STARBUCKS

STARBUCKS
Jodie Moore
Coffee
• 2nd largest US import next to oil
• US consumes one fifth of the world’s coffee
– Largest consumer in the world
Background
• Began in 1971 in Seattle, WA
– 4 stores
• 1982
– 5 stores
• IPO in 1992
– 275 stores
• Serves more than 15 million customers per week
– 4,709 stores
Why to buy Starbucks
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Strong management
Brand awareness
Industry leader
Employees
Competition
Diedrich Coffee
• 370 Coffeehouses
• Scaled back expansion
plans
AFC Enterprises
• Seattle’s Best Coffee
– 160 coffeehouses
• 2nd largest operator of
fast-food chicken
Howard Schultz
• CEO and Chairman
• Grew up in Brooklyn
projects
• Northern Michigan
University
• “If I was in a position
where I could make a
difference, I wouldn’t
leave people behind”
Orin Smith
• President
• Harvard Business
School
• Cut in pay to come to
Starbucks
• 1-2 days behind
counter each quarter
Howard Behar and H20
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1989 joined Starbucks
Previous 25 years in furniture industry
Howard, Howard and Orin = H20
Top management has been there since the
beginning
Partnerships
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Horizon Air
Nordstrom
Sheraton Hotels
Hear Music
United Airlines
Chapters Inc.
Dreyers
Canadian Airlines
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Kraft Foods
Albertsons
Host Marriot
Hyatt Hotels Inc.
Barnes and Noble
Tazo Tea
Pepsi
Pepsi
• Began in 1994
• New DoubleShot
– Canned espresso drink with cream
– Throughout US by April
• Joint venture income $28.6 million in 2001,
up from $20.3 million in 2000
– Increase in Frappaccino sales
Financials
et Profit Margin
6.8%
Return on Assets
10.2
Earnings per share
.51
Price to Earnings Ratio
46.55
Current Ratio
1.48
Return on Equity
13.4
Revenues
2,649
2,169
20% Growth Rate
1,680
1,309
975
698
465
1995
1996
1997
1998
1999
2000
2001
Revenue Breakdown
Specialty
16%
Retail
84%
Revenue By Region
3000
2500
Foreign Countries
United States
Total
Revenue (millions)
2000
1500
1000
500
0
1999
2000
2001
Employees
• Stock options and health benefits for parttime employees
• Fortunes 100 best companies to work for
• Consulting firm polls employees annually
– Rates Starbucks “best of class”
Risks
• Growth
– Open one new store a day
– Moving into Europe/Asia
– Anticipate 21% growth next year
• Free Trade Coffee
– Importer pays at least $1.25 per lb
– Starbucks largest purchaser of FTC
• Green coffee costs
Store Growth
4709
3501
2498
1886
1412
1015
1996
1997
1998
1999
2000
2001
Stock
Valuation
• Discounted Cash
Flows
– 20% growth for next 5
years
• $30.60 per share
– 20% next 2 years, 10%
after that
• $22.21 per share
• EV/EBITDA
– $21 per share
Porter’s Five Forces
• Threat of new entrants
– Economy of scale
– Brand Identity
• Supplier Power
– Controls price
– Free Trade Coffee
• Buyer Power
– Lots of suppliers to
choose from
• Substitutes
– Not as convenient
– Value good coffee
• Jockeying for Position
– Perishable product
– High exit barriers
• Loyal management
• Specialized assets