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Starbucks
1. Adam Berger, Justin Buchman,
Donald Chase & Suzana Hsu
Starbucks
Presented by:
THE FRAPPUCCINOSTHE FRAPPUCCINOS
2. The Frappuccinos
Presentation Outline
Introduction to Starbucks
Industry Overview
Company Overview
Site Analysis
Recommendations for Improvement
Focused Recommendation for Improvement
Final Action Plan
Impact Analysis
Wrap Up
3. The Frappuccinos
Introduction to Starbucks
Company started in 1971 in Seattle,
Washington
Grew from 55 stores in 1989 to over 2,200
stores today
Products sold include:
- beverages - pastries
- whole coffee beans - coffee-related retail items
5. The Frappuccinos
Industry Definition
Specialty Eatery Industry
– Fits within the largest segment of disposable
income spending -- food and beverages
– Steady growth in this segment in the 1990’s has
led to an abundant number of new companies
– As demand for convenience has made eating
out a normal routine, the demand for specialty
food services has increased in recent years
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Industry and Competitive
Analysis
Market Structure
– Monopolistic Competition
Competitive Activity
– Many companies are in the market and competition is fierce
– Competitors use location, product mix, and store atmosphere
differentiation to establish market niche
Industry Costs and Capital Structure
– Low to moderate costs for each location
– Major start-up expenditures are property and equipment
– Major operating costs are labor and cost of sales
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Industry PEST Analysis
Political Influences
– Relationships between coffee producing nations and US
– State & Local government controls
Economic Influences
– Constant demand for food and beverages
– Changes in disposable income could influence purchase levels
Social Influences
– Consumer preferences could shift from coffee to other beverages
Technological Influences
– Use of technology can improve operational efficiencies
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Starbucks Corporate Strategy
Maximize market penetration
Provide a relaxing, attractive social
atmosphere
Offer high-quality products
Create a great working environment
Achieve profitability
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Starbucks SWOT Analysis
Strengths
– Largest market share in industry
– Differentiated atmosphere
Weaknesses
– Aggressive expansion could lead to managerial / financial problems
Opportunities
– Whole bean sales in supermarkets
Threats
– Lack of ownership of coffee farms can lead to price fluctuations
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Company Financial
Performance (1998 FY)
Revenues $1,308.7 million (% of Sales)
Gross Margin 195.7 million 15%
Pre-tax Profit Margin 116.4 million 8.9%
Net Income 68.4 million 5.2%
Return-on-Assets 8.7%
Return-on-Equity 11.0%
Debt-to-Equity 0.04
12 mo. Revenue Growth 28.4%
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Site Characteristics
Leased store located on Central Street in Wellesley
Store has over 1,000 square feet of retail space and
1,000 square feet of office and storage space in the
basement
Second most profitable store in the fourteen store
region
Located one block away from Commuter Rail train
station and in busy retail shopping area
Only one direct competitor (Au Bon Pain) in the area
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Site’s Operational Results
(1998 FYTD – 11 Months)
Financial Operations
1998 1997 %∆
Total Sales $760,576 $796,688 (4.5%)
COGS 242,593 262, 945 (7.7%)
C/M 517,983 533,743 (3.0%)
Fixed Exp. 367,746 431,923 (14.9%)
EBIT $150,237 $101,820 47.6%
– No money spent on independent advertisement
– Local entertainment budget underutilized
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Volume of Sales vs. Contribution Margin %
$0
$50,000
$100,000
$150,000
$200,000
$250,000
$300,000
Espresso
Drinks
Whole
Beans
Drip Coffee Pastries Blended
Beverages
Other
Beverages
Serveware Packaged
Food/Tea
Media Brewing
Equipment
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
Dollar Volume Sold Product Contribution Margin %
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Site 7-S Analysis
Strategy
– Store’s strategy is to create a comfortable Third
Place environment
– Serve customer a customized high-quality product
– Achieve high level of profitability by focusing on
high-margin items while generating add-on sales
– Minimize overall expenses by focusing on
controllable expenses
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Site 7-S Analysis
– Corporate organization
is tall with four levels
of management above
store management
B a r is t a s B a r is t a s B a r is t a s
S h ift S u p e r v is o r s
A s s is t a n t M a n a g e r
S t o r e M a n a g e r
Structure
– Functional in structure
and relatively flat
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Site 7-S Analysis
Staffing
– Location has one manager, an assistant manager and
16 partners
– Benefits package includes health, dental, and vision
care, stock options, free shift drinks, and a free
pound of coffee each week
– Raises are based on semi-annual performance
evaluations with raises ranging from 0-5%
– Bonuses are not utilized, but the location has given
away non monetary rewards
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Site 7-S Analysis
Systems
– Corporate headquarters exercises controls over
individual sites
– Total Quality Management is specifically built into
their processes
– Utilizes a large amount of information
technology (IT)
– Internal controls for the store are determined by
the manager based in part on information
provided by the IT system
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The use of IT at Starbucks
Corporate IT
System
Individual
Stores
Individual
Stores
Sales,
Inventory,
Staffing
Sales,
Inventory,
Staffing
Individual
Stores
Inventory,
Orders,
Transfers
Vendors,
Distributors,
Mgmt.,
Channel
Members
Orders, Budgets,
Future Sales
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Site 7-S Analysis
Skills
– Most important skills include “people skills” and
drink preparation ability
– Partners receive training to learn about products,
brewing methods, and sales techniques
– Retraining mainly occurs during new product roll-
outs, although this site does not use regular
meetings, but instead one-to-one discourse
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Order Cycle Times
Take
Customer’s
Order
Bottleneck
Order?
Pastry?
.53 Min
.53 Min
Yes
Yes
No
Pastry?
.40 Min
.27 Min
Yes
No
No
Bottleneck Capacity 114 / Hr
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Site 7-S Analysis
Style
– Basic management style is Laissez Faire
– Management motivates through reviews and
raises
– Work duties are assigned by shift supervisors
– Employees are allowed to use initiative and
empowered to make decisions
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Site 7-S Analysis
Shared Values (from Mission Statement)
– Provide a great work environment
– Treat each other with respect and dignity
– Embrace diversity
– Apply the highest quality standards for products
– Develop enthusiastically satisfied customers
– Contribute to the community and environment
– Recognize that profitability is essential to future
success
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Alignment of Store with
Corporate Strategy
Contrary to the mission statement focus, the
reduction of staffing levels appears to be more
important than developing satisfied customers
The relevance of the benefits package is
misaligned considering the average age of
employees
The high turnover rate of partners and managers
is detrimental to customer environment
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Recommendations For
Improvement
1. Revamp the employee reward system
2. Tighten focus on creating the “Third
Place” environment
3. Focus profitability measures on profitable
sales, not just reduction in staffing
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Revamp Employee Reward
System
Large percentage of the staff are under the
age of twenty
Benefits package focuses on medical,
dental, and vision care, as well as the
employee stock options
Outside of hourly wage, and semiannual
raises, there are few monetary rewards
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Improve “Third Place”
Environment
Site has a very high employee turnover rate
Manager “promoted” to a another store in
hopes of improving their poor performance
Site has very poor handicapped accessibility
Condition of restroom in each of our visits
was poor and had no baby changing area
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Focus Profitability Measures
on More Than Just Staffing
Store is underperforming on some high
margin product segments
Too high a focus on minimizing direct labor
as a key to achieve profitability
Focus on high-margin items and profitable
add-on sales
By increasing pastry sales by 33%, store
would realize a $16K increase in
contribution
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Pros and Cons of Discounted
Opportunities
Revamp the Employee Reward System
Pros
– Employees are motivated
with more incentive to
perform
– Lower employee turnover
rates
– Positive reinforcement
which leads to higher
feelings of job satisfaction
Cons
– Pay and benefit structures
dictated by corporate HQ
– Cost of benefits would
additional benefits lower
site profitability
– New reward system requires
additional management
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Pros and Cons of Discounted
Opportunities (Cont.)
Focus Profitability Measures on More Than
Just Staffing
Pros
– Higher staffing levels
benefit other employees
– Better customer service
– Improved customer
focus could lead to
higher sales
Cons
– Staffing is a cost that will
decrease profitability
– Upper-level management
perception of low
employee productivity
– Employees may get in
each other’s way
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Three-Step Action Plan For
Improvement
Decrease employee turnover rate
– Focus on hiring older employees where benefits
package is more appropriate
– Base raises on performance rather than
maximizing raises for economic reasons
– Develop and actively maintain a reward system
for employees (i.e. employee of the month)
– Develop a system of regular employee
communications / meetings
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Action Plan (cont.)
Improve site accessibility and cleanliness
– Upgrade front door and restrooms for
handicapped accessibility
– Add a baby changing station
– Redesign restroom to separate cleaning supplies
from bathroom or move cleaning supplies to
another location
– Focus employee attention on restroom
cleanliness
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Action Plan (cont.)
Enhance Starbuck’s differentiated
atmosphere
– Utilize entertainment budget to hire outside
entertainers, have book / poetry readings, etc.
– Display the store’s collection of games and
activities more prominently
– Make the location more of a “scene”
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Impact Analysis - Benefits
By focusing on the initial recruitment and
hiring stage, and by rewarding employees
based on merit current turnover rates will be
reduced.
By focusing on site accessibility and
cleanliness, the physical facility will not
detract from atmosphere.
By improving Starbucks’ atmosphere, it
will become a more attractive place to go.
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Potential Risks
Customers may not react positively to the
changes being made
Not enough available employees to meet re-
aligned hiring needs
Claims of age discrimination and negative
affect on sales in youth demographic
Costs associated with planned change
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Wrap-Up
Starbucks is the market leader in a growing
market segment
Starbucks is known world-wide for its high-
quality food products and differentiated
“Third Place” atmosphere
The Wellesley location embodies the ideals
of the corporate mission and has been very
profitable, but there are still opportunities
for improvement
Fixed Expense increase in 1998 over 1997 due to higher depreciation expense, advertising expense, and salaries in 1997 than in 1998.
Controllable expenses include cost of sales, labor and benefits, supplies, inventory mark outs and adjustments, and store costs for donations, entertainment, and customer relations.
Tall corporate hierarchy affects communication between the corporate HQ and individual stores.
Staffing direction based on direct hour allowances
Inventory control and ordering
Check list of daily job tasks
Overall store capacity a function of the number of workers on the floor.
Both at the register and at the bottleneck. With two people at bottleneck, cycle times are more around .29 minutes and hourly capacity is 208 units / hr. Store capacity much higher based on number of employees working, number of registers working, and exact product mix of sales.
Management steps in and out as needed, but is not overbearing.
Wages have normally been maximized for economic reasons.
We saw two excellent examples of employee empowerment.
This is directly from the Starbucks Mission Statement
To communicate this, all employees get the Partner Information Manual
We saw a great work environment in action at this location
The benefits package is not relevant to employees who are under the age of twenty.
Remind that with the raises, standard policy has been to give maximum allow to keep overall wages competitive.
We estimate that the additional $16K is enough to hire 2 more PT partners.