Starbucks Corporation

Company Profile

Publication Date: 30 Apr 2010

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Starbucks Corporation

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TABLE OF CONTENTS

TABLE OF CONTENTS

Company Overview..............................................................................................4
Key Facts...............................................................................................................4
SWOT Analysis.....................................................................................................5

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Starbucks Corporation
Company Overview

COMPANY OVERVIEW

Starbucks Corporation (Starbucks or ‘’the company’’) is primarily a retailer of specialty coffee.

Starbucks operates in the US, the Asia Pacific region, Greater China (China, Hong Kong, Macau
and Taiwan), the Europe Middle East Africa (EMEA) region, and Latin America. The company is
headquartered in Seattle, Washington and employs about 142,000 people.

The company recorded revenues of $9,774.6 million during financial year ended September 2009
(FY2009), a decrease of 5.9% as compared with FY2008. The reason for the decline in revenues
was primarily due to strained consumer discretionary spending in the US and international markets.
The operating profit of the company was $562 million during FY2009, an increase of 11.5% over
FY2008. The net profit was $390.8 million in FY2009, an increase of 23.9% over FY2008.

KEY FACTS

Head Office Starbucks Corporation

2401 Utah Avenue South
Seattle
Washington 98134
USA
Phone 1 206 447 1575
Fax
Web Address http://www.starbucks.com/
Revenue / turnover 9,774.6
(USD Mn)
Financial Year End September
Employees 142,000
NASDAQ National SBUX
Market Ticker

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SWOT Analysis

SWOT ANALYSIS

Starbucks stores offer a wide choice of regular and decaffeinated coffee beverages, a broad selection
of Italian-style espresso beverages, cold blended beverages, iced shaken refreshment beverages,
a selection of premium teas, and distinctively packaged roasted whole bean coffees in both US and
international markets. The company’s extensive product offering enabled it to enhance its reach,
cater to a wider customer base and meet customer’s diverse needs efficiently. However, frequent
product recalls hurts the value of the Starbucks brands and lead to a decline in the demand for its
products.

Strengths Weaknesses

Wide range of coffee-products sold through Product recalls by Starbucks affect margins
the company’s retail operations and brand image
Research and development capabilities
leveraged to strengthen product portfolio
Operations in more than 50 countries and
relationships with established players such
as Kraft

Opportunities Threats

Cost reduction initiatives such as Increased minimum wages affect operating

rationalizing of global retail network to
improve margins
Entry into Europe’s ready-to-drink coffee
sector and a tie-up with Arla Foods
Introduction of Starbucks VIA coffee
essence in Japan
Stable credit ratings strengthen stakeholder
confidence
margins
Discretionary spending negatively impact
the margins
Increasing health consciousness among
Americans could reduce demand

Strengths

Wide range of coffee-products sold through the company’s retail operations

Starbucks stores offer a wide choice of regular and decaffeinated coffee beverages, a broad selection
of Italian-style espresso beverages, cold blended beverages, iced shaken refreshment beverages,
a selection of premium teas, and distinctively packaged roasted whole bean coffees in both US and
international markets. Furthermore, it also offers variety of fresh food items, including healthier choice
selections focusing on high-quality ingredients, nutritional value and great flavor. Food items include

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SWOT Analysis

pastries, prepared breakfast and lunch sandwiches, oatmeal, and salads as well as sodas, juices
and bottled water. Additionally, Starbucks is a retailer of specialty coffee in the world. Starbucks also
sells coffee and tea products and licenses its trademark through other channels such as licensed
retail stores. Starbucks operated 8,832 company operated stores and 7,803 licensed retail stores
worldwide as of September 2009. Such an extensive product offering enabled the company to
enhance its reach, cater to a wider customer base and meet their diverse needs efficiently.

Research and development capabilities leveraged to strengthen product portfolio

The core strength behind Starbucks's brand is the quality of its products. The company has a strong
research and development team which is responsible for the technical development of food and
beverage products and new equipment. Starbucks's strong research and development capabilities
enable it to focus on relevant product innovation, expansion and leveraging of its existing products
and sales channels. For instance, in FY2009, the company launched Starbucks VIA ready brew
coffee to capture a significant share of both the $21 billion global instant coffee category and the
single-serve market and further expanding its coffee expertise and leadership in local and international
markets. Starbucks VIA is made with a proprietary, US patent-pending microgrind technology to
preserve the coffee’s taste, quality and freshness. Additionally in September 2009, the company’s
brand Seattle’s best coffee introduced “Just Pure Flavor”, an innovation for fresh brewed coffee that
offers customizable flavor by the cup. The new flavors use no dairy, sugar or artificial sweeteners,
and add less than 50 calories to a 12 fl. oz. (5 calories) beverage.

Starbucks invests substantial amount of resources on technical research and development activities
including customary product testing and product and process improvements. For instance, Starbucks
spent approximately $6.5 million, $7.2 million and $7.0 million during FY2009, 2008 and 2007,
respectively on its research and development activities. Starbucks's focus on quality and product
innovation help sustain the brand value of the company and introduction of new products at regular
intervals helps them to stay competitive.

Operations in more than 50 countries and relationships with established players such as Kraft

Starbucks is well positioned to increase its revenues, customer’s base, and profit margins through
its expanded presence in international markets. Starbucks currently operates in more than 50
countries. The company’s international markets include Argentina, Australia, Austria, Brazil, Bulgaria,
Canada, China, Czech Republic, France Germany, Greece, Hong Kong, Indonesia, Ireland, Japan,
Malaysia, Mexico, Middle East New Zealand, Peru, Poland, Portugal, Romania, Russia, Singapore,
South Korea, Spain Switzerland, Taiwan, Thailand, Turkey and the UK.

Additionally, Starbucks also has established relationships with Kraft Foods, the largest confectionery,
food and beverage corporation in the US. For instance, Starbucks sells its branded packaged coffees
and teas in grocery and warehouse club stores throughout the US through its licensing relationship
with Kraft Foods. Kraft Foods manages all distribution, marketing, advertising and promotion of
Starbucks products. Additionally, Starbucks also sells packaged coffee and tea internationally both
to warehouse club stores, such as Costco Wholesale, and to grocery stores through a licensing
relationship with Kraft in Canada, the UK and other European countries.

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SWOT Analysis

Furthermore, the company also licenses the rights to produce and market Starbucks branded products
through several partnerships both domestically and internationally. For instance, Starbucks is a 50%
equity investor in a joint venture between The North American Coffee Partnership and Pepsi-Cola
Company. Through its stake in this joint venture, the company manufactures and markets
ready-to-drink beverages, including bottled Frappuccino beverages and Starbucks DoubleShot
espresso drinks in both the US and Canada markets. Furthermore, it also manufactures, markets
and distributes its super-premium Tazo Tea ready-to-drink beverages in the US through its licensing
agreement with a partnership formed by Unilever and Pepsi-Cola Company and also markets and
distributes Starbucks super-premium ice cream products in the US through its licensing agreement
with Unilever.

Starbucks's strong international presence and wide geographical reach through its licensing
agreements with leading companies in the food service, increases its bargaining leverage in its key
markets and provides it with strong brand equity.

Weaknesses

Product recalls by Starbucks affect margins and brand image

Starbucks has recalled few of its products in the recent times. For instance in FY2009, the Consumer
Product Safety Commission ordered recall of thousands of Starbucks and Seattle's best coffee blade
grinders. The recall was prompted as the company’s grinders can fail to turn off or can turn on
unexpectedly, posing a laceration hazard to consumers. The total recalls of company products
included 530,000 grinders. Additionally, the company announced a voluntary recall of more than
12,000 glass water bottles due to the possibility of lacerations. The US Consumer Product Safety
Commission and Health Canada claimed that while removing or reapplying the bottle’s stopper, the
bottle can shatter and cut the consumer which strained Starbucks to recall its glass water bottles in
FY2009. Furthermore, Starbucks also recalled few of its products containing peanut butter from its
stores following an outbreak of salmonella in the US. Product recalls such as these hurt the value
of the Starbucks brand and lead to a decline in the demand for its products.

Opportunities

Cost reduction initiatives such as rationalizing of global retail network to improve margins

The company in FY2009 initiated a cost reduction program to improve its margins through rationalizing
its global store portfolio. For instance, during the year, Starbucks completed the closure of nearly
1,000 company-operated stores globally. At the end of FY2009, approximately 800 US
company-operated stores, 61 stores in Australia and 41 company-operated stores in other international
markets had been closed. The remaining international store closures are expected to be completed
by the end of FY2010. Initiatives such as these helped the company to improve its operational
efficiencies through reduced cost expenditures. For instance, through closure of company’s stores

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SWOT Analysis

globally has led to cost savings of $580 million in FY2009 for Starbucks, and few more closures
expected in FY2010 is likely to reduce further cost of the company which positively impact the
margins. Cost reduction initiatives and related operational efficiency efforts such as these will
significantly contribute to the margin improvement of the Starbucks.

Entry into Europe’s ready-to-drink coffee sector and a tie-up with Arla Foods

Starbucks announced to enter the ready-to-drink (RTD) coffee products in Europe in January 2010.
The ready-to-drink (RTD) coffee category market in Europe is valued to be $550 million. Furthermore,
during the same year, the company also signed an agreement with Arla Foods, a leading producer
and distributor of quality milk products in Europe. Under the agreement, Arla Foods will manufacture,
distribute and market Starbucks-branded premium RTD coffee beverages in Europe. The new
relationship with Arla Foods complements Starbucks coffee expertise and experience in the
ready-to-drink coffee category. Furthermore, extending the Starbucks brand into new distribution
channels globally is a part of the company’s long-term plans to target international growth in key
regions such as Europe. The success of Starbucks premium RTD products in the US and Asia
demonstrates strong business opportunity for the company in European markets. The company’s
decision to enter European markets through introduction of its strong RTD coffee category products
will boost its top line and also expand its geographical reach.

Introduction of Starbucks VIA coffee essence in Japan

After the company’s successful introduction of Starbucks VIA ready brew in the US, UK and Canadian
markets in FY2009, it launched Starbucks VIA coffee essence in FY2010, its first premium coffee
stick product in Japan, where 63% of total coffee sold is instant. The company will sell its Starbucks
VIA coffee essence product through 870 Starbucks stores in Japan and eventually expand distribution
to include grocery shops and other retail channel. Japan is one of the biggest market at-home coffee
markets valued at $5 billion. With the body, flavor and rich aroma expected from Starbucks coffee,
Starbucks VIA coffee essence will create a new category for coffee drinkers looking to enjoy Starbucks
quality coffee in Japan. Additionally, Japan is a key market for Starbucks as it eyes the $23 billion
instant and single serve coffee market. The launch of Starbucks VIA coffee essence in Japan is
likely to expand Starbucks customer base besides enhancing revenues.

Stable credit ratings strengthen stakeholder confidence

Starbucks has been rated well by credit rating agencies on account of recording strong financials
for FY2009. For instance, the rating agency Standard and Poor’s Ratings Services in August 2009,
revised its outlook on the Starbucks credit ratings to stable from negative based on improved credit
metrics and stabilizing performance. It also affirmed the BBB corporate credit rating on the company
and raised the short-term rating to A-2 from A-3. Strong financial performance and improved cash
flows were the main reason for Starbucks’s improved ratings. The stable credits of the company
increases stakeholder confidence and also provide an opportunity to raise finances to meet any
expansion plans in the future.

Threats

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SWOT Analysis

Increased minimum wages affect operating margins

In recent times, tight labor markets, increased overtime, government-mandated increases in minimum
wages and a higher proportion of full-time employees have resulted in an increase in labor costs,
which could materially impact the company's operating margins. The federal minimum wage rate in
the US, which remained at $5.15 per hour since 1997 reached $6.55 per hour in July 2008. It is
expected to further rise to $7.25 an hour from July 2009. Starbucks employed about 142,000 people
in the US, as on September FY2009. Increased labor costs could increase overall costs and affect
the company's operating margins.

Discretionary spending negatively impact margins

As a retailer dependent upon consumer discretionary spending, Starbucks will face an extremely
challenging FY2010. All major western including the US, the UK, Germany, France, Italy, Spain,
Japan and Australia are in the grip of recession and are forecast to remain so through 2010. Even
the key emerging market economies are currently experiencing downturns, including China, Middle
East and Brazil.

The global economic downturn has led to a severe decline in consumer confidence. Consumers
also have less money for discretionary purchases as a result of job losses, foreclosures, bankruptcies
and reduced access to credit. A decrease in consumer confidence and the resultant curbed consumer
spending would result in decreases in customer traffic and average value per transaction. Starbucks's
business is highly sensitive to changes in customer traffic, and the current economic downturn would
put downward pressure on the company's margins.

Increasing health consciousness among Americans could reduce demand

Starbucks's products contain caffeine, dairy products, sugar and other active compounds, the health
effects of which are the subject of increasing public scrutiny. It is suggested that excessive
consumption of caffeine, dairy products, sugar and other active compounds can lead to a variety of
adverse health effects.

Particularly in the US, there is increasing consumer awareness of health risks, including obesity,
due in part to increasing publicity and attention from health organizations, as well as increased
consumer litigation based on alleged adverse health impacts of consumption of various food products.
Increasing health awareness among American consumers could significantly reduce the demand
for the company's beverages and food products.

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