5

Table of Contents 1. Our Strategy Process ......................................................................................... 9

1.1 Kick-Off ....................................................................................................... 9 1.2 Strategy Research ......................................................................................... 9

1.2.1 Different Views on Strategy ...................................................................... 9 1.3 Strategy Model ............................................................................................10

1.3.1 External Environment ..............................................................................10 1.3.2 Internal Environment ..............................................................................10

1.4 Strategic Direction ........................................................................................11 2. Results of our Strategy Process ..........................................................................12

2.1 External Environment ................................................................................12 2.1.1 Task Environment ...................................................................................14 2.1.2 Industry ................................................................................................14

2.2 Conclusion and Analysis of External Environment .............................................14 2.3 Internal Analysis ..........................................................................................17

2.3.1 Company Background .............................................................................17 2.3.2 Starbucks Business Model Canvas ............................................................17 2.3.3 Core Competencies and Competitive Advantage Analysis .............................18 2.3.4 Current CSF ...........................................................................................18 2.3.5 Internal Weaknesses ...............................................................................18 2.3.6 Financial Performance .............................................................................20 2.3.7 Current Strategic Direction ......................................................................20 2.3.8 Current Strategic Challenges ....................................................................21 2.3.9 Conclusion .............................................................................................21

2.4 Possible Strategic Directions ..........................................................................22 2.4.1 New Strategic Direction ..............................................................................22

1. Creating a Sustainable and Ethical Business Network .......................................22 2. Product Differentiation .................................................................................23

2.4.2 Why the Team Choose to Focus on Those Two Strategies ...............................23 3. Competitive Method 1 .......................................................................................25

3.1 General Description ......................................................................................25 3.2 Alignment with New Strategic Direction ...........................................................26 3.3 Correspondence with the External Environment ...............................................26 3.4 Correspondence with the Internal Environment ................................................27 3.5 Alignment with the Current Strategy ...............................................................27 3.6 Value Creation .............................................................................................27 3.7 Competitive Advantage .................................................................................27 3.8 Influence on Stakeholders .............................................................................28 3.9 Financial Feasibility.......................................................................................28

3.9.1 Initial Investment ...................................................................................28

6

3.9.2 Depreciation ..........................................................................................28 3.9.3 Expenses ...............................................................................................29 3.9.4 WACC ...................................................................................................29 3.9.5 Increase in Volume of Sales .....................................................................29 3.9.6 Cash Flow Statement ..............................................................................29 3.9.7 Profitability Analysis ................................................................................29

3.10 Measure of Success ....................................................................................30 3.11 Incentives and Risks ...................................................................................30 3.12 Conclusion CM1 ..........................................................................................31

4. Competitive Method 2 .......................................................................................32 4.1 General Description ......................................................................................32

4.1.1 Visualisation of Starbucks Lounge .............................................................33 4.2 Alignment with New Strategic Direction ...........................................................34 4.3 Correspondence with the External Environment ...............................................34 4.4 Correspondence with the Internal Environment ................................................34 4.5 Alignment with the Current Strategy ...............................................................34 4.6 Value Creation .............................................................................................34 4.7 Competitive Advantage .................................................................................35 4.8 Influence on Stakeholders .............................................................................35 4.9 Financial Feasibility.......................................................................................35

4.9.1 Initial Investment ...................................................................................35 4.9.2 Depreciation ..........................................................................................35 4.9.3 Expenses ...............................................................................................36 4.9.4 WACC ...................................................................................................36 4.9.5 Effect of Investment ...............................................................................36 4.9.6 Cash Flow Statement ..............................................................................37

4.10 Measure of Success ....................................................................................37 4.11 Incentives and Risks ...................................................................................37 4.12 Final Conclusion CM2 ..................................................................................38

4.13 Recommendations for Starbucks .....................................................................38 5. Appendices ......................................................................................................39

1. Pros and Cons of CMs .....................................................................................39 2. Task Environment - Competition Table ..............................................................40 3. In-Depth Information, External Environment .....................................................41 4. Remote to Industry Source Table .....................................................................46 5. KDFC Impact Matrix .......................................................................................55 6. Confrontation Matrix, KDFC Task ...................................................................56 7. Business Model Canvas, Starbucks ...................................................................57 8. Business Model Canvas, Costa Coffee ...............................................................57 9. Business Model Canvas, McDonalds .................................................................58 10. Business Model Canvas, Dunkin Donuts ..........................................................58

7

11. Patterns Identifying CC within Starbucks from BMC ..........................................59 12. CSF, CM, CC, CA Flowchart ............................................................................60 13. Relationship Matrix (CC-KDFC) .......................................................................61 14. Financial Data, CM1 ......................................................................................62

14.1 Effect of Investment ................................................................................62 14.2 Cash Flow Statement ...............................................................................63 14.3 Operating costs .......................................................................................64 14.4 Salary ....................................................................................................64 14.5 Coffee Bean Price ....................................................................................65 14.6 Increase per Year, Coffee .........................................................................65

15. Financial Data, CM2 ......................................................................................66 15.1 Effect of Investment ................................................................................66 15.2 Cash Flow Statement ...............................................................................67

16. Starbucks Lounge, Questionnaire ...................................................................68 17. Present and Future CSF.................................................................................70 18. Competitor Analysis ......................................................................................71 19. Graphs ........................................................................................................77

19.1 Disposable Income Globally ......................................................................77 19.2 Middle-Income Households .......................................................................77 19.3 Future Credit Ratings Globally ...................................................................78 19.4 Age Dispersion ........................................................................................78 19.5 Global Population .....................................................................................78

References ..........................................................................................................81

8

9

1. Our Strategy Process

1.1 Kick-Off As high potential the team were hired by the corporation of Starbucks in order to create two competitive methods (CM) which align with the strategic objectives for future corporate improvement and long-run added value. The first step was to create a plan of approach to determine and become aware of the team dynamics and characteristics, supported by the outcome of the Birkman test and a personal SWOT analysis.

1.2 Strategy Research

...while the main laws of strategy can be stated clearly enough for the benefit of all and sundry, you must be guided by the actions of the enemy in attempting to secure a

favourable position in actual warfare (Tzu, 2010)

1.2.1 Different Views on Strategy There are two major schools of thought when it comes to what strategy actually is: One defines strategy as something hospitality enterprises of the future will only succeed if their managers are able to see opportunities in the environment of the business and invest in value-adding competitive methods (Olsen, et al., 1998). This means that a company will have to look at the external market and adjust their strategies to the shifting market demands before it shifts, i.e. come up with strategies that are ahead of the market and create a need. The other major school of thought states that the traditional process for developing strategy consists of analysing the internal and external environments of the company to arrive at organisational strengths, weaknesses, opportunities and threats (SWOT). The results from this situation analysis, as the process is sometimes called, are the basis for developing missions, goals and strategies. (Enz, 2010) This means that a company looks at what it has and develops strategies from that. Conclusion The team agrees that the second theory is more useful and will therefore base their strategic development from that school of thought. The team feels that it is important to include both internal and external factors when deciding on a future strategy and plan. The market will always play a major part in the success or failure of the strategy but if a company is not aware of the internal resources and strengths there is a chance that they will not utilise the potential within the company itself.

10

1.3 Strategy Model Due to the complexity of Starbucks and the development of the CMS the team did not utilise only one strategic model, but researched several options, such as Porters Five Forces (Porter, 1996), Olsens Co-Alignment Theory (Olsen, et al., 1998), Enz approach to expansion (Enz, 2010), Porters and Kramers SV (Porter & Kramer, 2011), SWOT (partly), Impact/risk analysis, Ranking order/KDFC matrix (after the teams own design), P.E.S.T.E model (Housing Industry Association, 2011), flowcharts, a questionnaire, Business Model Canvas (Osterwalder & Pigneur, 2010), Ansoff Matrix (Ansoff, 1987) together with constant discussions and critical assessment of results, as well as weekly feedback sessions from the teams coach, Mr Huizing.

1.3.1 External Environment First, the team chose to divide the different scans according to Olsens Co-Alignment Theory (Olsen, et al., 1998) (remote, task and industry environment) to put the work ahead into perspective and gain structure. It is the recommended model for this purpose according to the training the team received and provided a good general structure. The second model that the team chose was the P.E.S.T.E analysis. It provided the team with a framework within which to operate and the team thought that the P.E.S.T.E covered the necessary areas of interest and influence. For the actual research within the P.E.S.T.E the team chose to modify Porters Five Forces. The team used the categories from Porter to gain even more structure and insight into market developments; both past, present and future. The categories from Porter in combination with the P.E.S.T.E covered all stakeholders and areas of a company and the team were convinced that when combining all these models all areas of research would be covered. This research also revealed whom the competition were for future analysis. When analysing the data from the research the team created their own risk analysis matrix where the KDFC (for a descriptive table of the KDFC please see chapter 2.1) were compared and assessed in relation to the trends found in the task and industry environments (Appendix 5). The potential impact of the KDFC on the main trends were ranked on correlation (Appendix 6) and by analysing and discussing the results the team could start to identify patterns and directions. This matrix also identified the most influential KDFC and that gave the team an important insight into the most important areas to focus on. After having determined what the major trends were and how those trends would be affected by the KDFC the team could move on to the internal analysis.

1.3.2 Internal Environment The team wanted to have a structural approach to the internal analysis as well and therefore chose to utilise the Business Model Canvas in their analysis. Once Starbucks was plotted on the canvas (Appendix 7) the team moved on to plotting the three main competitors (globally) using the same canvas (Appendix 8, 9 and 10). This enabled the team to identify how and what Starbucks did differently and where the competition were outperforming them.

11

Continuing, using the information from the Business Model Canvas together with critical thinking and discussion the team could determine Starbucks CC as well as the corresponding CSFs, CMs and CAs. This is visualised in a flowchart to generate a proper overview of the current CC of Starbucks (Appendix 11). This gave the team a clear understanding of what Starbucks the company actually did and what makes them unique in within the market they operate. As a continuation of this process and to gain more understanding of where the gaps were for Starbucks in comparison to future developments in the world and that resulted in Future CSF (Appendix 15); areas that Starbucks will have to cover to survive within the industry. After having created a clear image of what the future market might look like and what the minimum requirements for a business where, the team could now focus on coming up with new strategic directions for Starbucks.

1.4 Strategic Direction When a company wants to develop they can chose from a range of strategies; growth, differentiation, cost leader, vertical/horizontal integration and many more. The strategy that the company chooses will influence many aspects of the industry and therefore there needs to be analysis, investigation and research performed before a direction if picked. This was the most challenging part for the team as there were many possible directions and opportunities. It took several long discussions to determine where the team wanted to take the company in the future and what CMs to develop. There were several directions the team could choose and in order to settle on the most favourable ones the team did a critical assessment on the possibilities, using knowledge obtained during the scans. The assessment of the different strategic directions and motivations for why these directions were disregarded can be found in chapter 2.4.2. The team settled on Creating a Sustainable and Ethical Business Operation for the first CM as the research pointed to this as both a major external as well as internal influence. The CM that the team chose to develop was that of implementing a Shared Values concept for their farmers around the world. A complete outline of CM1 can be found in chapter 3. The second strategic direction that the team chose were Porters Differentiation Strategy (Porter, 2007) and the CM that the team chose was introducing Starbucks Lounge. A complete outline of the second CM can be found in chapter 4. All the CMs that the team came up with were assessed and the pros and cons of each CM were weighted against the research done earlier in the process (Appendix 1).

12

2. Results of our Strategy Process 2.1 External Environment

13

14

2.1.1 Task Environment Scope In this analysis the impact of the KFDC on consumers, competition, suppliers and regulators within the task environment (Olsen, et al., 1998) of Starbucks are being outlined. The scope set to define the task environment is as follows;

The task environment takes in consideration only F&B outlet related companies worldwide. F&B outlets related companies worldwide are demand driven

2.1.2 Industry Scope The scope set by the research group is

Global industry that sells and retails coffee, coffee drinks and other non-carbonated

beverages as their main products The scopes are defined by the group to ensure to include all aspects of the task and industry environment come together to paint a complete picture of the environment Starbucks operates is in.

2.2 Conclusion and Analysis of External Environment For an in-depth description as well an outline of sources, please see Appendix 3. Looking at the world in the future, the main influence on any company will be the need to operate in a sustainable manner. Research has painted a picture of the future where resources are scarce and the population is too large to be sustained by the resources available; water, energy, and food. The way companies are operating in our time has proven destructive and unsustainable and only a small portion of the planets population are benefiting from it. A company that wants to be market leader in the future needs to have sustainability as a key word in their strategic direction and they need to ensure that the resources needed for the operations are secured. Countries that suffer from scarcity of resources or that are unable to produce these resources domestically will have to invest in innovative agricultural and technological research to explore new possible sources of food and energy. Companies that are dependent on natural resources, such as coffee or cocoa beans, are going to be very exposed in the future as these crops are already showing sign of stagnation due to a deceased production rate as well as threats of disease. This sustainability trend is also reflected in the future needs and wants of consumers. The major influence on any purchase in 2030 will be where, when and how the product was produced, under what conditions and if it was done under ethically correct conditions. An increasing number of consumers are requiring products originated from resource-responsible companies and due to this future demand, many companies need to make drastic changes to their strategies and operations to satisfy the consumers. This is going to require investments in several sustainable technologies that will assist companies in attaining their green and ethical goals.

15

The increased interest and dependency on technology is an element that will be a natural part of every citizens life in the future. The development of the Internet of Things as well as the expectation to constantly be connected is another element that will be essential for the future success of a business. The consumers will require smart, self-learning devices as well as a constant flow of information and services. The need of non-stop services and products will lead to an increase in automation and robotics on an operational level which will lead to an increase in unemployment and a social counter-reaction. This reaction will be most evident in the future cities. Due to the increased unemployment rate on an operational level and rising population numbers, future citizens will move to the cities to look for a better life; socially and professionally. Due to operational level position being dominated by robots people will have the opportunity to stay in school and gain a higher education level. This will lead to a later career start and as a consequence of that, the future citizen will have fewer children and those children will come later in life. Due to increasing medical technologies, the life expectancy will increase as well the quality of life. The social movement will include the need for people to live in small communities and connect with their peers. Self-sustainability and close social ties will be important and any business that wants to succeed in the cities will have to develop a product or service that taps in to this need for a personal touch and a social meeting place. A future company will have to find a strategy that balances the technological need with the social requirements of the future consumers. Some of these urban citizens will have been successful in finding an employment that will allow them to travel to new markets, such as the developing BRIC or ASEAN 5 countries. These markets will be increasingly important in the global financial markets as the financial leverage will shift in their favour as Europe and the US will see a decline in financial trust. The new markets will offer new possibilities for businesses that want to expand, both on a production level as well as on an operational level. The people of these new markets demand and require businesses with a Westernised image and they have the disposable income to spend on these slightly more expensive brands. Many companies will choose to expand into these new, lucrative, markets and will develop new strategies to attain the market leadership. However, the fact that products such as coffee and cacao beans are becoming increasingly scarce means that any company that operates within this industry will have to find a way to secure the resources before demand overtakes supply and as a result, the company cannot expand further.

16

17

2.3 Internal Analysis After the external factors and developments had been researched and concluded, the company itself was being analysed. By researching Starbucks core values, mission, vision, company structure, critical success factors and the areas of business in which Starbucks is operating, their competitive advantages and performance, compared to their closest competitors were discovered. This internal analysis, in combination with the external findings, allowed the team to develop a future strategic direction for Starbucks. Methodology Due to the current market position of Starbucks the team decided to use the Business Model Canvas to, firstly, paint a clear picture of what Starbucks did and secondly, determine the core values and core competences of the company (Appendix 7). The Business Model Canvas gives unique insights in a company by focusing on many different subjects and areas in the companys business. From the Business Model Canvas the trends and how these were connected emerged and when put into a flowchart (Appendix 11) for visualisation, all the connections and the direction toward competitive advantages and critical success factors emerged. To ensure that the CCs, CMs, CSF and CAs that the team found were solid the team also applied the Business Model Canvas for the three closest competitors (Appendix 8, 9 and 10) of Starbucks and that way it became evident where the gaps were and where there was room for improvement within the company

2.3.1 Company Background Starbucks opened its first store in 1971 in Seattle, USA. It started out small as a roastery as well as a retailer of spices, tea and coffee beans. In 1982 Howard Schultz joins the company and in 1984 the company starts expanding and much of its success is accredited to Mr Schultz. Today, Starbucks is a global corporation with close to 20,000 stores. The company portfolio includes several brands such as Teavana, Evolution Fresh and La Boulange. Starbucks is the market leader in the US and is one of the most recognised brands in the world operating in 60 countries (Starbucks, 2014).

2.3.2 Starbucks Business Model Canvas By interpreting the patterns emerging from the Business Model Canvas (Appendix 7) it becomes evident that Starbucks CCs are mainly focused within the R&D area as well as superior customer relations and product quality. The company has focused their energy on expanding the market presence and to become a household name that is widely recognised and valued by consumers. Starbucks does reach several customer segments in different ways. This together with very well-known brand and market presence results in very effective marketing of the company. Quality Management plays a big part within Starbucks. The staff training they provide, quality assurance processes and efficient management of supply chain result in an effective quality management system that delivers consistent product. Due to many investments in research and development as well as Starbucks innovation, they came up with new design concepts which really showcases a skill of creation an aesthetic appeal. Fair treatment, staff training and several employee benefits proves that Starbucks knows how to manage their human resources effectively resulting in low turnover and high loyalty. Consumers mainly come to Starbucks because of many value propositions such as third place between home and

18

work, personal service as well as being able to be involved within company development. Customer care and involvement for Starbucks is of high importance which translates into consumers having an emotional attachment to the brand. Especially within US it is very convenient to go to Starbucks as its market presence is very large. Starbucks strategy is to grow and they know how to do it effectively and where to locate their stores. Finally good relationship with all its suppliers creates a sustainable long term relationship.

2.3.3 Core Competencies and Competitive Advantage Analysis A complete outline of the three largest competitors, McDonalds, Costa Coffee and Dunkin Donuts can be found in Appendix 16. Looking at all competitive advantages together it clearly outlines that Starbucks very smartly developed and utilised their core competencies in order to become a market leader. Firstly there is a clear core product which the company perfects every day and allocate R&D resources towards. This product is very effectively marketed towards the public focusing on the emotional brand attachment instead of product attachment like DD or MCD, which seems to be very effective. This is due to the fact that emotional brand attachment itself cannot be very easily substituted and product can. Prime clustering locations not only ensure higher presence in key locations over its competitors but also makes it very convenient for the customer which is another advantage of Starbucks. Another competitor which comes very close is MCD. As the cherry on top of the cake comes customer involvement within the companys development and everyday life as well as outstanding customer care and service which leads to show how affective Starbucks is behind the scenes. Starting from the suppliers, every big company must have good relationship in order to provide product consistency. The difference between different companies in this area is very minor. Starbucks implemented very effective Quality Management system which ensures not only overall product quality and consistency but also global in store service quality assurance due to not having any franchises like its competitors but company operated and licensed stores which must follow the same procedures. Also looking at the recruitment human resource management of Starbucks it shows how effective they are with providing trainings and making employees a valuable asset of the company, by looking at very low staff turnover which again ensures quality and consistency. Looking at the table in Appendix 17 it becomes evident that the two most vital CC for Starbucks in the future are innovation from within and sustainable supplier relation as these correspond the with challenges of the future.

2.3.4 Current CSF For a complete outline of CSF and clarification on future CSF please see Appendix 15.

2.3.5 Internal Weaknesses Below is an outline of the major weaknesses identified within the Starbucks Corporation. Large, global corporation image The picture painted by Starbucks themselves does not include the less flattering aspects of being one of the worlds largest corporations.

19

Starbucks currently holds a majority coffee market share in the USA and therefore they are the market leaders and controllers. Being a large corporation means operating on a global level and affecting many peoples lives. In the future the trends point to many small scale societies where the community is in focus as well as living in a sustainable way and producing green products. Starbucks current CSR (Starbucks, 2014) tries to project a positive image of a community driven company but when inspected the CSR plan achieves little and there has been several issues raised in regards to unethical treatment of farmers and small producers. This is a major threat to Starbucks if they want to continue as market leaders in the future and they need to adjust the image to fit the actions. Over-dependency on the US market The market leading position in the USA puts Starbucks at a risk as they as a company are over dependent on the American market and very vulnerable to changes in the US financial market. In the future the US market is predicted to be over-taken by other, emerging, markets; amongst others China. This means that Starbucks will have to work towards spreading the risk of market dependency through expanding globally. However, this is a huge investment as it involves opening stores, launching marketing campaigns and hiring and training staff. It can be worth investing the capital to expand in order to avoid the risk of another financial crisis as the company was hit hard from the last one; the share value dropped and lost 30 of its 40 points and had to close 300 stores in the US. High priced products The trends show that there will be an increase in the disposable income in the emerging markets like Asia and South-America. Due to this fact the high priced products that Starbucks currently sells are not a threat. In the American and European market the high price product can be a possible threat in the future due to the unstable and declining economy. Next to this, there is a shift in the way why consumer are willing to pay that high price; it is not because of the tangible items that guests come to Starbucks but it is moving towards the social aspect and that could become the main reason why guests choose Starbucks ahead of the competition. This means that in the future Starbuck has to consider the layout of the outlets due to the fact that the consumer in the USA and Europe come to Starbucks to socialise instead of only having a beverage. In the future, in the Asian and South-American markets the high prices a be continued due to the luxury level that is linked with Starbucks in these markets and in the future the citizens of these markets will also have a higher disposable income which will mean a larger segment than Starbucks can currently reach.. American/European corporation culture clashes with other cultures Starbucks represents a western type of culture, both in its store image and corporate culture. This is no surprise as it is an American company that mainly operates in the US. Since Starbucks are expanding and want to take advantage of the new markets emerging they can face a problem when cultures collide. The American way of operating is recognised by an aggressive and overruling style and Starbucks are famous for their core product, coffee, something that is also connected to a Western lifestyle. In other cultures the accepted manner of operation can vary. There are cultures where the aggressiveness

20

will be seen as something rude and in other places it is not acceptable to the genders to mix in the same room. Currently, Starbucks are not adapting their concept to the local market and this will be a threat to their future expansion plans. Looking at the Chinese market where the majority of the market are made up of tea houses, and tea drinkers, Starbucks will struggle is if they do not adapt to the local palate. Overcrowding and cannibalisation of the own market The US market is saturated by Starbucks. Because of their aggressive prime clustering localisation of their outlets they destroyed the competition and the local shops. Due to this fact, they are cannibalising on their own shop around the corner. If Starbucks keep this aggressive expansion strategy in new market, then it can happen in these market as well. The prime clustering localisation strategy can help the company to grow rapidly in new markets, such as China, but due to the high investment the risk is high as well as discussed in a previous paragraph.

2.3.6 Financial Performance Since 2009 Starbucks has been growing its revenue at a consistent level having an average revenue increase of 11.05% per year. Last year Starbucks noted a revenue of $14.9 billion and at the same time it achieved revenue growth of 12% from last year. Operating margin has noted a healthy increase together with the revenues of Starbucks - in 2009 being 9,2% and in 2013 being 16.5% (NON-GAAP). It has to be mentioned that in 2013 Starbucks posted an operating loss of which resulted in operational margin at -2.2% at the end of the year. The main reason for that was litigation charge of $2.8 billion from Kraft Foods for terminating an agreement. Starbucks current cash conversion cycle stands at 54.7 days. This long conversion period is mainly affected by Inventory Holding Period of 67.3 days. Starbucks is performing quite well with Accounts Collection period of 12.8 days and Payment Deferral Period of 25.4 days. Starbucks should focus on reducing the period of cash conversion if they want to attain higher efficiency. In 2012 Starbucks noted an impressive ROE of 29.2% and ROA of 17.8%. Starbucks boats healthy debt/equity ratio of 0.29 and maintains a decent current and quick ratio of 1.02 and 0.81 (Starbucks, 2014).

2.3.7 Current Strategic Direction Starbucks main strategy at the moment is growth. Expanding into new markets and have a high market presence. In their annual report Starbucks outlines the following goals for 2013 onwards (Starbucks, 2014), (Choi, 2012).

x Core of Innovation and Operational Excellence x Open 1,500 new stores, globally x Innovative Concepts x Expanding the Teavana Concept x Aggressive growth for Evolution Fresh x Customer Connections (mobile technology and loyalty programmes)

21

The growth focus of Starbucks involves all areas and most of their brands and they are admittedly aggressive in most of their goals and strategies to reach them. Alongside the growth strategies Starbucks are focusing on product innovation. The company are aiming at offering more products at more locations.

2.3.8 Current Strategic Challenges The challenges with the current strategy affects the stakeholders in five different ways:

Customers Employees Shareholders Suppliers Generic Issues

The risk of losing customers due to

increased competition within the coffee

market

Risk of having a decreasing pool of line staff due to older and more well-educated

population

Over-reliance on the American market leaves Starbucks

vulnerable to changes in the American stock

market

Resources running out

Over-saturated market

Need to create something that is

unique

Damaged confidence from shareholders after the Kraft incident. Can

damage future investment plans

Crop diseases leads to higher prices and scarcity of supplies

Not currently adapted to deal

with future sustainability

demands

Customer demanding more insight into

product background

No new generation of coffee farmers due to the horrible

working environment and low payments

Currently not adapting to local cultures in new

markets Demanding sustainable

and green produce

Forces to drop prices due to different living

standards in new markets (e.g. India)

2.3.9 Conclusion If Starbucks wants to continue their success story in the future they have to, firstly, live up to the future CSF (Appendix 15) where the most important areas are sustainability and personalisation. At the moment, Starbucks are outperforming the competition within one of these areas, personalisation, but are seriously lacking in the other, sustainability. The current CC of Starbucks (Appendix 11 and 16) were identified through utilising the BMC (Appendix 7) and through this a gap was discovered. Starbucks are, as mentioned earlier, not living up to the future expectations of the customers; the needs and wants for sustainability and ethically produced goods, nor do they successfully adjust products or process to the local market. Therefore, in order to maintain their position as market leaders, Starbucks needs to evolve the current CC to fill the gap of the future. The two CC that will give Starbucks the most advantages in the future are innovation and supplier relationships as both these factors will put the company ahead of the competition in two of the most important areas in the future by continuously adapting to consumer requirements and by helping the company secure future scarce resources in a sustainable manner. At the moment Starbucks have two main internal weaknesses that, if not addressed, will become more troublesome in the future; negative large corporation image, as the future

22

consumer will treasure local produce and highly priced products as the financial leverage will shift from the US and European markets, where Starbucks has the largest number of stores to the developing markets. In order to counter these threats Starbucks needs to develop strategies and plans that protects them and enables them to continue to grow, as that is their current overall strategy. New pricing strategy and actions to improve companys global image may need to be implemented in order to remain the market leader. Alongside these two weaknesses Starbucks are facing an increasing competition from large corporations that are branching out into a domain that was previously reserved for Starbucks. However, due to Starbucks market share they maintain the market controller as the competition tries to imitate their concepts, products and ideas. This is why one of Starbucks CCs is innovation and it will help the company to constantly stay ahead. However, a more serious and difficult challenge lies in the fact that Arabica beans, Starbucks main resource, are running out. This is why Starbucks may need to adjust their business practices so that they operate in a greener and more ethical manner, in order to secure future bean supplies or explore new core products. Combined with a huge CA, incorporating Starbuck into the consumers life, as well as the future mentality shift of consumers, Starbucks may need to seize this opportunity to remain their market leadership and diversify from future competition. Since Starbucks has been the market leader for many years the company has the financial foundation to keep expanding and innovate, however, due to the Kraft Incident (Burritt, 2013) in 2013 investors will be more careful and critical towards the companys future endeavours. To counter the current strategic challenges Starbucks may need to diversify or differentiate to stay unique and maintain their customer base as well as move towards creating a more sustainable business.

2.4 Possible Strategic Directions After analysing the external and internal environment the team came up with the following possible strategic directions

1. Differentiation (Porter, 2007) 2. Adaptability to local culture (also regarding products) 3. Creating a Sustainable business network 4. Growth outside of US and balance the market share globally 5. Increase communication and information exchange with customers 6. Internal and external recruitment as well as increased training effort (Starbucks

academy)

2.4.1 New Strategic Direction 1. Creating a Sustainable and Ethical Business Network As the main issues for Starbucks focus around the lack of a sustainable practice and the future scarcity of resources, the team think it is wise to consider this as one main strategic direction; Creating a Sustainable Business Network.

23

2. Product Differentiation The other main challenge for Starbucks is the fact that their position as market leaders offering a unique product is challenged outside of the US where there are chains that offer the exact same product but at a lower price (e.g. Costa is a market leader in UK). Therefore, the team has concluded that the second strategic direction should be Product Differentiation.

2.4.2 Why the Team Choose to Focus on Those Two Strategies Adaptability to local culture (also regarding products) Should Starbucks adapt to the local market in every new country there is a risk that the core business is lost and the unique Starbucks Experience will be lost. The possibility to adapt slightly to the local flavour can be incorporated under the Differentiation strategy Growth outside of US and balance the market share globally Starbucks are currently expanding outside of the US with the same core products as within the US. The team did not want to focus on another growth strategy as it is already a main focus of the company and it is clearly successful. Internal and external recruitment as well as increased training effort (Starbucks Academy) This is an attractive idea as securing competent and loyal staff should always be a priority for a large corporation. However, since staff turnover is already low within Starbucks it is not a strategic direction that the team believes should be a priority. It is not a problem and therefore there are more pressing issues that Starbucks should focus on. Increase communication and information exchange with customers This idea is very attractive to increase a loyal group of customers. Starbucks has at the moment already a large group of loyal customers and they share valuable information with Starbucks by the mobile app, feedbacks platforms etc. Starbucks should keep their current level of communication toward their customers and focus on more pressing issue where Starbucks can actually make a large change. Bases on the CM analysis (Appendix 1) the team decided that the two most suitable CMs were

CM1 Starbucks should implement a Shared Value concept in order secure future supply of

Arabica beans

CM2 Starbucks should introduce the new concept Starbucks Lounge in order to foster and

further the social aspect of the chain

24

25

3. Competitive Method 1 Starbucks should implement a Shared Value concept in order to secure future supply of Arabica beans

3.1 General Description Shared value (SV) involves creating economic value in a way that also creates value for society by addressing its needs and challenges. Businesses must reconnect company success with social progress. Shared value is not social responsibility, philanthropy, or even sustainability, but a new way to achieve economic success. It is not on the margin of what companies do but at the centre (Porter & Kramer, 2011). The team believes that securing the resources, primarily Arabica coffee beans, is vital for Starbucks future success. Research has shown that an increasing number of coffee farmers are turning away from their trade as

x The farmers do not have access to the world market to sell their produce x Prices are determined by commodity traders that strive for the lowest price x Farmers do not make enough money on the sales to live a decent life so they turn

away from coffee and start to grow more profitable crops x Poverty which leads to starvation, lack of housing, clean water and economic

stimulation x The farmers do not have the knowledge to grow their crop in a strategic and/or

sustainable way x They have no access to primary health care or education

(Bailey, 2009) Therefore, the team is convinced that introducing a SV strategy will put Starbucks ahead of its competitors and will allow them to maintain the market leader in the future. Securing the resources today will allow Starbucks to continue their organic growth strategy for the coming years. Studies (Bailey, 2009) show that what farmers need in order to obtain a sustainable coffee economy

x Producers should receive a level of prices and wages that covers the production costs as well as the living cost

x Working conditions should comply with ILO conventions x Producers should adopt sustainable practices in environmental terms x Access to credit opportunities should be improved x Access to commercial information and marketing change should be approved

The SV strategy is a continuation of CSR but more about building a sustainable society and creating wealth for all parties involved in the supply chain. The situation is, as outlined above, dire for the farmers and due to this the younger generations are turning away from coffee farming because it does not give them a good life or even a minimum income and therefore the future of the Arabica bean in threatened.

26

The suggested main focus of this strategy is knowledge and education. The team suggests that Starbucks invest in education centres in the countries from where the majority of their coffee is supplied; Ethiopia, Brazil and Columbia. These centres should offer free courses for the farmers in the coffee growing areas to educate them on subjects like

x Reading, writing and math x Basic business law (contracts, agreements etc.) x Sustainable and green farming techniques x Basic business practice x Disease management x Attaining green certificates

These centres will be built by local contractors to stimulate the economy and to involve the community from an early stage on. The benefit for Starbucks lies in the increase of customers to their outlets due to a positive public image and future demand for sustainable and ethical produce. The model corporation, Illy, saw an increase of 123% in revenue and customers when they implemented the SV concept (Illy , 2014). Starbucks will promise the farmers to buy their beans at an above market price and use this fact when marketing towards the consumers. As all the trends point to the increasing interest of sustainability and ethical produce Starbucks can expect an increase in customers that want to drink good coffee as well as making sure that the farmers that grew that coffee got paid a fair value for it. In order to fully utilise the PR that the SV concept brings Starbucks will have to allocate money for a marketing campaign to spread the knowledge of the SV concept and to be guaranteed the financial benefits of it. Once the basic training is complete Starbucks will ask the farmers to sign a Code of Conduct or a contract for a certain amount of years after receiving the training.

3.2 Alignment with New Strategic Direction The SV concept is in line with the strategic direction that the team chose; Sustainable and Ethical Business Practices. It is a defensive strategy that defends against the biggest threat to the coffee market; scarcity of resources. With this CM Starbucks will pioneer the way towards a more sustainable coffee industry and will, once again, make farming attractive to the younger generation.

3.3 Correspondence with the External Environment For a complete table of references regarding the Key Value Drivers in the External Environment please see Appendix 4. There are several sources supporting the implementation of SV. The first, and most obvious, is the fact that the supply of Arabica Bean is running out and if nothing changes there will be no more Arabica beans by 2080. This goes hand in hand with the increasing interest and necessity of sustainable goods and produce. The future consumers want to

27

know where their produce comes from and that it has been grown in a good way. Should Starbucks adapt a SV strategy they will be the first large coffee chain to do so and they will have an enormous positive impact on the world market.

3.4 Correspondence with the Internal Environment For a complete list of internal sources please see Appendix 4. Starbucks wants to have good supplier relationships and a SV is that, and more. It goes hand in hand with their innovative CC as it is something new for a large coffee corporation to venture in to and it helps with the emotional branding as the consumers are already choosing brands based on ethical performance. However, there is a large gap in where Starbucks are now and where they should be in the future, based on external trends. The only concrete sustainable action the chain is taking is making sure that a part (8%) of their retail beans are Fair Trade. Adapting a SV strategy will close much of this gap and put Starbucks in the top regarding sustainable produce and green, ethical business practices.

3.5 Alignment with the Current Strategy Starbucks main focus is organic growth (Starbucks, 2014). At the moment the chain is focused on opening new stores and expand on a yearly basis. The chain is consuming 3% of the global Arabica production but since the bean is becoming increasingly scarce this strategy is threatened in the future, if Starbucks does not change anything. Therefore, the SV strategy is needed to continue the organic growth strategy because if there are no beans, Starbucks will not have any coffee to sell in their many stores. The SV strategy operates where the consumers does not see but is essential for Starbucks to continue to grow-grow-grow.

3.6 Value Creation Value is created at many levels with the SV strategy. Firstly, it will benefit Starbucks as they will have a guaranteed supply of high quality beans the SV concept expected to bring in an additional $11,3 million in future revenue during the first year (Appendix 12). Secondly, the farmers and their community will benefit as their beans are sold at a decent price thus giving them and their families a better life. It will attract farmers back to the profession as Starbucks will pay them well for the quality beans and it will help the farming communities to grow and flourish. Through educating the farmers Starbucks will be guaranteed high quality beans as well as consistency of quality. As one of Starbucks CCs are iconic brand image and aim to emotionally attach their customers to them this will generate more customers and open Starbucks up to new market segments.

3.7 Competitive Advantage The main CA lies in the fact that Starbucks will have a steady supply of beans and therefore will be able to keep expanding when competition will struggle to do the same. Furthermore, Starbucks will be able to guarantee a higher quality of their beans as the strategy is focused around educating the farmers in quality and sustainability. Another main CA can be found in the improved public image the company will get through being able to prove that the company are giving back to society and are not

28

taking advantage of the farmers. Together with this, Starbucks will take a huge step closer to becoming a green and sustainable company and they will be pro-active, not reactive to the future demands of customers and world trends.

3.8 Influence on Stakeholders The SV strategy is a long-term investment but it is necessary to invest in it as Starbucks will face difficulties if no action is taken. The SV strategy will allow the company to grow and this will have a positive effect on the shares and company value. Since a lot of the benefits of a SV lies in the positive public image for the company Starbucks can expect several new investors as well as the increase in customers and revenue. Ultimately, when Starbucks invest in SV they are investing in the future for the company and it will allow them to keep their position as market leaders for years to come. The influence on the community will be positive, both on a supplier level and on a consumer level. The farmers will be able to live a decent life and create a future for themselves and their community and the consumers will experience an increase in satisfaction from fulfilling the want and need of consuming sustainable and ethically produced goods.

3.9 Financial Feasibility 3.9.1 Initial Investment Plan for Starbucks is to provide education to 25% of its coffee farmers within the next 10 years and improve the coffee economy as a part of Shared Value Creation. Starbucks currently sources their coffee from 300,000 coffee growers meaning that it would take

75,000 under its scope. Assuming that each school can accommodate 100 people, investment will require building of 750 schools (120,00 each = $162,000). Starbucks currently

spends 1.34% of their total revenue on advertising therefore the team has decided to use the same percentage for marketing campaign out of predicted future revenue from first year. Other expenses include logistics, additional materials and equipment. For a complete effect of investment calculation please see appendix 12.1. 3.9.2 Depreciation The main investment for the shared value concept is building of schools in farming villages therefore the team takes into account school building depreciation. According to construction standards for schools, it should have a life cycle of at least 60 years. The team will base depreciation expense on this information.

Depreciation School building value 250,000 Life expectancy 60 years Depreciation per school per year 4166 Total depreciation per year 3,125,000

Initial Investment School buildings $225,000,000 Marketing campaign $ 1,996,450 Other Expenses(including training) $5,000,000 Total investment $231,969,450

29

3.9.3 Expenses The teacher salary is based upon the minimum wage of a teacher of $300 dollar per month with a yearly inflation increase of 1,5%. The based all number on five teachers

per school, working for 10 month a year. The leftover two month are free during the season for the picking of the beans. For a complete table outlining the salaries,

COS and bean prices please see appendix 12.4, 12.3 and 12.5. 3.9.4 WACC The WACC was calculated according to Starbucks Annual Report 2013 (Starbucks, 2014).

Risk free interest rate is based on 10 year US Government bond. As the initial investment is quite high and the competitive method is risky due to the constantly changing coffee market as well as changing climate the WACC has been increased by 2% risk factor.

3.9.5 Increase in Volume of Sales Due to several sources regarding buying decisions based on company being green and responsible the team thinks that the number of customers will increase by 1% in the first year, 2% in years 2-4, 3% in year 5, 2% in years 6-8 and 1% in years 9-10. According to Yale in 2008 56% of customers will buy products from responsible companies (Dhar, et al., 2010). The same research was done two years later where this number increased by another 12%. According to the surveys done by Green Retail Decisions which performs checks on customers regarding buying patterns it shows that 83% of Americans consider sustainability when buying food, 38% want to show their support for responsible companies and 27% believe the products are healthier (Merritt, 2014).

3.9.6 Cash Flow Statement For a complete cash flow statement please see appendix 12.2. 3.9.7 Profitability Analysis The profitability index of the Shared Value concept is 7,81 which indicates that the

project will be very profitable. The IRR indicated the possibility to have a higher WACC rate before the NPV is at zero. From these two number can be concluded that the project will be a profitable investment.

Expenses Over 10 years Teachers salary $112,125,000 Additional farmers salary $164,687,500

Risk free interest rate 2.64 Market risk premium 5.50% Beta factor 1.2 Cost of equity 6.07% Cost of debt 3.85% Share of equity 0.775 Share of debt 0.225 US Corporate Tax 39.1% WACC after taxes 5.23% Risk factor 2% Final WACC 7.23%

NPV $1,579,559,520 IRR 51% PI 7.81

30

3.10 Measure of Success In order to determine the success of the CM the team decided to utilise four different categories

x Outcome x Quality x Efficiency x Project in total

The team recommends Starbucks to utilise the BBSC in order to control and measure the success of the project and the KPIs for the BBSC could be, but are not limited to

x Percentage increase of customers x Flavour ratings of beans in tests x Number of completed schools (out of the 750 suggested)

3.11 Incentives and Risks

Pros Risks Contingency Plan

Guaranteed coffee bean

supply

Farmers do not deliver the beans

If the community does not deliver the products or if they are not interested in participating in the SV concept Starbucks will move on and find a community that is interested

Positive brand image towards customers and

suppliers

The marketing campaign does not reach the intended market and the customers are not

informed of the SV strategy and its impact on the farmers lives.

The campaign needs to be thoroughly researched and executed as the SV stands and falls with the increase in consumers

Sustainability, transparency and

traceability of product

Investors and/or shareholders do not think the initial investment will be beneficial for the

company

Present the financial analysis together with the research that proves that SV is the future for the coffee industry

Improved living standards for the

farming community

Farmers that are already involved in the SV become increasingly demanding or farmers that

are not yet part of the project will become demanding

Present a long term plan of when the corporation is planning on including all communities and offer information to those communities that want to start ahead of time

High quality beans

Quality of produce does not meet standards Firstly, Starbucks will investigate as to why the quality is not up to standards and increase the training

Farmers forming an emotional tie to Starbucks that leads to loyalty

Another company tried to overtake the farming community and offer more money or a farmer that wants to take the knowledge and grow

independently

Starbucks will enforce the Code of Conduct/contract to try to persuade the farmer to stay loyal to Starbucks

Starbucks will attract highly

qualified staff as the brand will become more

attractive

Will enable the continuous

growth of the brand

Natural disasters and/or aggressive conflicts Force majeure

31

3.12 Conclusion CM1 Initial investment for CM1 will come to almost $232,000,000 which may seem like a large investment especially due to the fact that Starbucks had to pay $2.8 billion fine to Kraft Foods. The team has looked into annual report of Starbucks which shows that the company has over four billion dollars of retained earnings and in 2013 has made investments worth more than $2.5 billion which is why initial investment for CM1 is realistic and feasible. Shared Value concept leads to a sustainable future of Starbucks with many monetary but also social and ethical benefits. CM1 adds significant economic value to the company with an NPV of $1,579,559,520.This investment results in a very high IRR of 51% and promising PI of 7,81. For a complete financial overview of CM1 please see Appendix 12. In comparison to CM2 initial investment is very similar but the added value to the company is much higher even with the risk factor being 1% higher due to unpredictable coffee market. It has to be taken into account that there will also be positive PR for the brand of Starbucks as well as the company will gain an image of responsible and caring for the future which can bring further monetary and non-monetary benefits.

32

4. Competitive Method 2 Starbucks should introduce the new concept Starbucks Lounge to foster and further the social aspect of the chain

4.1 General Description At the moment Starbucks are unique in being the only large, global corporation offering F&B in a comfortable setting. However, with an increase in accessibility several companies are threatening Starbucks unique position. Therefore, developing a concept that none of their competition offers will allow them to stay ahead. This concept was developed through market research, a questionnaire (Appendix 14). The team decided to introduce a pay for the time spent concept. The outcome was the development of the Starbucks Lounge, a concept that offers guest the opportunity pay for the time spent on the premises instead of what they consume. The lounges are going to be located in close proximity to places where people linger and need a place to sit, either for studies, work or socialising, e.g. close to universities. The customer will come to the lounge, check-in with their membership card and sit at one of the tables, workstations or comfortable sofas. There will be free F&B, however, research has shown that this is not the most important aspect of the lounge. When questioned the target group said they wanted sandwiches, cakes, salads and other snack-like foods. All Starbucks regular assortment of beverages will be available. The lounges will be fitted with top of the line technical equipment, free Wi-Fi as well as a printing possibilities. There will be areas with comfortable sofas for groups that are there to socialise and there will also be large tables and workstations for the students and professionals that come there to work. Staff is not essential for the success of the lounge as personalised service was ranked low in the research. The team envisions a system where consumers can sit in the lounge, order via an online system and then receive a notification when their order is ready to be picked up at the counter. The Lounge will be adaptable to different times and target groups such as

x Early bird offers for the ageing population x Mid-day to afternoon for students and professionals x Late night offers with different assortment of F&B for people that want to watch

games and or socialise When the customer leaves the lounge he or she checks out and the time spent will be charged to the user. Research showed that students preferred to be charged for every 15 minutes but this can be adjusted to the different target markets requirements.

33

4.1.1 Visualisation of Starbucks Lounge

34

4.2 Alignment with New Strategic Direction The Lounge concept is an offensive strategy that will allow Starbucks to penetrate new markets with a new product and therefore the strategic direction is Differentiation. This differentiation strategy will allow Starbucks to maintain their uniqueness and it will strengthen the social aspect of the brand.

4.3 Correspondence with the External Environment For a complete list of sources please see Appendix 4. The future consumer will look for small communities and move from individualism to socialism and therefore the lounge will provide the perfect opportunity to fill that gap. The lounge will fill the social need of the consumer and Starbucks will be able to cement their wish to be a home away from home. The future consumer also wants access to the latest technological developments, something that goes hand in hand with the lounge concept. Apart from technological developments, Starbucks will also offer green and sustainable F&B products as that is another demand from the customers. As there will be more people in the cities Starbucks will offer the space to socialise and spend time.

4.4 Correspondence with the Internal Environment For a complete list of internal sources please see Appendix 4. A main focus of the lounge concept is to strengthen and enhance the Starbucks Experience. This ties back to one of the most prominent CCs (Appendix 11), the iconic emotional branding. Consumers think of Starbucks as a social meeting point and want to be seen with their products. Therefore, the lounge is the perfect solution for expansion. It will require membership and it will be a place to be, a home away from home where people can meet, work, study or just hang out. The involvement from customers is vital for the brand and that should also be key when it comes to the lounges. Consumer input will enhance the attachment for the product and create loyalty. In the future, coffee will not be the only core product for Starbucks as the social aspect will become equally important.

4.5 Alignment with the Current Strategy Starbucks wants to continue to expand and grow and the lounges offer an excellent opportunity for Starbucks to grow in areas that they have not explored before. It is innovative, new and fresh and it plays on the emotional attachment for the brand. Starbucks current strategy includes opening 1,500 stores in the US (Starbucks, 2014).

4.6 Value Creation Firstly, the added value is for the company with an additional $126,3 million in future cash flow during the first year (Appendix 13). Starbucks will also benefit from the increased emotional attachment to the brand through increased socialising and welcoming feeling. Since staff are secondary at the lounges Starbucks will also save a lot of money on the staff cost. The customers will benefit from the lounges through finding a place to be and a home away from home. As they only pay for the time spent in the

35

lounge the experienced added value will come through the unlimited supply of F&B and technical equipment. The shareholders will experience added value through an increased value of the company and therefore an increased stock value.

4.7 Competitive Advantage Should Starbuck chose to open lounges the company will be unique in introducing the pay-as-you-go concept. This concept is something that has only been tried out small scale before and Starbucks will be able to open at the most attractive locations ahead of the competition. The lounge will allow them to explore target markets in a new way (seniors, professionals and students) and strengthen the emotional attachment to the brand.

4.8 Influence on Stakeholders As this is a continuation and evolvement on Starbucks organic growth strategy and therefore the shareholders will experience an increase in stock value and overall company value. The overall additional revenue from the lounge venture is $700 million in the first year. It also allows Starbucks to explore new revenue streams and approach their target markets from a new angle. For the community the lounge will offer a place to be, outside of home and work/school.

4.9 Financial Feasibility 4.9.1 Initial Investment The plan of Starbucks is to build Lounges to attract a new target group in new areas than before. A normal Starbucks is around 160 - 250 m2 but the Starbucks Lounge will be bigger and more spacious with around 400 m2 (Net Lease Advisor, 2014). As it costs around $450,000 to build an average sized Starbucks and the team decided that lounges will be double the size it will cost one million dollar per lounge (Choi, 2012) which includes $100,000 for equipment costs. There will be 250 outlets built near the largest universities and world trade centres in the US. Starbucks currently spends 1.34% of their total revenue on advertising therefore the team has decided to use the same percentage for marketing campaign out of predicted future revenue from first year. Other expenses include logistics, additional materials and IT solutions. This will sum up to a total investment of around 260 million US dollar.

Initial Investment Building and equipment $250,000,000 Marketing campaign $9,380,000 Other expenses $2,000,000 Total $261,380,000 4.9.2 Depreciation

Depreciation Current SB revenue $14,900,000,000 Starbucks depreciation 4.20% Total Depreciation $625,800,000

36

Depreciation for the lounges is calculated based on Starbucks 2013 annual report (Starbucks, 2014) and their current depreciation as percentage from

the revenue. The team believes that this approach is the most accurate as it takes into account the most up to date depreciation expense and translates it to the new concept of Starbucks lounges.

4.9.3 Expenses The expenses are based upon the number provided in the Starbucks annual report (Starbucks, 2014). The team believes that Starbucks lounges will operate at a COS 10% lower than currently due to having a more cost efficient products and higher revenue than an average Starbucks store. Store, other and admin operating expenses remain at the same level.

Expenses as a Revenue % COS incl. occupancy costs 32.90% Store operating expenses 28.80% Other operating expenses 3.10%

General and admin. expenses 6.30% Total expenses excluding depreciation 71.1%

4.9.4 WACC The WACC was calculated according to Starbucks Annual Report 2013 (Starbucks, 2014).

Risk free interest rate is based on 10 year US Government bond. Initial investment is very similar to CM1 but the concept is based on already globally known brand which decreases the risk factor. The team decided to use a risk factor of 1% due to changed price strategy. 4.9.5 Effect of Investment Starbucks Lounges will be mainly located next to big universities and colleges, an average size of a large university/college in US is 20,000, (National Center for Education Statistics, 2013) in order to attract as much students as possible. Current catch rate of

Starbucks is 2% so this number has been used to work out how many customers the lounges will be able to attract. Therefore the team predicts that minimum of 400 customers per day will visit the lounge (Adkins, 2013). The questionnaire which was done by

Number of Starbucks outlets 19767 Depreciation per outlet $31,659 Number of lounges 250 Total annual depreciation $7,914,706

Risk free interest rate 2.64 Market risk premium 5.50% Beta factor 1.2 Cost of equity 6.07% Cost of debt 3.85% Share of equity 0.775 Share of debt 0.225 US Corporate Tax 39.1% WACC after taxes 5.23% Risk factor 1% Final WACC 6.23%

37

the SDV team (Appendix 14) shows that majority of participants will use the lounge concept for study purposes which is why the team believes that average stay per person will be 2 hours. This performance will result in average occupancy of Starbucks lounge of 50%. The team believes that as the lounge concept develops it will be able to increase its occupancy by 2% every year for the next 5 years and it will remain at 60% for another 5 years of this investment. For a complete table outlining the effect of investment please see Appendix 13.1. 4.9.6 Cash Flow Statement For a complete cash flow statement please see Appendix 13.2. 4.9.7 Profitability Analysis

The profitability index of the Lounge concept is 3.96 which indicates that the project will be profitable. The internal rate of return (IRR) is at 42%. The IRR indicated the possibility to have a higher WACC rate before the NPV is at zero. From these two number can be concluded that the project will be a profitable

investment.

4.10 Measure of Success In order to determine the success of the CM the team decided to utilise four different categories

x Outcome x Quality x Efficiency x Project in total

The team recommends Starbucks to utilise the BBSC in order to control and measure the success of the project and the KPIs for the BBSC could be, but are not limited to

x Number of lounges built x Occupancy at lounges x Average time spent x Average operational profit

4.11 Incentives and Risks Pros Risks Contingency Plan

New concept High initial investment Predicted NVP $687,586,202

Based on market demand There is little to no interest from the

different target markets and the lounge will be empty

There has been research performed and the indicators from both the external and internal points in this direction

Increasing the emotional attachment to the brand

Other corporations copy the concept Starbucks will have to trademark the concept

Reaching new target markets

Customers abuse the concept

The price for staying in the lounge will cover the projected costs. Also, there is always a small portion of the population that will abuse systems. Starbucks maintains the right to reject any customer disturbing the order in the lounge

Low operating cost Location does not fit the concept Through thorough research using the Starbucks

NPV $773,134,912 IRR 42% PI 3.96

38

(10% decrease in COS including occupancy cost)

developed software for scouting locations the optimal location for the purpose will be discovered

Exploring new revenue streams

Price sensitive customers might decline the offer

Current research and ongoing research should assure a concrete price match for the target group. The involvement of the customers in the product also reassures consistent feedback in regards to the concept.

4.12 Final Conclusion CM2 Initial investment for CM2 will come to just over $260,000,000 which just as explained in CM1 the team believes is very feasible and realistic. Starbucks lounges focus on the main selling point of Starbucks which is the social component and Starbucks experience. This competitive method is built on the strong emotional brand and high global recognition of Starbucks therefore the risk is lower than CM1. NPV of Starbucks lounges comes to $773,134,912 with the IRR and PI being at 42% and 3.96 which is relatively lower than shared value concept. For a complete financial analysis of CM2 please see Appendix 13. In comparison to CM1 the Starbucks lounges will not have as a major impact on customers because it mainly focuses on one target group but it uses the biggest core competence of Starbucks which is creating the third place between home and work and taking it to another level. Development of this concept can make Starbucks very unique amongst its competition which will result in remaining the market leader.

4.13 Recommendations for Starbucks Both CMs are a result of an external environment scan combined with an internal analysis of Starbucks and its core competencies. CM1 is a defensive strategy reacting on major threats from the external environment such as scarcity of resources, especially coffee. The shared value concept builds a long-term and sustainable network between suppliers communities and Starbucks resulting in very positive and healthy relationship with customers, high profitability and NPV. CM2 is an offensive strategy based on product differentiation. It focuses on penetrating the existing market with a new concept by utilising the social component of Starbucks and turning it into a core product of the lounges. However it results in a lower profitability and NPV than CM1 with a higher investment. For the reasons stated above which are linked to KFDC and financial analysis the team recommends for the further development of CM1 and therefore changing the mission statement of Starbucks to:

To socially enrich and nurture the human spirit one personality, one cup, one community and one passion throughout a lifetime.

39

5. Appendices 1. Pros and Cons of CMs

Competitive Method

Corresponding Strategic Direction Links to External Scan

Links to Internal Scan

Alignment with CC Added Value

Risks & Disadvantages

The Starbucks

Lounge x Product Differentiation

x Mentality Shift - from individualism to socialism

x Information Age - Dependency on technology

x Third place (between home/work)

x CSF of Wi-Fi x Grow and develop the

Starbucks Experience concept

x Innovation from within

x Customer Care and operational excellence

x Iconic emotional brand

x Provides a meeting and socialising place x Customers can utilise top-of-the-line

technology x Unlimited access to F&B products x Greater insight into whom our customers are

(through digital data mining in the lounge)

x Large initial investment costs x Privacy issues x Price perception of the

Starbucks brand can change x Customers that abuse the

system x Self-cannibalization

Drink made from coffee

berries together

with a new healthy

and organic product portfolio

x Product Differentiation x Sustainability

x Resource Management x Waste management x Increasing demand from

customers to consume sustainable produce

x Customers demand healthy products

x Innovation and Sustainable Supplier relationship

x Using all parts of our core product (coffee beans)

x Making profit from a former waste product x Offering a healthy product to our customers

x Initial investment costs Copy cats

x Limited market

Creating Shared Value

x Sustainable Operation x Resource management x Securing future resources x Starbucks are not doing

anything to increase sustainability

x Sustainable Supplier Relationships

x Innovation from within

x Image x Securing the coffee beans for the future x Additional revenue from selling produce to

competitors x Long-term CA x Better pricings for the resources

x High initial investments x Copy cats (only large

corporations) x Need to secure a large part of

the coffee bean market x Danger from monopoly issues

Starbucks Academy x Product Differentiation,

x Global citizen, Mentality Shift and Information Age

x Ageing population x Higher educated corporate

employee x Scarcity of qualified staff

x Effective HRM x Iconic emotional

brand

x In the future there will be fewer young staff members so therefore Starbucks needs to train them

x Keeping the talent within the company x Stable quality x Decrease employee turnover x Expand business portfolio to external

training

x Investment x Not attractive with a line job x Also over-saturated market x Already having a very low turn

over

Digital Data

Collection and usage through

App

x Product Differentiation x Information Age x Mentality Shift

x Increased customer loyalty

x Develop and expand the Starbucks Experience

x Service marketing effectiveness, Iconic emotional brand, Innovation from within

x More personalised service for the customer x The possibility to connect and communicate

with other guests x Easy and affordable information gathering

for Starbucks x Minimal investment cost x Additional revenue stream from selling the

gathered data

x Limited information gathering (only the loyal guests)

x Privacy issues x The impact is not large enough

to change to future of Starbucks

40

2. Task Environment - Competition Table To determine all the companies who are acting in the task environment the selected the top ten in three different industries; Fast Food chains, Casual dining restaurant chains and retail chains. Fast food: Easily prepared processed food served in snack bars and restaurants as a quick meal or to be taken away. Casual Dining Restaurant Chains: Include Brasseries, Bistros, Bars Retail chains: Sells ready to eat/drink products and/or fresh produce The list is composed on the bases of the total number of outlets and the total revenue worldwide. These two factors best indicates the market penetrations of companies in the task environment. The three categories are chosen because these categories cover the total task environment set as scope by the teams definition.

Fast Food chains

# of outlets

worldwide (2013)

Revenue (in

millions $, 2013)

Casual Dining

Restaurant Chains

# of outlets

worldwide (2013)

Revenue (in

millions $, 2013)

Retail chains

# of outlets

worldwide (2013)

Revenue (in

millions $, 2013)

1 Subway 25,900 18,417 Applebees 2,010 2,520 Shell - Petrol station

40,650 468,000

2 McDonalds 14,146 $88,290 Waffle House

1,600 1,100 BP gas station

17,800 35,572

3 Starbucks 19,767 11,745 Dennys 1,500 538.53 Starbucks 23,187 19,767 4 Dunkin

Brands 9,734 8,777 IHOP 1,328 349.6 Dollar

General 10,506 16,022

5 Pizza Hut 5,757 5,666 Chilis 1,168 3,500 Aldi 9,800 62,670 6 Dominos

Pizza 4,540 3,500 Chipotle

Mexican Grill 1,600 3,210 Walgreen 7,821 66,977

7 Wendys 4,528 8,600 T.G.I. Fridays

915 2,700 7/eleven 52,900 12,300

8 Dairy Queen

4,459 2,300 Buffalo Wild Wings

925 1,200 CVS Caremark

7,472 63,863

9 KFC 4,319 4,459 Outback Steakhouse

979 661,000 Family Dollar Stores

7,442 9,331

10 Taco Bell 4,218 7,478 Nandos 805 650 Wal-Mart 4,570 $467,896

(National Retail Federation, 2014) The table shows the biggest players in the market in the set task environment. As shown, Starbucks is the only company who is involved in two out of the three categories in the top three. The difference between number one and number two is in all categories a doubling in the number of outlets. As seen in the table, Shell and Subways are the two companies who have, by far, the most outlets. In the case of Shell, there revenue is a factor ten higher than most other companies on the list. This is partly explainable by the fact that the revenue figure include the selling of petrol to individuals.

41

3. In-Depth Information, External Environment Mentality Shift

Mentality Shift Which includes small self-governed communities, people shifting from individualism to socialism also an economic shift towards social reward

system Appendices

Impact on Task Environment

x In developing countries it will take a long time to come to the Mentality Shift as these countries have not opened up for trade yet

x Increase of the Internet of Things o People will expect, and need, interactive technology in

their everyday life. This includes the increased usage of apps and other programs that will increasingly predict their wants for them

x A change in what consumers want to see on the shelves of their

retailers x Security of food supplies becomes increasingly important for people

o As a reaction to this there will be an increase of local produce and home-grown produce

x It will be harder to new entrants to break into the market

x There will be an increase in urbanisation and from this a community focused point of view will spring

o Local produce, home-grown and a limited market place

4.9.1, 4.6.1, 4.6.2, 4.7.2

Impact on Industry

Environment

x The current customer in the coffee segment is driven by taste, price and health

x On global level, customers regard healthiness and natural ingredients of the product as highly influential to their buying decision

x Cocooning does refer to the creation of an experience of traditional out-

of-the-house experiences at home. This trend strongly reflects in the coffee industry as a replication of the original coffee experience is now performed at home

x Customer loyalty x Fairtrade International (FLO) Standards of Fair Trade for Coffee FLO is

an international committee setting standards for when and how a coffee producer can be considered Fair Trade (this includes everything from production to end product)

4.10.1, 4.10.2, 4.12.2

Financial Developments

Financial Developments

Which includes upcoming new markets, especially within BRIC countries, open borders and increase in disposable income in some markets

Appendices

Impact Task Environment

x New F&B markets growing in Brazil, China, India and Vietnam o These new markets have a huge mid-income segment with

a lot of disposable income o They are striving for a more Westernised lifestyle

Includes luxury goods

4.6.1, 4.9.1, 4.8.1, 4.7.1,

4.7.2, 4.7.3

42

x There will be opportunities to break into these new markets thanks

to more open borders and increased transparency between countries o There will still be some highly regulated countries where

there can be hard to establish a company

x To secure food supplies the market will set the commodity price higher and due to scarcity the prices for commodities and produce will increase

o This brings with it huge investments in agriculture o Manufacturers will expand their markets into previously

unexploited markets such as the BRIC countries