Recognise the drivers of strategy and evaluate its impact on an organisation.

Case Study Brief: Starbucks Corporation

Headquartered in Seattle, Washington, and the world’s largest coffee company, Starbucks is a premier roaster, marketer, and retailer of specialty coffee in the world, with over 24,000 stores in 76 countries. The company provides customers with the “Starbucks Experience”—comprised of excellent customer service, clean stores, appropriate music, and a comfortable setting. Currently, Starbucks in the United States segment generates about 69 percent of total revenues. Millions of people, every day, meet at Starbucks to talk, do business, and chat with friends. The music selected to play in the stores enhances the relaxed look and feel of the coffeehouse. Starbucks offers a full coffeehouse experience, complete with premium teas, fine pastries, and other sweets. The company also sells a variety of coffee and tea products through licensed stores, grocery stores, and foodservice accounts. Several brands associated with Starbucks are Teavana, Tazo, Seattle’s Best Coffee, Evolution Fresh, La Boulange, and Ethos.

In February 2018, Starbucks and JP Morgan Chase began offering the Starbucks Rewards Visa Card, a co-brand credit card integrated directly into the Starbucks Reward loyalty program. Customers using this Visa card earn Stars with every purchase, both in and out of Starbucks stores, and can redeem their Stars for food and beverage items at more than 8,000 participating Starbucks locations. Cardholders also become members of the Starbucks Rewards loyalty pro- gram comprised of more than 14 million members. Later in 2018, Starbucks and Chase plan to offer a second co- branded product, the Starbucks Rewards Visa Prepaid Card.

Starbucks’ strategic plan is to add about 600 new stores annually in China during 2018– 2022, adding stores in 100 new cities to reach 230 cities across the country. The company plan is to more than triple revenue and more than double operating income in China between 2017 and 2022. This plan calls for the company to double the number of Starbucks stores in China from the end of FY2017 to 6,000.

Starbucks’ fiscal year ends on September 30. For the company’s fiscal Q1 2018 that ended December 31, 2017, revenues increased 6 percent to a record $6 billion, with comparable store sales up 2 percent. For that Q1, company’s revenues from stores in China increased 30 percent, with comparable store sales up 6 percent. Starbucks as a whole is performing really well.

History

Starbucks was founded in Seattle in 1971 as a roaster and retailer of whole bean and ground coffee, teas, and spices in a single store in Seattle’s Pike Place Market. The company was named after the first mate in Herman Melville’s Moby Dick. The Starbuck logo was inspired by the sea and features a twin-tailed siren from Greek mythology. The company was incorporated in 1985 and went public in 1992.

In November 2017, the company opened its first store in Jamaica and entered its seventy- sixth market globally. Together with its local business partner, Baristas del Caribe, LLC, Starbucks opened its first store in Puerto Rico.

In December 2017, Starbucks completed the sale of its Tazo Tea brand to Unilever; Starbucks desires to focus on a single tea brand, specifically its super premium tea brand, Teavana. Also, that month, Starbucks was named fifth in Fortune’s World’s Most Admired Companies survey. Additionally, the company completed its acquisition of the remaining 50 percent share of its East China business from long-term joint venture partners, Uni-President (UPEC) and President Chain Store Corporation (PCSC). With this transaction, Starbucks assumed 100 percent ownership of over 1,400 Starbucks stores in Shanghai and in the Jiangsu and Zhejiang Provinces, bringing the total number of company-owned stores in China to over 3,100. On this same day, UPEC and PCSC acquired Starbucks 50 percent interest in President Starbucks Coffee Taiwan Limited and assumed 100 percent ownership of Starbucks operations in Taiwan.

Values/Vision/Mission

Starbucks’ vision statement is “To establish Starbucks as the premier purveyor of the finest coffee in the world while maintaining uncompromising principles while we grow.”

Starbucks’ mission statement blends a grand and uplifting goal—nourish the human spirit— with a message about how it delivers this—by catering to its individual customers and communities. The vision can be viewed on the company’s website, in the “About Us” section: https:// www.starbucks.com/.

Segments

Starbucks is divided into four major operating segments:

1. Americas, including the United States, Canada, and Latin America
2. China/Asia Pacific (CAP)
3. Europe, Middle East, and Africa (EMEA)
4. Channel Development

All segments are comprised of stores, except “Channel Development” that includes all the Starbucks beverages and other branded products sold throughout the world through “channels” such as grocery stores, warehouse clubs, specialty retailers, convenience stores, and food- service accounts. The company has a few non-reportable operating segments, such as Teavana retail stores and Seattle’s Best Coffee, and Siren Retail that offers taste testing operations. The non-reporting segments are simply classified as Other Segments in the company’s financial reports. For fiscal 2017, Starbucks’ revenues by segment as a percentage of total net revenues were as follows: Americas (70%), CAP (14%), EMEA (5%), Channel Development (9%), and All Other Segments (2%). Thus, the Americas is by far the dominant segment for Starbucks. The Americas, CAP, and EMEA segments include both company-operated and licensed stores. In order to examine what Starbucks is doing currently, Exhibit 2 provides a summary of Starbucks operations across segments for Q1 2018. Notice that 700 new Starbucks stores were opened that quarter, but the company’s overall operating income declined 1 percent, primarily due to the 11 percent drop in operating profits in the EMEA segment. That segment is lagging the others in overall performance.

Starbucks provides in their financial documents a breakdown of revenue by type of store. Revenue from company- operated stores accounted for 57 percent of total net revenues during fiscal 2017. Exhibit 3 reveals that there are slightly more licensed stores than company-owned stores because outside of the Americas, Starbucks prefers to utilize licensed stores rather than owning stores.

EXHIBIT 2 Starbucks’ Operational Results Across Segments for Q1 2018

Source: Based on the company’s Q1 2108 quarterly report.

EXHIBIT 3 Starbucks’ Number of Stores Across the World as of October 1, 2017

Source: Based on the company’s 2017 Annual Report, p.3.

For Q2 2018 that ended 3-31-18, Starbucks reported that its same store sales increased 2 percent both globally and in the United States and were up 4 percent in China. The company’s revenues in Q2 increased 14 percent to a record $6 billion. Specifically, for Q2, Starbucks’ revenues from company-owned stores increased 15.1 percent to $4.828 billion, while revenues from licensed stores increased 14.4 percent to $625.6 billion. In the company’s Americas and EMEA segments, the trend is to add licensed stores, but in the China/Asia segment, Starbucks is primarily adding company- owned stores.

Finance

During Q1 of fiscal 2018 that ended December 31, 2017, active membership in Starbucks Rewards in the United States grew 11 percent versus the prior year to 14.2 million, with member spending comprising 37 percent of U.S. company- operated sales, and Mobile Order and Pay representing another 11 percent of U.S. company-operated transactions. Recognise the drivers of strategy and evaluate its impact on an organisation.

The Starbucks Card was used for 42 percent of U.S. and Canada company-operated transactions. During Q1 2018, Starbucks opened 700 net new stores globally, bringing total store count to 28,039 across 76 counties. Also, during Q1, the company returned a record $2 billion to shareholders through a combination of dividends and share repurchases. Specifically, Starbucks repurchased

28.5 million shares of common stock in Q1; approximately 52 million shares remain available for purchase under current authorizations.

Starbucks income statements and balance sheets for fiscal 2016 and 2017 are provided in Exhibit 4 and Exhibit 5, respectively. Notice all the green arrows pointing upward, signifying that the company is performing quite well.

Coffee Industry Overview

Coffee is the most commonly consumed beverage worldwide. The coffee market can be segmented into growers, roasters, and retailers. On the coffee-growing level, South America was ranked as the major coffee-producing region. Brazil produced and exported 43.2 million 60-kg bags of coffee in 2016. Other major producers are Vietnam and Columbia. Exporting countries tend to consume less coffee than their importing counterparts.

The United States has the largest market share with 45.8 percent of global retail coffee sales in 2016, followed by single-cup coffee. Starbucks and Dunkin` Donuts dominate out-of-home retail market, with a combined market share of over 65 percent. Growth in coffee cup per capita consumption is recently up 18 percent in China, 13 percent in the United Kingdom, and 3.5 percent in Japan. Consumers drink, on average, 1.64 cups of coffee per day, reporting that they drink it at home, on the way to work, and at work. People drink coffee to wake up in the morning or receive a burst of energy throughout the day. People drink more and more coffee as they get older, with the over-60 age group drinking more coffee than any other group.

EXHIBIT 4 Starbucks’ Income Statements (000 omitted)

Income Statement                 10/2/16                    10/1/17                                     percent Change

Source: Based on company documents.

EXHIBIT 5 Starbucks’ Balance Sheets (000 omitted)

Source: Based on company documents.

From 2012 through 2016, coffee retail sales in the United States grew at a compounded annual growth rate (CAGR) of 4.6 percent. During this period of time, there was, however, a shift from single-cup coffee brands that made up just 21 percent of dollar sales, to now ac- counting for 41 percent. This means that all other categories of coffee shrunk during those 5 years. For example, instant coffee and whole beans were both down by 11 percent, while ground coffee declined 9 percent. However, the single-cup market has matured, and 2017 reveals virtually zero growth. A study by the National Coffee Association (NCA) shows that household penetration of single-cup brewing machines in the United States has peaked at around 30 percent, after growing rapidly from just 9 percent in 2011. Fewer consumers today are shifting from drip coffee makers or from instant coffee to single-cup, resulting in slowing growth rates. Prices of single-cup coffee have declined over recent years to a level of what they were 10 years ago. Although retail sales are slowing, out-of-home channel sales of coffee are accelerating. U.S. foodservice coffee sales ended 2016 at around 3.3 percent higher than in 2015. This upward trend in out-of-home purchases of coffee is partly due to low unemployment and continued economic growth, both of which enable consumers to increase their coffee consumption out-of-home; this trend should continue in 2018–2019. Shifts in household composition are favoring the steady rise in out-of-home coffee sales. Additionally, more single households and fewer homes with underage children are reasons why fewer families have sit-down breakfast meals and choose foodservice alternatives in the morning, when the majority of coffee sales take place.

1. Continued focus on Cold Brew, Iced Coffee, and Frozen Dunkin` Coffee, which resulted in its highest quarterly beverage comparable sales of the year in the fourth quarter of 2017. Extend its premium tea and frozen beverage lines and introduce more espresso products.
2. After a record year for breakfast sandwich sales in 2017, emphasize morning sandwiches, both new and returning favorites, like the early-2018 reintroduction of the Sweet Black Pepper Bacon Breakfast Sandwich, and offering additional flavored bacon on sandwiches throughout the year.
3. Being the largest retailer of donuts in America, heavily promote its annual calendar full of seasonal donut offerings ready-to-go, leveraging key holidays like Valentine’s Day and Halloween, while ensuring that its Dunkin` Dozen—the brand’s 12 best-selling donuts—are available in each restaurant.
4. Eliminate all synthetic dyes from its national food and beverage menu in the United States by the end of 2018.
5. Launch Dunkin` Deals, a series of value offers that are expected to be available at participating restaurants throughout the year. The first Dunkin` Deal of 2018 included two Egg and Cheese Wake-up Wrap® sandwiches for $2 and, to drive afternoon and evening traffic, a medium hot or iced latte for $2 from 2p.m. to 6 p.m.

McDonald’s Corporation (MCD)

McDonald’s is the world’s leading global food-service retailer with over 36,000 locations in over 100 countries. Millions of people enjoy going to McDonald’s to get coffee. More than 80 percent of McDonald’s restaurants worldwide are owned and operated by independent local businessmen and women. For the full year 2017, some financial highlights of McDonald’s are as follows:

• Global comparable sales increased 5.3 percent, but consolidated revenues decreased 7 percent.
• Consolidated operating income increased 23 percent.
• Diluted earnings per share increased 17% (17% in constant currencies).
• Returned $7.7 billion to shareholders through share repurchases and dividends.
• Beginning in Q4 of 2017, began a 7 percent increase in its quarterly dividend to $1.01, demonstrating management’s continued confidence in the company’s performance.

For 2018, McDonald’s plans to invest about $2.4 billion of capital, the majority of which will be dedicated to reinvesting in our existing locations through accelerated deployment of Experience of the Future in the United States. In addition, the company plans to open about 1,000 new McDonald’s restaurants, 75 percent of which will be funded by licensees and affiliates around the world. Concurrently, the company plans to invest heavily in technology to modernize their customer experience and redefine convenience.

Headquartered in Oak Brook, Illinois, McDonald’s operates and franchises restaurants in the United States, Europe, the Asia/Pacific, the Middle East, Africa, Canada, Latin America, and internationally. Recognise the drivers of strategy and evaluate its impact on an organisation. The company’s restaurants offer various food products, soft drinks, coffee, and other beverages. The company operates close to 40,000 restaurants globally.

Keurig Green Mountain

The big news in 2018 in the beverage industry is that Keurig Green Mountain, the maker of Keurig K-Cup coffee machines, is acquiring Dr Pepper Snapple. Keurig is privately owned by JAB Holdings, one of Europe’s largest investment firms; JAB also owns Peet’s Coffee, Panera Bread, and Krispy Kreme doughnuts; JAB is a privately held fund that manages the money of the Reimann family, one of Germany’s wealthiest families. This acquisition, pending approval in Q2 2018, is aimed directly at both Coca-Cola and Starbucks Corp. This acquisition puts Keurig in the global soda business and strengthens its coffee business. Euromonitor reports that sales of ready-to- drink coffees increased more than 17 percent in 2017. JAB’s partner in Keurig is Mondelez International, who holds roughly 24 percent of the stock JAB, but that percentage will drop to about 14 percent when the Dr Pepper acquisition is finalized. Keurig’s revenue for 2017 is estimated to be $4.1 billion, and its market share in the coffee-pod industry has declined from 40 percent in 2013 to 23 percent in 2017.

Future

On February 27, 2018, Starbucks opened (at its Seattle headquarters) its first Reserve store in the United States, a new store format from the company’s Siren Retail business dedicated to its premium Reserve brand. Starbucks has announced plans to build 20-30 Roasteries and 1,000 Reserve stores, with 20 percent of the Starbucks store portfolio eventually becoming Starbucks Reserve bar locations. Starbucks recently opened its first international Reserve roastery in

Shanghai and launched the first Princi location in the United States inside its Seattle Reserve roastery. The company is bringing stand-alone Princi stores to Seattle, Chicago, and New York and plans to open roasteries in Milan and New York in late 2018, in addition to Tokyo and Chicago in 2019.

The new Starbucks Reserve stores offer a new premium retail format with a marketplace- style environment offering Reserve roasteries, freshly baked artisanal Italian food from Rocco Princi and Third Place experience. The Reserve roasteries bring to life the theater of coffee roasting and brewing and packaging for customers. The Siren Retail segment also includes Starbucks Reserve bar locations and Princi bakeries. Reserve stores offer customers the full beverage menu available at the Seattle Reserve roastery, but with a few new items including Nitro Draft Latte and Spiced Ginger Cold Brew on tap, as well as new espresso drinks such as the Bianco Mocha. The Princi menu continues to offer customer favorites including cornetti, brioche, Pizza Mozzarella di Bufala, focaccia sandwiches; the space includes a full mixology bar serving traditional Italian Aperitivo, aromatic Italian cocktails such as Aperol Spritz, Milano Torino, and Negroni Sbagliato, for afternoon and evening customers.

Starbucks pays above the minimum wage in all states across the country. In April 2018, all eligible U.S. Starbucks hourly and salaried partners received a second wage increase in addition to the annual increases they have already received this fiscal year. The company also provided an additional 2018 stock grant for all eligible full-time, part- time, hourly, and salaried U.S. partners across their stores, plants, and support centers. In addition, all Starbucks retail partners received at least a $500 grant, store managers each received a $2,000 grant, and plant and support center partner (non-retail) grants varied depending on annualized salary or level. Starbucks has also announced plans to create more than 8,000 new part-time and full-time retail jobs and an additional 500 manufacturing jobs in its Augusta, Georgia, soluble coffee plant.

For store partners, the company recently expanded their parental leave policy to include all non-birth parents with up to 6 weeks of paid leave when welcoming a new child. These new hu- man resource offerings are in addition to the nearly $7 billion of capital that Starbucks will de- ploy to build and renovate stores, manufacturing plants, and technology platforms in the United States over the next 5 years. Starbucks remains committed to providing opportunities to tens of thousands of Americans from disadvantaged backgrounds.

In May 2018, Starbucks announced its formation of a global coffee alliance with Nestlé

S.A. to increase both the at-home and away-from-home coffee and related categories around the world. As part of the alliance, Nestlé obtains the rights to market, sell, and distribute Starbucks, Seattle’s Best Coffee, Starbucks Reserve, Teavana, Starbucks VIA, and Torrefazione Italia pack- aged coffee and tea in all global at-home and away-from-home channels. In return, Nestlé pays Starbucks $7.15 billion, with Starbucks retaining a significant stake as licensor and supplier of roast and ground and other products going forward. The agreement also provides for the Starbucks’ brands to be represented on Nestlé’s single-serve capsule systems.

Dunkin` Brands has announced aggressive new growth initiatives aimed directly at capturing Starbucks’ market share. Starbucks needs a clear strategic plan to effectively and efficiently manage its worldwide building of more than 1,000 Reserve stores, coupled with converting existing Starbucks restaurants to the new format, and doubling down on its human resource benefits offered.

Required for the report:

A - Perform a strategic management analysis of Starbucks. (85 marks)

B - Excel Skills: relevant and well-presented tables, graphs, illustrations, as applicable (10 marks)

C – Overall Presentation: Bibliography/Referencing Linked to Turnitin report (5 marks

Guidance

Indicative Table of Contents

Executive Summary: Give a one-page overview of your strategic plan for the firm.

1. Introduction: Give a one-page overview of the firm.
2. Vision Statement: Present the firm’s vision statement versus your proposed statement.
3. Mission Statement: Present the firm’s mission statement versus your proposed statement.
4. EFE Matrix: Include 10 external opportunities and ten external threats.
5. CPM: Include the firm and two rival firms compared across 5 to 10 key variables.
6. Most Recent Income Statement and Balance Sheets
7. Financial Ratio Analysis: Show template-calculated and/or Internet-derived ratios and comment on key ones; do not give definitions of the ratios and do not highlight all the ratios.
8. IFE Matrix: Include strengths and weaknesses.
9. SWOT Analysis: Include SO, WO, ST, WT strategies and make sure the strategies are specific so you can reasonably estimate a cost ($/£ value) for any strategy that makes it to recommendations page.
10. BCG: Prepare two BCG matrices, one by geographic area and the other by product, if possible; focus more on the implications than the numbers or mechanics of the matrix; strategies must be specific; avoid vague terms such as market penetration.
11. IE Matrix: Prepare two IE matrices, one by geographic area and the other by product, if possible; focus more on the implications than the numbers. For example, state how a division located in the hold and maintain quadrant will move to the grow and build quadrant after your strategies are implemented. This approach is more effective than simply stating the division is located in the row and build quadrant.
12. SPACE Matrix: Prepare a detailed analysis for the focal firm; also show plots for two rival firms; focus more on the implications than the numbers. For example, describe how your firm will move within the SPACE graph/matrix after your recommendations are implemented. Comment specifically on a few axis variables and how your actions will improve them and thus the position of the firm in the SPACE. As with any matrix, do not teach the mechanics of the matrix in your report.
13. Grand Strategy Matrix: Include the focal firm and two rival firms in your matrix.
14. QSPM: Select the two most attractive SWOT strategies to include along the top row of your QSPM.
15. Perceptual Maps: Include two maps, be creative as per the dimensions; frame your discussion in terms of competitive advantage of focal firm versus rivals as per your proposed strategic plan. Discuss market space that is not yet used by rivals and the benefits or drawbacks of serving this market space. Comment on how rival firms are repositioning versus how you plan the focal firm to reposition given your recommendations.
16. Organizational Structure: Include (1) the existing chart developed based on executive titles, and (2) your proposed chart based on the guidelines provided in Chapter 7.
17. Corporate Valuations: Include (1) focal firm, (2) rival firm, and (3) potential firm to be acquired.
18. Recommendations: Include at least 3 with costs for each given and summed; divide your strategies (1) existing strategies to be continued and (2) new strategies to be started.
19. EPS/EBIT Analysis: Include (1) all stock, (2) all debt, and (3) some combination of stock and debt.
20. Projected Financial Statements: Provide 3 years to show expected impact of your recommendations.
21. Projected Financial Ratios: Show template-calculated ratios and comment on key ones.
22. Retained Earnings Table: Make sure far right column of table matches the retained earnings row on your projected balance sheets.

Marking Rubric