors have strong impacts on Starbucks development?
Give some explanations
8. How likely would you recommend Starbucks products to others?
a. Always 21%
b. Often 72%
c. Rarely 6%
d. Never 1%
9. What should Starbucks do to improve its accounting performance?
10. What should Starbucks do to lower cost of capital?
11. Could you give some recommendations for Starbucks future strategies?

31