2010    

 Tyler  Kettle  Mark  Hammond  Tori  Hunz  Kate  Geier  Shuncheng  Zhang    

[STARBUCKS]  Integrated  Company  Analysis  

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Academic Integrity Personal Statement “On our honor, we have neither given nor received unauthorized aid in completing this academic work.” Date: December 15, 2010 Kate Geier: _____________________________________ Mark Hammond: _____________________________________ Tyler Kettle: _____________________________________ Tori Kunz: _____________________________________ Shuncheng Zhang: _____________________________________

   

 

 

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Table  of  Contents  Introduction ................................................................................................................................................. 4  

Executive Summary..................................................................................................................................... 4  

Financial Statement Highlights.................................................................................................................... 4  

Financial Statement Analysis ...................................................................................................................... 5  

Primary Market Risks .................................................................................................................................. 6  

Stock-­‐Price  Forecasting................................................................................................................................ 6  

VIA Ready Brew: Launch Strategy ............................................................................................................. 7  

Positioning ............................................................................................................................................... 7  

Pricing ..................................................................................................................................................... 8  

Distribution .............................................................................................................................................. 8  

Promotions............................................................................................................................................... 8  

Instant Coffee Market: US ........................................................................................................................... 9  

Competitive Analysis and Positioning Strategy....................................................................................... 9  

Customer Analysis and Segmentation ..................................................................................................... 9  

Instant Coffee Market: UK ........................................................................................................................ 10  

Competitive Analysis and Positioning Strategy..................................................................................... 10  

Customer Analysis and Segmentation ................................................................................................... 10  

Recommendations ..................................................................................................................................... 11  

Recommendation #1: Continue Issuing Dividends................................................................................ 11  

Recommendation #2 – UK Market ........................................................................................................ 12  

Recommendation #3 – US and UK Markets.......................................................................................... 13  

Appendices ................................................................................................................................................ 13  

Works  Cited ............................................................................................................................................... 42  

 

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Introduction

Founded in 1971, Starbucks (NASDAQ:SBUX) is currently positioned as the world's premier

roaster and retailer of specialty coffee. SBUX's success is largely the result of their commitment to brand

development and innovation in the marketplace. Since its introduction, SBUX has remained committed to

its core values of providing customers with premium coffee and a community space. Innovative

developments have allowed SBUX to expand operations. Such innovations include new beverages, food

and entertainment items, and--most recently--SBUX VIA Ready Brew (VIA), a premium instant coffee

product. For company history and a detailed timeline of major company events, see Appendix A.

Executive Summary

Our analysis concludes that SBUX is on the right track to grow VIA domestically and

internationally. Having demonstrated great success during VIA's launch, the challenge now lies in

maintaining post-hype success and securing market share before competitors enter the new premium

instant coffee space (Coffee – US, 2010). It is also on-track to continue to issue dividends.

SBUX internal projections forecast market sales for the VIA brand exceeding $1 billion

(Andrejcak, 2010). As a result, the purpose of this paper is to examine the current strategies of VIA and to

provide recommendations for future growth. For our analysis, we will focus on VIA’s largest markets, the

US and the UK. For the UK, we recommend positioning VIA as a social identity brand tied to the youth

generation to change purchase behavior from Nescafé. For the US & UK, we recommend a defensive

branding strategy that makes VIA synonymous with “authenticity” and positions other brands as the

“artificial” substitute of "authentic" premium instant coffee.

Financial Statement Highlights

SBUX had a strong FY2010 and has shown marked improvements in key financial indicators.

The company was able to increase their operating income by $857.4 million and operating margin by

7.6% since 2009. SBUX increased their cash flow from operations from $1.4 billion in 2009 to $1.7

billion in 2010. Earning per share (EPS) increased by $.72 and SBUX issued the first dividend in

company history. Shareholders received $0.36 over the last three quarters (Appendix B). In addition, the

Board of Directors has authorized an extension of the share repurchase program. Since 2007, SBUX has

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authorized the repurchase of 55 million shares. At present, all but 20 million have been repurchased.

Altogether, SBUX was able to return roughly $460 million to their shareholders. (Starbucks 10-K)

Much of the financial improvements seen in fiscal 2010 are the result of a global store

restructuring that took place in 2008 and 2009. Over the past two years, SBUX closed over 900 stores

worldwide. The restructuring caused SBUX to incur significant costs, including lease exits and the sale or

retirement of equipment. Restructuring charges impacted EPS by approximately $0.04 per share in fiscal

2010 and approximately $0.28 in fiscal 2009. The company’s EPS growth was greater than 91% of its

peers in the Restaurants industry (See Appendix C). With the restructuring completed in early 2010,

SBUX is operating more efficiently and the financial statements illustrate their strong performance.

Financial Statement Analysis

SBUX has a strong capital structure with a debt to equity ratio of .15x, significantly lower than

their peers in the restaurant industry. Rather than taking on debt, SBUX is positioned to use revenue

generated from operations to fund financial investments (Appendix C). Moreover, even if SBUX were to

capitalize operating leases, the debt to equity ratio remains quite strong in comparison to its peers. Under

this assumption, the debt-to-equity ratio increases to .26x. Compared to McDonalds, at .76x, SBUX

remains competitive. However, it is difficult to compare this ratio to Caribou, SBUX's closest competitor

(Appendix C). As a debt-free company, Caribou Coffee has a debt-to-equity ratio of 0.

SBUX P/E ratio is in the 75th percentile of the restaurant industry, and its return on equity

indicates they are able to reinvest earnings more efficiently than 86% of competitors. These high ratios

signal value and strong growth potential to SBUX investors (Appendix C). Additionally, as indicated by

the Operating Margin, SBUX controls its costs and expenses better than 88% of its peers (Appendix C).

SBUX inventories are stated at the lower of cost or market, but its inventory turnover is lower

than 86% of its peers. This is most likely due to the fact that a significant portion of their inventory

consists of coffee beans. Coffee beans have a much longer shelf-life and are at times more susceptible to

global price volatility, so the low turnover ratio is not necessarily problematic. Moreover, based on their

high cash-flow from operating activities, the low ratio is not the result of weak sales (Appendix C).

Caribou Coffee and Einstein Brothers Bagel Corporation inventories are stated at the lower of cost or

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market. McDonald’s inventories are stated at cost. These similarities suggest little need to make

adjustments in order to facilitate a more insightful comparison.

Primary Market Risks

SBUX's primary market risk results from their heavy dependence on coffee beans and dairy

products. Because SBUX roasts and sells such significant amounts of high-quality whole bean Arabica

coffee and related products, the company faces significant risk due to coffee bean price volatility. This

risk is most evident in analysis of SBUX’s cost of goods sold. There is a very strong correlation between

coffee bean prices and cost of goods sold. For every $1 increase in the ICO composite price of Arabica

coffee beans, SBUX's cost of goods sold increases by $41.8 million (Appendix D). Although SBUX is

also susceptible to market risks in the cost of dairy products, the regression suggests that the price of

coffee beans alone is able to account for over 96% of the variation in cost of good sold. Therefore, we did

not run a regression to explain the relationship between dairy prices and cost of goods sold.

Stock-­Price  Forecasting  

Appendix E provides projected discounted cash flows to forecast SBUX's stock price under three

scenarios: baseline, "bull," and "bear." In order to project future cash flows based on the analysis

presented in this paper, total revenue is separated into two parts: VIA sales and non-VIA sales1. Different

long-term free cash flow growth rates were used for each of the three scenarios. Finally, to discount the

future cash flows under all three scenarios, a weighted average cost of capital (WACC) of 11.5% was

applied. This WACC is comprised of an 11.8% cost of equity and 3.88% cost of debt, weighted at 97.78%

and 2.22%, respectively (Appendix F). Note that the cost of equity is derived using a Beta of 1.158, which

was determined by running a regression analysis comparing SBUX stock price and the S&P 500 index

(Appendix G).

The first scenario, labeled baseline, provides DCFs based on SBUX’s internal projections for

VIA revenue growth. For the baseline case, non-VIA sales are projected to grow at the 11.4% historical

growth rate. The baseline case also assumes a 4.5% free cash flow growth rate. The remaining two

                                                                                                                         1  In the first ten months of 2010, SBUX had VIA sales totaling $100M. Assuming a slight reduction in the next two months, the projected total annual VIA sales in 2010 is $115M. SBUX estimates that total VIA sales will be $180MM in 2011 (Blair, 2010).  

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scenarios, labeled “bull” and “bear,” show the effect of two extreme market conditions. “Bear” considers

the impact on DCFs and stock price where VIA sales are 20% below internal projections. It also assumes

a slightly lower growth rate of non-VIA sales at 10%. Finally, the "Bear" scenario relies on a 4% long-

term free cash flow growth rate. “Bull,” on the other hand, considers the impact on DCFs and stock price

under the assumption actually VIA sales are 20% above projection. It also assumes a slightly higher

growth of non-VIA sales of 12%. In addition, the "Bull" scenario relies on a 5% long-term free cash flow

growth rate. For greater detail on market assumptions for all scenarios, please see Appendix E.

These DCFs are used to determine forecasted stock prices under each of the above three

scenarios. The resulting stock prices are as follows: Bull - $36, Bear - $29, and Baseline - $32. As of

December 13, 2010, SBUX closed at $31.99, which is nearly identical to the forecasted stock price under

the baseline assumptions. This suggests that the market has similar expectations for future growth as

SBUX management. This also suggests implications for investor responses to changes in VIA growth

expectations. For example, if investors' expectations for VIA growth are in line with our "Bull" case

projections, the SBUX stock price may be pushed up to our projected $36 valuation.

VIA Ready Brew: Launch Strategy

SBUX entered the instant coffee market as part of its Consumer Products Group (CPG) and

international growth strategy (Gould, 2010). Accounting for $21 billion annualized sales and 40% of total

global consumption, this market has potential to greatly expand the financial strength of SBUX Coffee

Company as a whole. Starbuck’s CPG sales increased by 4.9% in 2010, which was mainly due to the

successful launch of VIA sales in excess of $100M in its first year alone (Appendix I).

Positioning

VIA is positioned as a super-premium instant coffee. The product's point-of-difference is quality

taste that is available in a convenient on-the-go format. The target market is middle to upper income

consumers and working professionals. Unlike traditional instant coffee, the product is branded as a

“Ready Brew” item. This brand name is aligned well with VIA's premium positioning because it allows

the product to leverage “brewed” coffee brand associations like freshness and taste, rather than the low-

quality associations tied to “instant.” This point of differentiation is particularly important in the U.S.

market, where there is a negative stigma attached to instant coffee.

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Pricing

VIA is priced well above traditional instant coffee. At $0.83 ($0.59 UK) per 12oz serving vs.

Nescafe at $0.06 ($0.12 UK, premium blend) per 12oz serving, VIA’s pricing strategy is properly aligned

with its premium positioning (Appendix M). Additionally, VIA's pricing is below quick-service fresh-

brewed coffee brands like McDonald’s and Dunkin Donuts, which costs $1.35 or $1.65 per 12oz serving

(Consumer Reports Source). Because these quick service providers also deliver on premium taste, VIA’s

lower price provides a value offering to the quick service customer. This price strategy positions VIA to

successfully compete with part of the fresh brew market and capture market-share from existing

competition. It is important to note that SBUX is pricing VIA lower in the UK. SBUX is likely doing this

because a majority of UK's population drinks instant coffee and a higher price might not bring people into

the stores to purchase the product. For more detailed pricing comparisons, please see Appendix N.

Distribution

VIA was first launched in the US in 2009 and expanded internationally in 2010 to the UK, Japan,

Canada and the Philippines markets. In both the US and UK markets, SBUX restricted distribution to its

retail locations for the early months of the product launch. Once it established word-of-mouth and product

interest, distribution expanded to the food, drug, and mass merchandiser (FDM) channels. In the US,

Acosta is responsible for all distribution activities, whereas R.H. Amar & Co. is responsible for

distribution in the UK. See Appendix O for US SWOT and a limited analysis of Canada and Japan.

Promotions

After years of eschewing advertising for grassroots approaches, SBUX launched a robust

campaign to promote VIA. This campaign relied on traditional TV/print advertising, in-store taste tests

(VIA vs. roasted SBUX), digital campaigns and social media. While the medium of choice was different,

the main communications remained in-sync with the SBUX brand identity: promoting quality coffee and

community connection. This consistency helped differentiate VIA from traditional instant coffee, and

align it with the positive “quality” and “premium” nodes surrounding SBUX. Consequently, the launch

was successful at leveraging, rather than diluting, the equity of the master brand. See Appendix P for

sample ads, packaging and freeze pain images.

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Instant Coffee Market: US

In the United States, the term “instant” is synonymous with bad taste. The majority of US

consumers perceive instant coffee as a low-quality alternative to fresh brewed coffee. The category makes

up only 13.4% of total US coffee consumption (Appendix Q). This is substantially lower than the rest of

world, where instant coffee represents 40% of global consumption and well over 50% of consumption in

major international markets (e.g., UK, Japan) (Gould, 2010). However, consumer demand for on-the-go

items is continuing to grow in the US. As a result, there is large market potential for a premium instant

coffee offering. VIA’s challenge is to separate itself from traditional instant coffee and to secure premium

instant (read: “Ready Brew”) with the VIA brand before new competitors enter this space.

Competitive Analysis and Positioning Strategy

Since VIA is positioned on quality and taste, whereas traditional instant coffee is primarily

positioned on price, traditional instant coffee is not VIA’s primary competitor in the US market. Despite

this, VIA will likely face direct competition from dominate instant coffee manufacturers Nestle, Kraft and

Smuckers. These competitors are likely to mimic the benefits of VIA to gain sales in this new market.

Until direct competition enters the market, VIA’s closest competitors include quick-service fresh-

brewed coffee brands such as McDonald’s and Dunkin Donuts, because of their convenience and price.

We ruled out Kuerig’s K-cups and ground coffee being a competitor, due to K-cups requiring the

purchase of an expensive machine and ground coffee taking away the convenience factor.

Customer Analysis and Segmentation

VIA’s primary target market is middle to upper income working professionals leading busy on-

the-go lifestyles. This target fits with the broader demands of the US consumer, who is becoming

increasingly busy with competing demands at work and at home. This lifestyle change is fueling demands

for more convenience in consumer goods. Despite this demand for convenience, taste is still king for food

and beverage items, and consumers do not want to compromise quality or taste when they buy (2010 State

of the Snack Industry Report, 2010). And, while older generations (55+) are the highest coffee

purchasers, more than 80% of them are loyal to national brands such as Folgers and Maxwell House. In

contrast, younger consumers (18-34) purchase a higher level of regional/specialty brands, and are also

significantly more likely to use a “pod style” coffee maker (Coffee – US, 2010). Finally, VIA

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consumption location can be broken into three broad locations. 52% of VIA customers drink the product

at home, 25% drink it at work, and 20% drink it while on-the-go. (Wyss, 2010)

Instant Coffee Market: UK

In 2009, coffee sales in the UK totaled $1,235 million2, with instant coffee comprising 80% of

total coffee sales. Unlike the US, the UK consumer does not have the same negative associations with

“instant coffee,” and frequently chooses instant as their coffee beverage (Appendix R).

While the instant market continues to grow, the largest growth is seen in the roast and ground

coffee category. This trend is due to consumers' increasing demand for a better taste from their coffee

products. As a result, VIA’s challenge is to steal market share from current companies while leveraging

their premium taste to secure ownership of the premium instant category before new competitor entry.

Competitive Analysis and Positioning Strategy

In the UK, VIA is also positioned as a premium instant coffee product. Since instant coffee

consumption is common there, VIA will be directly competing with instant coffee producers. Nestle

currently dominants this market with its Nescafé Original and Gold Blend varieties accounting for 61%

market share in 2009 among leading brands (Appendix S). Kenco, manufactured by Kraft, ranks next with

13% market share for its Kenco Really brand line. (UK Coffee, 2010).

While VIA does compete directly with the above-mentioned brands, VIA is a revolutionary

product within the market. It is created by combining air-dried granules with fresh Arabica beans that

brew in the cup. This process, and resulting taste profile, differentiate VIA from even the highest quality

instant coffees currently sold in the UK. However, next year, Kraft plans to roll-out a new premium

instant coffee product that aims to mimic the favorable VIA taste attributes (Charles, 2010).

Customer Analysis and Segmentation

During 2009, consumers spent $989 million2 on instant coffee, up 12% from 2005. More

interestingly, the roast/ground market has grown almost 50% from 2005 reaching sales of $235 million.

This increase is attributable to younger consumers purchasing more roast and ground coffee because of its

                                                                                                                         2  Converted from pounds at the current exchange rate of 1.58  

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premium taste profile (Appendix U). In addition, younger consumers drink less instant coffee than older

consumers, with only 63% drinking instant coffee in a three-day period vs. 83% of those 55-plus.

Younger consumers drink coffee at local coffee shops, but they also drink it at home. Since

younger consumers have grown-up drinking at local coffee shops, their tastes have changed and they

demand a better tasting, premium type of coffee (RDS). Younger consumers' at-home consumption has

grown into purchasing premium coffee. We believe SBUX needs to target these types of consumers with

VIA. SBUX estimates that the average SBUX consumer drinks 56 cups of coffee a month and only two of

these cups are sold from a retail location (Wallop, 2010). SBUX has the opportunity to target to these

younger consumers and give them the SBUX experience at home and work.

Recommendations

Each of our recommendations provides a solution to a specific challenge we have identified in the

coffee market. The first recommendation applies to SBUX Corporation’s financial dividend policy. The

other recommendations address SBUX’s market strategy as they expand VIA. The first addresses a

market-entry barrier associated with the UK culture. The second market strategy recommendation is

applicable to both the US and UK market. It provides a recommendation to VIA to defend itself against

competitive players who may enter the premium instant coffee segment in the future.

Recommendation #1: Continue Issuing Dividends

Although this analysis concludes that the stock is undervalued if current VIA sales forecasts are

too conservative, we do not recommend that SBUX execute stock repurchases at prices below $36 per

share. This is because SBUX, as a growth company, should use excess cash on projects that are expected

to increase shareholder value. And, although an additional 20 million authorized share repurchases

remain, the stock is performing much better than it during the repurchases in 2007-2009.

Instead, SBUX should continue paying dividends. This is true for several reasons. First, SBUX is

currently sitting on over $1 billion in cash and cash equivalents. Second, SBUX issued dividends in Q2,

Q3, and Q4 of FY2010. Therefore, if SBUX does not continue issuing dividends, the company runs the

risk of scaring-off investors that have recently purchased SBUX shares. These shareholders likely

invested in SBUX partly because of their interest in owning a dividend-producing stock. Along the same

lines, by consistently issuing dividends, SBUX will continue attracting new dividend-seeking investors.

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Dividends are also attractive to investors that are less certain about future growth prospects because

proceeds from dividends are received today. Of course, this is particularly important in today's economic

climate, where uncertainty regarding future growth is significant.

Recommendation #2 – UK Market

• Market Challenge: Convince coffee consumers to switch instant coffee brands despite previous

loyalty to traditional brands like Nescafe.

• Proposed Solution: Position VIA as social identity brand; appealing to the good taste profile of the

hip consumer.

For the UK market, we recommend targeting younger consumers (16-34). These consumers have a

demonstrated preference for premium tasting coffee. They also have increased exposure to the coffee

shop culture compared to older generations that grew up on tea and traditional instant coffee. However,

despite this exposure, these younger consumers are still likely to have Nescafe in their cupboards.

To encourage brand switching, VIA must differentiate itself from Nescafe. We know that innovation

and premium taste are two attributes that differentiate these brands. Innovation is synonymous with what

is “new,” “cool” and “hip.” As such, we recommend positioning focused on being cool and on superior

taste. Our recommended campaign themes include: “VIA. Ain’t your Nanna’s instant coffe." and “Those

who choose VIA, choose good taste.” For details in support of these campaigns, please see appendix V.

We suggest executing these campaigns in media channels relevant to the youth market. These include

print ads in popular Gen Y magazines, outdoor advertising in downtown locations and public

transportation vehicles, and poster placements in trendy cafes and areas of social collaboration. In keeping

with the “hip” theme, we recommend utilizing online and social media advertising promoting consumer

engagement (i.e, YouTube, Facebook, blogs, Twitter). Grassroots marketing should supplement

traditional media. We recommend hiring street teams and brand ambassadors, and utilizing the youth

market to promote the product in cities, clubs and campus locations.

Advertising messages should be simple and free of clutter to complement previous placements

shown during the launch period, as well as the convenience attribute of this on-the-go product. Since VIA

is a new brand, this consistency is important as common themes activate and build on mental nodes that

have already been established in the consumer’s memory.

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Recommendation #3 – US and UK Markets

• Market Challenge: Align VIA with a unique value proposition that protects the brand against

competitors entering the premium instant coffee segment.

• Proposed Solution: Make VIA synonymous with “authenticity,” while positioning other brands as

the “artificial” substitute for real premium instant coffee.

To defend VIA against competition, we recommend replicating social disruption branding strategy

frequently used by iconic brands throughout history. This strategy identifies a disruption theme (i.e.,

conformity) in the current environment and positions the brand with a value attribute designed to resolve

this disruption (i.e., “Think Different”). Some examples of successful social disruption branding include

Pepsi’s “The Pepsi Generation” during the 1960’s youth revolt, and Coca-Cola’s “the Real Thing”

campaign, which appealed to stability demands when the revolution of the 60’s spun out of control.

Media reports and consumer beliefs suggest that “uncertainty” is the social disruption theme in

today’s society. Today, consumers are uncertain about everything. From employment, to finances, the

environment, to ethics, no one is sure what lies ahead. With this uncertainty comes a need for comfort.

Consumers want something real and authentic to provide them a sense of stability and reassurance. As a

result, we recommend positioning VIA as the “authentic” brand for the soluble coffee category.

Indeed, VIA offers the authentic taste of a fresh brew. In taste tests around the globe, it has been

indistinguishable from traditional SBUX coffee--a brand and product on which consumers already rely,

and one they can trust for premium taste and quality flavor. If something is authentic, it is real; it is

reliable and stable. Positioning VIA as “authentic” resolves uncertainty and aligns with consumer needs

today. “Authentic” is what people want to relate to, and a brand identity people are want to be a part of.

In addition, authentic is NOT artificial--a word that is synonymous with “instant.” Positioning

around authenticity separates VIA from instant. It creates a unique space in the soluble coffee market, and

protects VIA from competitive entrants. If VIA is the “authentic” soluble coffee, everything else becomes

artificial. SBUX VIA becomes the only "authentic" soluble coffee.

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Appendices Appendix A:

Appendix B: In millions, except earnings per share and store information The following selected financial data are derived from the consolidated financial statements. The data below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Risk Factors,” and the consolidated financial statements and notes.

As of and for the Fiscal Year Ended(1)

Oct 3, 2010 (53 Wks)

Sep 27, 2009 (52 Wks)

Sep 28, 2008 (52 Wks)

Sep 30, 2007 (52 Wks)

Oct 1, 2006 (52 Wks)

RESULTS OF OPERATIONS Net revenues: Company-operated retail $ 8,963.5 $ 8,180.1 $ 8,771.9 $ 7,998.3 $ 6,583.1 Specialty: Licensing 1,340.9 1,222.3 1,171.6 1,026.3 860.6 Foodservice and other 403.0 372.2 439.5 386.9 343.2 Total specialty 1,743.9 1,594.5 1,611.1 1,413.2 1,203.8

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Total net revenues $ 10,707.4 $ 9,774.6 $ 10,383.0 $ 9,411.5 $ 7,786.9 Operating income(2) $ 1,419.4 $ 562.0 $ 503.9 $ 1,053.9 $ 894.0 Earnings before cumulative effect of change in accounting principle 948.3 391.5 311.7 673.7 582.5 Cumulative effect of accounting change for asset retirement obligations, net of taxes 0.0 0.0 0.0 0.0 17.2 Net earnings including noncontrolling interests $ 948.3 $ 391.5 $ 311.7 $ 673.7 $ 565.3 Net earnings (loss) attributable to noncontrolling interests 2.7 0.7 (3.8 ) 1.1 1.0 Net earnings attributable to Starbucks $ 945.6 $ 390.8 $ 315.5 $ 672.6 $ 564.3 Earnings per common share before cumulative effect of change in accounting principle — diluted (“EPS”) $ 1.24 $ 0.52 $ 0.43 $ 0.87 $ 0.73 Cumulative effect of accounting change for asset retirement obligations, net of taxes — per common share 0.00 0.00 0.00 0.00 0.02 EPS — diluted $ 1.24 $ 0.52 $ 0.43 $ 0.87 $ 0.71 Cash dividends declared per share $ 0.36 $ 0.00 $ 0.00 $ 0.00 $ 0.00 Net cash provided by operating activities $ 1,704.9 $ 1,389.0 $ 1,258.7 $ 1,331.2 $ 1,131.6 Capital expenditures (additions to property, plant and equipment) $ 440.7 $ 445.6 $ 984.5 $ 1,080.3 $ 771.2 BALANCE SHEET Total assets $ 6,385.9 $ 5,576.8 $ 5,672.6 $ 5,343.9 $ 4,428.9 Short-term borrowings 0.0 0.0 713.0 710.3 700.0 Long-term debt (including current portion) 549.4 549.5 550.3 550.9 2.7 Shareholders’ equity $ 3,674.7 $ 3,045.7 $ 2,490.9 $ 2,284.1 $ 2,228.5 STORE INFORMATION

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Percentage change in comparable store sales(3) United States 7 % (6 )% (5 )% 4 % 7 % International 6 % (2 )% 2 % 7 % 8 % Consolidated 7 % (6 )% (3 )% 5 % 7 % Net stores opened (closed) during the year: United States Company — operated stores (57 ) (474 ) 445 1,065 810 Licensed stores 60 35 438 723 733 International Company — operated stores (15 ) 103 253 302 250 Licensed stores 235 291 533 481 406 Total 223 (45 ) 1,669 2,571 2,199

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Appendix C:

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19  

 

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21  

 

22  

 

23  

 

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Appendix D

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Appendix E: Discounted Free Cash Flow Analysis Baseline Case

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Bull Case

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Bear Case

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Appendix F:

Cost of Capital (WACC) Appendix G: Equity Beta

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Appendix H:

Appendix I: Stock Price & EBIT Margin (%)

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Appendix J: Capital Structure:

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Appendix K: Coffee Bean Price and Cost Of Good Sold

Appendix L:

Source Mintel

0.00  

20.00  

40.00  

60.00  

80.00  

100.00  

120.00  

140.00  

0.00  

500.00  

1,000.00  

1,500.00  

2,000.00  

2,500.00  

3,000.00  

3,500.00  

4,000.00  

4,500.00  

5,000.00  

2001   2002   2003   2004   2005   2006   2007   2008   2009  

COGS_SBUX  

ICO  Composite  Price  

Nestle  31.9%  

KraV  28%  

J.M  Smuckers  Co.  23.7%  

Starbucks  VIA  Ready  Brew  

1.6%  

Private  label/Other  16.4%  

US  Instant  Coffee  -­‐    Market  share  by  manufacturer  

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Appendix M:

UK Prices Via Nescafe Alta Rica In $ Via Dollars

Nescafe Alta Rica Dollars

Price £4.45 £3.46 Price $ 7.03

$ 5.47

Serving 12 45 Serving 12 45 Price Per Serving £0.37 £0.08

Price Per Serving

$ 0.59

$ 0.12

Premium 482%

(DBR Staff Writer)

Appendix N:

(Consumer Reports)

 $0.83    

 $1.55    

 $1.35    

 $1.65    

Starbucks  Via   Starbucks     Mcdonalds   Donkin  Donuts  

Prices  US  

US Prices Via Nescafe Alta Rica Price $9.95 $6.59 Serving 12 105 Price Per Serving $ 0.83 $0.06 Premium 1321%

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Appendix O:

Appendix P: Starbucks VIA Ready Brew, packaging and promotion examples Rich color hues and traditional Starbucks coffee cup imagery & logos complement the premium positioning of Starbucks VIA Ready Brew. This imagery also aligns VIA with the authentic taste and trusted quality of traditional Starbucks, while easy to open package design and simple “how to” directions signify convenience. Package:

34  

 

Print Advertisement:

Online Advertising and Social Media In an effort to get consumers engaged with Starbucks VIA Ready Brew, Starbucks launched a nationwide taste challenge matching VIA against traditional Starbucks Coffee. The results confirm the authentic fresh brew taste of the VIA product. In addition to traditional broadcast media, Starbucks utilized social media channels (i.e., YouTube and Facebook) to create further buzz about the product. Keeping with the integrated marketing campaign, messaging in these advertisements aligns with the product position around quality taste and authentic premium ingredients. Since both taste and authenticity are also part of the traditional Starbucks brand identity, VIA benefits from “Starbucks” as an endorser brand which helps grant credibility and support for the VIA name. Commercial – YouTube Clip

35  

 

http://www.youtube.com/watch?v=bFvaXXFrg-E

http://www.thebrainchildgroup.com/blog/2010/10/starbucks-via-coffee-commercial/ Facebook Promotion – Starbucks VIA Taste Challenge

36  

 

Consumer Promotions and Mobile Marketing Efforts: A second effort to engage consumers with VIA includes traditional promotion offers and outdoor advertising. Both strategies bring the brand closer to the consumer in a convenient and fun manner. The promotion offer ships straight to the consumer making it convenient to try the product. The outdoor advertising uses automobiles to communicate their message, a vehicle that is synonymous with on-the-go attributes.

37  

 

38  

 

Appendix Q:

Source Mintel Appendix R:

Source Mintel

Roasted  Coffee  76.6%  

Single  Cup  Coffee  3.7%  

Instant  Coffee  13.3%  

Ready  to  Drink  Coffee  6%  

US  Total  Coffee  -­‐    Market  share  by  coffee  type  

Instant  80%  

Roast/ground  19%  

Ready  to  drink  1%  

Retail  Sales  of  Coffee  in  UK  

39  

 

Appendix S:

Source Mintel Appendix T:

Nescafé  Original  35%  

Nescafé  Gold  Blend  24%  

Kenco  Really  Smooth  8%  

Kenco  Really  Rich  7%  

Kenco  Decaffeinated  

5%  

Nescafé  Decaf  4%  

Nescafé  Cappuccino  

4%  

Douwe  Egberts  Condnental  Gold  

5%  

Carte  Noire  5%  

Kenco  Rappor  3%  

Market  Share  Instant  Brand  Leaders  UK  

Nestlé  42%  

KraV  20%  

Douwe  Egberts  8%  

Cafédirect  2%  

Taylors  2%  

Lavazza  2%  

Gala  (Lyons)  1%  

Food  Brands  Group  (Percol)  

1%   Own-­‐label  16%  

Others  6%  

Market  Share  of  Total  Coffee  Sales  in  UK  

40  

 

Appendix U:

Appendix V: Recommend Advertisements Since good taste is always in style, the second campaign is also hip. More importantly, by mentioning “good taste,” SBUX is aligned with the target’s premium taste preferences. It also aligns with VIA’s most distinguishing product attribute: superior taste when compared to Nescafe.

(Sample Advertisement Created by ICA Team)

33%  26%  

17%  13%   12%  

57%  

42%   39%  

23%   22%  

75%  

47%   50%  

25%  21%  

79%  

53%  44%  

39%  

14%  

82%  

61%  

24%  

42%  

6%  

0%  

10%  

20%  

30%  

40%  

50%  

60%  

70%  

80%  

90%  

At  home  (mine  or  other  people’s)  

In  cafés/  coffee  shops  

Drink  it  at  work  –  where  I  make  

it  myself  

In  restaurants/  pubs/fast  food  

outlet  

Drink  it  at  work  –  but  buy  it  

either  at  work  or  elsewhere  

Where  They  Drink  by  Demographics  in  UK  

16-­‐24  

25-­‐34  

35-­‐44  

45-­‐54  

55+  

41  

 

This campaign appeals to our target consumers desire to be distinctly different from their older generations. Younger consumers see parents and grandparents as distinctly un-cool, boring and outdated. Thus, Nescafe (their grandma’s coffee) also appears outdated. VIA--the new generation of coffee--is cooler, more hip and more in-line with who they want to be.

 

(Sample Advertisement Created by ICA Team)  

 

 

 

 

 

 

 

 

 

 

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Works  Cited  2010  State  of  the  Snack  Industry  Report.  (2010,  March).  Information  Resources  Inc  .  

Andrejcak,  M.  (2010,  December  7).  CEO  Schultz  Reinvigorates  Coffee  Retailer’s  Clientele  and  Shareholders;  Chief  Barista  Brews  Strong  Starbucks  Blend.  Retrieved  from  Marketwatch.  

Blair,  W.  (2010).  Starbucks  Corporation:  Raising  Estimates  on  Record  Fiscal  2010.  

CARIBOU  COFFEE  COMPANY,  INC.  .  (2010,  January  3).  Retrieved  from  Edgar  Online.  

Charles,  G.  (2010,  December  1).  Coffee  Wars:  Kenco  takes  on  Starbucks  Via.  Retrieved  from  Brand  Republic.  

Coffee  –  US.  (2010,  September).  Mintel  Reports  .  

DBR  Staff  Writer.  (2010,  July  11).  Starbucks  Launches  Via  Ready  Brew  In  Tesco  Stores  Across  UK.  Drinks  

Business  Review  .  

Gould,  S.  (2010,  March  3).  Starbucks  VIA®  Ready  Brew  Global  Expansion  Begins  with  U.K.  and  Japan.  Retrieved  from  Starbucks  Newsroom.  

How  much  for  a  cuppa?  Coffee  and  tea  are  becoming  more  sophisticated  as  suppliers  drive  preiumisation,  but  commodity  pressures  threaten  to  make  brands  even  more  expensive,  says  Nick  

Hughes.  (2010,  September  11).  RDS  Business  Suite  .  

McDONALD’S  CORPORATION  .  (2010,  February  26).  Retrieved  from  SEC  Watch.  

Starbucks  Corporation  10  K.  (2010,  October  3).  Retrieved  from  SEC  Watch.  

Starbucks  Corporation.  (2010,  December  10).  Reuters  .  

Starbucks  VIA  Ready  Brew  at  Starbucks  Store.  (n.d.).  Retrieved  from  StarbucksStore.  

Starbucks  wars.  (n.d.).  Consumer  Reports  .  

UK  Coffee.  (2010,  February).  Mintel  .  

Wallop,  H.  (2010,  March  4).  Starbucks  Via  instant  coffee  on  sale  in  Britain.  The  Telegraph  .  

Wyss,  L.  (2010  ,  August  3).  Starbucks  VIA®  Ready  Brew  Hits  $100  Million  Sales  Mark  in  First  10  Months.  Retrieved  from  Starbucks  Newsroom.