Starbucks

Presented by: Adam Berger, Justin Buchman, Donald Chase & Suzana Hsu

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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 1990s 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 Gross Margin 195.7 million Pre-tax Profit Margin 116.4 million Net Income 68.4 million 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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(% of Sales)

15% 8.9% 5.2%

Company Financial Performance (1998 FY)

30% 25% 20% 15% 10% 5% 0% -5% -10%
Net Profit Margin ROE ROA Debt/Equ 12-Mo Rev Growth

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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Sites Operational Results (1998 FYTD 11 Months)



Financial Operations
1998 Total Sales $760,576 COGS 242,593 C/M 517,983 Fixed Exp. 367,746 EBIT $150,237 1997 $796,688 262, 945 533,743 431,923 $101,820 %( (4.5%) (7.7%) (3.0%) (14.9%) 47.6%

No money spent on independent advertisement Local entertainment budget underutilized The Frappuccinos

Volume of Sales vs. Contribution Margin %

$300,000

100.0% 90.0%

$250,000 80.0% 70.0% $200,000 60.0% $150,000 50.0% 40.0% $100,000 30.0% 20.0% $50,000 10.0% $0 Espresso Drinks Whole Beans Drip Coffee Pastries Blended Other Serveware Packaged Beverages Beverages Food/Tea Media Brewing Equipment 0.0%

Dollar Volume Sold

Product Contribution The Frappuccinos Margin %

Site 7-S Analysis

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Site 7-S Analysis



Strategy
Stores 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



Structure
Functional in structure and relatively flat Corporate organization is tall with four levels of management above store management

Store Manager

Assistant Manager

Shift Supervisors

Baristas

Baristas

Baristas

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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

Sales, Inventory, Staffing Individual Stores Individual Inventory, Orders, Transfers

Stores

Sales, Inventory, Staffing

Individual Stores

Corporate IT System

Vendors, Distributors, Mgmt., Channel Members

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 rollouts, although this site does not use regular meetings, but instead one-to-one discourse
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Order Cycle Times

Yes Yes
Pastry? .53 Min

No
Take Customers Order Bottleneck Order? .53 Min

Yes No
Pastry?

.40 Min

No Bottleneck Capacity 114 / Hr The Frappuccinos

.27 Min

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 others way The Frappuccinos

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 Starbucks differentiated atmosphere

Utilize entertainment budget to hire outside entertainers, have book / poetry readings, etc. Display the stores 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 realigned 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 highquality 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

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