Adam Berger, Justin Buchman, Donald Chase & Suzana Hsu

StarbucksPresented by:

THE FRAPPUCCINOSTHE FRAPPUCCINOS

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Presentation Outline Introduction to Starbucks Industry Overview Company Overview Site Analysis Recommendations for Improvement Focused Recommendation for Improvement Final Action Plan Impact Analysis Wrap Up

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Introduction to Starbucks

Company started in 1971 in Seattle, Washington

Grew from 55 stores in 1989 to over 2,200 stores today

Products sold include:- beverages - pastries- whole coffee beans - coffee-related retail items

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Industry Overview

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Industry Definition

Specialty Eatery Industry– Fits within the largest segment of disposable

income spending -- food and beverages– Steady growth in this segment in the 1990’s has

led to an abundant number of new companies– As demand for convenience has made eating

out a normal routine, the demand for specialty food services has increased in recent years

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Industry and Competitive Analysis

Market Structure– Monopolistic Competition

Competitive Activity– Many companies are in the market and competition is fierce– Competitors use location, product mix, and store atmosphere

differentiation to establish market niche

Industry Costs and Capital Structure– Low to moderate costs for each location– Major start-up expenditures are property and equipment– Major operating costs are labor and cost of sales

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Industry PEST Analysis

Political Influences– Relationships between coffee producing nations and US– State & Local government controls

Economic Influences– Constant demand for food and beverages– Changes in disposable income could influence purchase levels

Social Influences– Consumer preferences could shift from coffee to other beverages

Technological Influences– Use of technology can improve operational efficiencies

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Company Overview

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Starbucks Corporate Strategy

Maximize market penetration Provide a relaxing, attractive social

atmosphere Offer high-quality products Create a great working environment Achieve profitability

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Starbucks SWOT Analysis

Strengths– Largest market share in industry– Differentiated atmosphere

Weaknesses– Aggressive expansion could lead to managerial / financial problems

Opportunities– Whole bean sales in supermarkets

Threats– Lack of ownership of coffee farms can lead to price fluctuations

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Company Financial Performance (1998 FY)

Revenues $1,308.7 million (% of Sales)

Gross Margin 195.7 million 15% Pre-tax Profit Margin 116.4 million 8.9% Net Income 68.4 million 5.2% Return-on-Assets 8.7% Return-on-Equity 11.0% Debt-to-Equity 0.04 12 mo. Revenue Growth 28.4%

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Company Financial Performance (1998 FY)

-10%-5%0%5%

10%15%20%25%30%

Net ProfitMargin

ROE ROA Debt/Equ 12-Mo RevGrowth

Industry Starbucks

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Site Analysis

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Site Characteristics

Leased store located on Central Street in Wellesley Store has over 1,000 square feet of retail space and

1,000 square feet of office and storage space in the basement

Second most profitable store in the fourteen store region

Located one block away from Commuter Rail train station and in busy retail shopping area

Only one direct competitor (Au Bon Pain) in the area

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Site’s Operational Results (1998 FYTD – 11 Months)

Financial Operations 1998 1997 %

Total Sales $760,576 $796,688 (4.5%) COGS 242,593 262, 945 (7.7%)C/M 517,983 533,743 (3.0%)Fixed Exp. 367,746 431,923 (14.9%) EBIT $150,237 $101,820 47.6%

– No money spent on independent advertisement– Local entertainment budget underutilized

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Volume of Sales vs. Contribution Margin %

$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

EspressoDrinks

WholeBeans

Drip Coffee Pastries BlendedBeverages

OtherBeverages

Serveware PackagedFood/Tea

Media BrewingEquipment

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

Dollar Volume Sold Product Contribution Margin %

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Site 7-S Analysis

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Site 7-S Analysis

Strategy– Store’s strategy is to create a comfortable Third

Place environment– Serve customer a customized high-quality product– Achieve high level of profitability by focusing on

high-margin items while generating add-on sales– Minimize overall expenses by focusing on

controllable expenses

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Site 7-S Analysis

– Corporate organization is tall with four levels of management above store management

B aris tas B aris tas B aris tas

S h ift S u p erviso rs

A ss is tan t M an ag er

S to re M an ag er Structure

– Functional in structure and relatively flat

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Site 7-S Analysis

Staffing– Location has one manager, an assistant manager and 16

partners– Benefits package includes health, dental, and vision care,

stock options, free shift drinks, and a free pound of coffee each week

– Raises are based on semi-annual performance evaluations with raises ranging from 0-5%

– Bonuses are not utilized, but the location has given away non monetary rewards

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Site 7-S Analysis

Systems– Corporate headquarters exercises controls over

individual sites– Total Quality Management is specifically built into

their processes– Utilizes a large amount of information technology

(IT)– Internal controls for the store are determined by

the manager based in part on information provided by the IT system

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The use of IT at Starbucks

Corporate ITSystem

IndividualStores

IndividualStores

Sales,Inventory,

Staffing

Sales,Inventory,

StaffingIndividual

Stores

Inventory,Orders,

Transfers

Vendors,Distributors,

Mgmt.,ChannelMembers

Orders, Budgets,Future Sales

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Site 7-S Analysis

Skills– Most important skills include “people skills” and

drink preparation ability– Partners receive training to learn about products,

brewing methods, and sales techniques– Retraining mainly occurs during new product roll-

outs, although this site does not use regular meetings, but instead one-to-one discourse

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Order Cycle Times

Take Customer’s

Order

BottleneckOrder?

Pastry?

.53 Min

.53 Min

Yes

Yes

No

Pastry?

.40 Min

.27 Min

Yes

No

No

Bottleneck Capacity 114 / Hr

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Site 7-S Analysis

Style– Basic management style is Laissez Faire– Management motivates through reviews and

raises– Work duties are assigned by shift supervisors– Employees are allowed to use initiative and

empowered to make decisions

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Site 7-S Analysis Shared Values (from Mission Statement)

– Provide a great work environment – Treat each other with respect and dignity– Embrace diversity– Apply the highest quality standards for products– Develop enthusiastically satisfied customers– Contribute to the community and environment– Recognize that profitability is essential to future

success

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Alignment of Store with Corporate Strategy

Contrary to the mission statement focus, the reduction of staffing levels appears to be more important than developing satisfied customers

The relevance of the benefits package is misaligned considering the average age of employees

The high turnover rate of partners and managers is detrimental to customer environment

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Recommendations

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Recommendations For Improvement

1. Revamp the employee reward system

2. Tighten focus on creating the “Third Place” environment

3. Focus profitability measures on profitable sales, not just reduction in staffing

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Revamp Employee Reward System

Large percentage of the staff are under the age of twenty

Benefits package focuses on medical, dental, and vision care, as well as the employee stock options

Outside of hourly wage, and semiannual raises, there are few monetary rewards

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Improve “Third Place” Environment

Site has a very high employee turnover rate Manager “promoted” to a another store in

hopes of improving their poor performance Site has very poor handicapped accessibility Condition of restroom in each of our visits

was poor and had no baby changing area

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Focus Profitability Measures on More Than Just Staffing

Store is underperforming on some high margin product segments

Too high a focus on minimizing direct labor as a key to achieve profitability

Focus on high-margin items and profitable add-on sales

By increasing pastry sales by 33%, store would realize a $16K increase in contribution

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Focused Recommendation

Improve “Third Place” Environment

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Pros and Cons of Discounted Opportunities

Revamp the Employee Reward System

Pros– Employees are motivated

with more incentive to perform

– Lower employee turnover rates

– Positive reinforcement which leads to higher feelings of job satisfaction

Cons– Pay and benefit structures

dictated by corporate HQ– Cost of benefits would

additional benefits lower site profitability

– New reward system requires additional management

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Pros and Cons of Discounted Opportunities (Cont.)

Focus Profitability Measures on More Than Just Staffing

Pros– Higher staffing levels

benefit other employees– Better customer service– Improved customer

focus could lead to higher sales

Cons– Staffing is a cost that will

decrease profitability– Upper-level management

perception of low employee productivity

– Employees may get in each other’s way

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Three-Step Action Plan For Improvement

Decrease employee turnover rate– Focus on hiring older employees where benefits

package is more appropriate– Base raises on performance rather than

maximizing raises for economic reasons– Develop and actively maintain a reward system

for employees (i.e. employee of the month)– Develop a system of regular employee

communications / meetings

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Action Plan (cont.)

Improve site accessibility and cleanliness– Upgrade front door and restrooms for

handicapped accessibility – Add a baby changing station– Redesign restroom to separate cleaning supplies

from bathroom or move cleaning supplies to another location

– Focus employee attention on restroom cleanliness

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Action Plan (cont.)

Enhance Starbuck’s differentiated atmosphere– Utilize entertainment budget to hire outside

entertainers, have book / poetry readings, etc.– Display the store’s collection of games and

activities more prominently– Make the location more of a “scene”

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Impact Analysis - Benefits

By focusing on the initial recruitment and hiring stage, and by rewarding employees based on merit current turnover rates will be reduced.

By focusing on site accessibility and cleanliness, the physical facility will not detract from atmosphere.

By improving Starbucks’ atmosphere, it will become a more attractive place to go.

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Potential Risks

Customers may not react positively to the changes being made

Not enough available employees to meet re-aligned hiring needs

Claims of age discrimination and negative affect on sales in youth demographic

Costs associated with planned change

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Wrap-Up

Starbucks is the market leader in a growing market segment

Starbucks is known world-wide for its high-quality food products and differentiated “Third Place” atmosphere

The Wellesley location embodies the ideals of the corporate mission and has been very profitable, but there are still opportunities for improvement

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Conclusion / Questions