The GrAde Final only

Starbucks

Robert Shulzinsky

Southern New Hampshire University

20 May 2018

Starbucks majors in the in roasting, marketing as well as retailing specialty coffee. The company seeks to maintain equilibrium between profitability and social responsibility in its dealings. The main source of the company revenue comes from the supplies by the entity, accredited supplies as well as consumer packaged goods and foodservice trading. As required by the law the company has been annual financials which include the balance sheet, income statement as well as statement of cash flow. In this case we will analyze the key company financials. We will determine the company financial performance based on records for 2010 through 2012 as well as general industry performance of the company.

Ratio analyzes

Profitability management ratios

These ratios help in determination of how well is the company able to meet its costs using the revenues generated. These mainly include gross, operating and net margin ratios.

The company Gross profit margin in the year 2010 was 58.8%. This dropped to 58.0% in 2011 and 56.3% in the year 2012. This shows a decline in the company profitability throughout the years. This puts the company at a financial risk. It means the company ability to make best value out of its sales is decreasing.

As it is normally with whatever other entities, Starbucks Company must strive to report net incomes and returns that are portrays the company to be in a better position than the competitors. Additionally, taking a gander at Starbucks' productivity proportions after some time gives a gage of how the organization is performing regarding cost proficient and creating gives back that surpass the organization's expense of capital. The operating margin ratio was 13.3% in the year 2010, 14.8% in the year 2011 and 15.0% in the year 2012. This depicts a continuous increase for the three years. The ratio is higher than the 5% industry value.

Net Margin is another important aspects for the Starbucks, as it shows the organization's ability in factoring in of the care of working expenses, financing and duty costs. The company net margin was 8.9% in 2010, 10.7% in 2011 and 10.4% in the year 2012. There was a slight increase in 2011 but a decrease in 2012. The normal industry ratio is 3.2%.

Asset Management Ratios

Total asset ratio

The company asset management ratio 1.68 in 2010, 1.59 in 2011 and 1.69 in 2012.

Return on Assets

The company Return on asset ratio was 14.8% in 2010, 17.0% in 2011 and 16.8% in .

2010 2011 2012

Fixed asset turnover 4.4 5.0 5.0

Account turnover ratio 35.4 30.3, 27.4

Day’s sales account receivables 10.3 121 13.3

Inventory turnover 8.1, 5.1, 4.7

Days cost of sales in inventories 44.9 71, 7 78.8

Debt Management Ratios

Long-term debt to total assets 8.6%, 7.5%, 6.7%

Equity multiplier 1.73, 1.68, 1.61

If the company increases the net profit margin 4% and the prices will remain constant, the company will need to increase the number of sales made. The company can also raise the company products in order to increase the level of profits made with the same amount of sales.

Generally return on assets shows how the company is profitable in respect to its assets. Starbuck has efficiently utilized it assets with regards to its ROA. According to the financial statement provided in the years 2010, 2011 and 2012 the company has a ROA of 14.8%, 17% and 16.8% respectively. For companies the higher ROA, the better as it means high returns on assets for less investment put on assets. The company’s intention of increasing its assets investment by 5% whereas sale remaining unchanged this would translate to a decrease in ROA. For instance in 2012, the company has a net income of 1.383M, increasing the asset investment by 5% would lead to decline in ROA to 16% (Rackley, 2015).

The horizontal trend analysis

Starbuck							(US $ in Millions)
	FYE September		'10-'12
	2010	2011	2012				CAGR
Revenue	13,299.50	11,700	10,707				15.5%
Gross profit	7,486	6,785	6,291				12.2%
EBITDA	1,437	1,811	1,997				11.5%
Revenue	-	10.8%	14.0%
Gross Profit	-	8.1%	12.5%
EBITDA	-	11.0%	12.0%

Starbuck has gained popularity for the years it has been in operational and has gained a good reputation around the world. It is well known for its coffee that it has specialized on. The company operates in about 75 countries around the world. The company’s mission is “inspire and nurture human spirits- one cup and one neighborhood at a time.” The company buys high quality coffee that it sell alongside other beverages and food items. The company has intensified its revenue sources by selling licenses for its trade name that comes in form of groceries and other food service outlets. The report analyzes Starbucks’s 2010, 2011 and 2012 financial report and compares its investment pattern and financial position over the three years. The report also seeks to examine whether it is feasible for the company to carry out some expansion mission over other cities.

The company should intensify its operations in order to increase its revenue. Having registered a fall in gross margin that fell from 58% in 2011 to 56.4% in 2012, Starbuck should diversify its operations as it has a strong brand of commodity offered in order to improve on its investment income. Through opening of new stores and intensifying on sales in the global markets, introducing new product mix can play a vital role in increasing on the company’s revenue. However the product and market mix should be critically analyzed to meet the vision and objectives of the company. In the year 2012 the company turnover reduced by 4% as compared with the year 2011. This situation can however be improved by increasing the sales or reducing the investments made on the inventories. Introduction new product line can help to improve the company’s investment mix. Lastly, through better pricing of its products the company can also enjoy some good returns on the investments.

In the year 2012, Starbuck registered a decline in accounts receivable while fixed asset turnover remained same for the same year. The Day’s sale in accounts receivables for the company improved from 12.1 days to 13.3 days this means an improvement or increased effectiveness of period that Starbucks took to collect debt.

In the year 2011 the company registered a decline in inventory turnover from 8.1 in 2010 to 5.1 in the year 2011. The reasons behind this might be as a result of the company trying to increase its inventory level with an aim of attaining operating goals. The reduction in asset turnover for the company depicts a concern and shifts the blame towards inefficient management of asset as inventory is significant asset for the company. The total asset turnover reduced in 2011 by .6 and in 2012, a slight improvement is reported as well which reflects as overall fall in asset management. With a keen eye on some classes of fixed assets of Starbuck Company, fixed assets, inventory and accounts receivable elaborate a serious slowdown. The reduction in accounts receivable efficiency might have resulted from a change in revenue mix but a reduction in inventory may portray a serious issue in inventory management (Harvard, 2016). The general trend of the financial reports reveals that the company’s health was poor and the investments do not bring any improvement on the side of the company. All reduction in performances of various financial analysis reveals that the investments made do not improve on the company’s position.

The company’s expansion of its operations by 50 stores in U.S is a feasible idea that would improve the company’s performance as it is with regard to the analysis done. Opening of a store in Miami is a good idea bearing in mind it is a metropolitan city. This will provide an incredible market for the company’s coffee. The company’s reputation may also give it an upper hand in getting a market share, however, already in existence local business may pose stiff competition to the Starbuck coffee. The hot temperatures of the city might as well not favor intake of coffee.

In the year 2013, the company entered into a commitment of hiring 10000 veterans spouses by the year 2018. On my personal opinion, hiring veterans is a very good idea, veterans are deemed to have a good work experience and strong work ethics. Leadership skills possessed by the veterans is essential for the wellbeing of Starbuck. From a financial point of view, hiring veterans can provide the company with federal tax credit. The Work Opportunity Tax Credit (WOTC) is a Federal tax credit available to businesses entities or employees for hiring individuals in the community that portrays diversity in the workplace. As much as this this may bring Starbuck company will have to withstand one more challenges. The company will incur more expenses in order to maintain the operating margin associated with the costs of keeping the veterans. As the controller, I anticipate the challenge of marinating the veterans in the company as well as marinating the profitability of the company. Where cost of working with the veterans may be seem to be relatively cheaper, the management may be tempted to hire more veterans ignoring the other available qualified employees.

The reporting of Starbucks includes the three segments that are: 1) Americas, which includes, US, Canada, and Latin America; 2) Middle East, Europe and Africa, they are all referred collectively as the “EMEA” region; and 3) china or Asia Pacific. China’s financials reports are done under the China / Asia Pacific while Brazil’s financial reports are done under US, Canada, and Latin America and Czech’s reports are done under EMEA (Mason et., al 2017).

In the year 2012, about 151 stores were opened in China alone which reported a revenue growth by 31% in the year 2012. The total store count summed up to 18,066 in the year 2012 and the revenue growth for the same stores for the period of three years was as follows % in the year 2012, 8% in the year 2011 and 7% in the year 2010. This in an indicator that china provides an ideal market for opening new stores. With a very big market, china has continuously provided market for both existing and potential businesses. The Starbuck goal of opening an additional 1500 stores vests a great potential in the China market. EMEA reported a static but a comparable store sales and operating income of $10m for the financial year 2012, a reduction by $30m as compared to the financial year 2011. The total number of stores in Brazil increased by 25 in the year 2012 in comparison to the year 2011.

The percentage of total net revenues for the financial year 2012 depicted the following figures with regards to the various regions: China and Asia Pacific (5%), EMEA (9%), Americas (75%) and Channel Development (10%) (Starbucks).

After the analysis, I rank the countries: China, Brazil and Czech with regards to the sales as follows: China the highest because of the profitability and growth opportunity exhibited in its market. Brazil comes second while Czech comes third based on prior history on the country’s market performances.

Project Milestone Two: Recommendations Guidelines

In order for the company to register improvement in revenue the company must increase its investment portfolio. With regards to the 2012 financial reports, there is a reduction of gross profit margin in the year 2011 from 58% to 56.4% in the year 2012. Basing on this report, the company should consider improving the investing activities of the company. This takes a dimension of maybe opening new stores around the country and other potential countries. This is not limited to selling coffee only the company may opt to diversify its activities by selling other products other than coffee. To improve the company’s portfolio management, it should do so by employing different investment mix and some investment activities that complement each other. Accountability in terms of assets allocation will be of great merit to the company. The turnover inventory ratio decreased in the year 2012 by 0.4%. However this could be improved by the company’s seeking to improve on the investment mix in order to improve the company’s inventory turnover.

With respect to the Starbucks annual reports they reveal the company’s investment have not in any way improved significantly the company’s financial position. This has been revealed by the reduction of the following ratios which includes: the assets turnover rate, profit margin and the inventory turnover. With regards to the debt collection period, it reduced significantly implying reduction in the cash flows generated from the debtors. This may be due to poor method and policies of the company debt management. It is advisable that the company seeks better methods of debt collection such as giving of discounts to the debtor for prompt payment as well as seeking viable methods of investments that are not limited to marketing its products but also opening new branches around the country.

Expanding the U.S operations by 50 stores is feasible. The location of the current stores in the

Miami/Ft. Lauderdale area is a promising location. The high population in this area provides the company with an ideal market for its products. The population in Miami is a promising market for the Starbucks products which is coffee, the performance of the stores is also an encouraging factor of a potential expansion in the market share through the use of various marketing mix and use of the competitive advantages as the company has a good reputation (Logan, 2016). Despite this, the company should be in anticipation of a stiff competition as there are many competitors in the area, the competition at times may be unhealthy for the new businesses and therefore the company should be cautious when making decisions on where to open new stores as it must lay considerations on the factors such as the strength of the existing entities dealing in the same line of products as offered by the Starbucks (Schultz, 2011). The company must make an exemplary decision in pricing its product in order to remain competitive in the market.

If not possible to open the stores in Miami, I would recommend the management to open new stores in the Florida Metropolitan areas such as Orlando and Jacksonville. These area exhibit many ideal reasons as to why Starbucks should open new stores. First, these area have a rapidly growing population that promise an all-time market for the company’s products, the population is composed of young and old people who are all the target market for the company’s products. Another reason is that in these areas the company is likely not to face serious competition as there is a few established companies in the region dealing with the same products (Jackson et al., 2016). This can greatly help the company to increase its markets share in the industry as well as improving its revenue scores.

References

Rackley, J. (2015). Return on Investment. In Marketing Analytics Roadmap (pp. 71-85). Apress, Berkeley, CA.

Veterans. (n.d.). Retrieved May 18, 2018, from https://www.starbucks.com/responsibility/community/veterans

Qian, Y. A. N. G., & Xing, T. U. (2016). Starbucks VS Chinese Tea—Starbucks Brand Management Strategy Analysis in China. International Business and Management, 12(1), 29-32.

Mason, A., Cole, T., & Goza, N. (2017). STARBUCKS: A CASE STUDY OF EFFECTIVE MANAGEMENT IN THE COFFEE INDUSTRY. Journal of International Management Studies, 17(1).

Starbucks. Fiscal 2010 annual report. Retrieved May 18, 2018, from http://investor.starbucks.com/financial-information/annual-reports/default.aspx , http://s21.q4cdn.com/369030626/files/doc_financials/2010/Annual/FY12-Annual-Report-on-Form-10-K.pdf

Logan, N. (2016). The Starbucks Race Together Initiative: Analyzing a public relations campaign with critical race theory. Public Relations Inquiry, 5(1), 93-113.

Schultz, H. (2011). Onward: How Starbucks fought for its life without losing its soul. Rodale

Benson, J. F., Mahoney, P. J., Sikich, J. A., Serieys, L. E., Pollinger, J. P., Ernest, H. B., & Riley, S. P. (2016). Interactions between demography, genetics, and landscape connectivity increase extinction probability for a small population of large carnivores in a major metropolitan area. Proc. R. Soc. B, 283(1837), 20160957.