Starbucks Consulting Case

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Led fifteen students in a Deloitte consulting project, presented in Chicago.

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  • **Explain Licensed Income
  • International licensed stores appears to garner the greatest revenues.
  • Caribou: provides a similar assortment of products to Starbucks, coffee, specialty drinks, pastries, packaged coffee. McDonalds: does not provide specialty drinks (frappuccino, latte, macchiato). Dunkin Donuts: provides less expensive coffee in attractive orange and red cups.
  • Very important slide
  • high prices less uniformity in drinks breakfast sandwiches taking away from the experience For example – popsicles don’t have a large customer base, and not very Starbucks oriented.
  • Be specific
  • Be specific
  • Change to an actual timeline (graphic)
  • Be specific
  • Starbucks Consulting Case

    1. 1. Starbucks Returning to the Starbucks Experience Student International Business Council University of Notre Dame Deloitte Consulting April 11 th , 2008 Student International Business Council
    2. 2. <ul><li>1. Summary of Issues </li></ul><ul><li>2. Financials </li></ul><ul><li>3. Current Operations </li></ul><ul><li>4. The Experience </li></ul><ul><li>5. Competitive Environment </li></ul><ul><li>6. Current Operation Problems </li></ul><ul><li>7. Schultz’s Vision </li></ul><ul><li>8. Plan to Achieve the Vision </li></ul>Agenda Student International Business Council
    3. 3. <ul><li>Purveyor of premium coffee and handcrafted specialty beverages </li></ul><ul><ul><li>Purchase from sustainable farms & oversee roast </li></ul></ul><ul><li>Enhancing coffee experience with Italian style brewing & increasing offering with joint ventures </li></ul><ul><li>Retailing of specialty goods to have farther reach </li></ul><ul><li>“ We aren’t in the coffee business, serving people. We are in the people business, serving coffee” - Howard Schultz </li></ul>Business Model Student International Business Council
    4. 4. <ul><li>The experience that makes Starbucks unique has taken a back seat to efficiency and overexpansion </li></ul><ul><li>There has been a loss of focus on their target market and Schultz’ vision </li></ul><ul><li>Costs and expenses are rising, cutting into the bottom line </li></ul><ul><li>Revenues growth is slowing </li></ul>Current Situation Student International Business Council
    5. 5. <ul><li>Increase revenue </li></ul><ul><ul><li>More licensed branches abroad </li></ul></ul><ul><ul><li>Focus on specialty drinks </li></ul></ul><ul><li>Decrease cost </li></ul><ul><ul><li>Remove unnecessary products </li></ul></ul><ul><ul><li>Slow domestic expansions </li></ul></ul><ul><ul><li>Decrease costs on particular non-drink items </li></ul></ul><ul><li>Enhance experience </li></ul><ul><ul><li>In store attractions and focus on customer </li></ul></ul>Plan of Implementation Student International Business Council
    6. 6. <ul><li>1. Summary of Issues </li></ul><ul><li>2. Financials </li></ul><ul><li>3. Current Operations </li></ul><ul><li>4. The Experience </li></ul><ul><li>5. Competitive Environment </li></ul><ul><li>6. Current Operation Problems </li></ul><ul><li>7. Schultz’s Vision </li></ul><ul><li>8. Plan to Achieve the Vision </li></ul>Agenda Student International Business Council
    7. 7. <ul><li>1,065 store increase in the United States from 2006-2007 </li></ul><ul><li>277 store increase internationally 2006-2007 </li></ul><ul><li>Expenses increased significantly from 2005-2007 </li></ul><ul><li>Earnings have peaked </li></ul><ul><li>Net Operating Income is increasing at a decreasing rate </li></ul>Recent News Source: Starbucks’ 10-K Student International Business Council
    8. 8. High-Level Financials Source: Yahoo Finance Student International Business Council Dollars (in millions) FYO,2007 FYO, 2006 FYO, 2005 FYO, 2004 FYO, 2003 Total Revenue $9,411 $7,787 $6,369 $5,294 $4,076 Operating Income $1,053 $893 $780 $606 $421 Net Earnings $672 $564 $494 $389 $265
    9. 9. Key Financials Source: Starbucks’ 10-K Student International Business Council Year 2007 2006 2005 2004 2003 2002 2001 2000 Revenue (in Millions) 9411.5 7786,9 6369.3 5294.3 4075.5 3288.9 2649.0 2169.2 % increase in revenue 17.26 18.2 16.88 23.02 19.3 19.46 18.11 22.54 Costs of goods (in Millions) 3999.1 3178.8 2605.2 2198.7 1685.9 1350.0 1112.8 953.6 % increase cost of goods 20.51 18.04 15.6 23.32 19.92 17,57 14.31 22.29 Year 2007 2006 2005 2004 2003 2002 2001 2000 Revenue (in Millions) $9411.5 $7786.9 $6369.3 $5294.3 $4075.5 $3288.9 $2649.0 $2169.2 % increase in revenue 17.26 18.2 16.88 23.02 19.3 19.46 18.11 22.54 Costs of goods (in Millions) $3999.1 $3178.8 $2605.2 $2198.7 $1685.9 $1350.0 $1112.8 $953.6 % increase cost of goods 20.51 18.04 15.6 23.32 19.92 17.57 14.31 22.29
    10. 10. Results of Operations <ul><li>Revenues are increasing, but expenses as a percentage of revenue are increasing a well. This takes away from the bottom line, net operating income. </li></ul>Source: Starbucks’ 10-K Student International Business Council 2007 2006 2005 Revenues $9.4 billion $7.8 billion $6.4 billion Expenses (% of Revenue) 89.9% 89.7% 88.9% Earnings (% of Revenue) 7.1% 7.2% 7.8%
    11. 11. Slowing Revenue, Increasing Cost <ul><li>Percentage increase in revenue is strong from year to year until 2005 where it plummets. </li></ul><ul><li>Cost percent increase remains the same until 2005, then begins to increase. </li></ul><ul><li>Stock price peaks from 2005-2006, then drops. </li></ul>Source: Yahoo Finance Student International Business Council
    12. 12. Same-Store Sales Growth <ul><li>Domestically, the sales growth is increasing at a decreasing rate. Internationally, it is steady. </li></ul>Source: Starbucks’ 10-K Percentage change in comparable store sales (%) 8 10 8 7 5 Consolidated 7 6 6 8 7 International 9 11 9 7 4 United States 2003 2004 2005 2006 2007 Student International Business Council
    13. 13. Growth Trends 2006-2007 Source: Starbucks’ 10-K <ul><ul><li>International licensed stores appears to garner the greatest revenues. </li></ul></ul>Student International Business Council % Growth in Net Revenue % Growth in Licensed Stores Domestic 17% 6% International 25% 13%
    14. 14. Domestic vs. International Student International Business Council
    15. 15. International Stores International Stores Source: Starbucks’ 10-K Student International Business Council $138 million $625 million $220.8 million 2007 2006 % Change Licensing Income: $186 million 18.7% Total Sales $824.5 million 31.9 Net Operating Income $108 million 27
    16. 16. <ul><li>1. Summary of Issues </li></ul><ul><li>2. Financials </li></ul><ul><li>3. Current Operations </li></ul><ul><li>4. The Experience </li></ul><ul><li>5. Competitive Environment </li></ul><ul><li>6. Current Operation Problems </li></ul><ul><li>7. Schultz’s Vision </li></ul><ul><li>8. Plan to Achieve the Vision </li></ul>Agenda Student International Business Council
    17. 17. <ul><li>1971- First store opens in Seattle </li></ul><ul><li>1982- Howard Schultz joins as director of retail operations and marketing </li></ul><ul><ul><li>2 years later 1 st Starbucks Café Latte served </li></ul></ul><ul><li>1987-Schultz’s Il Giomale acquires Starbucks, becomes Starbucks Corporation </li></ul><ul><li>2000- Schultz becomes chairman/chief global strategist & Orin Smith becomes new CEO </li></ul><ul><li>2007- Schultz returns as CEO in an attempt to renew the company’s focus on customer experience and innovation. </li></ul>History Student International Business Council
    18. 18. <ul><li>Establish Starbucks as the premier purveyor of the finest coffee in the world, while maintaining uncompromising principles as we grow </li></ul><ul><li>Apply the highest standards of excellence to the purchasing, roasting and fresh delivery of our coffee </li></ul><ul><li>Develop enthusiastically satisfied customers all of the time </li></ul><ul><li>Recognize that profitability is essential to future success </li></ul>Mission Statement Schultz’s Memo, April 2007 Student International Business Council
    19. 19. <ul><li>Starbucks primarily relies on its brand name and image to sell coffee </li></ul><ul><li>Starbucks links its name with quality </li></ul><ul><li>Expect that customers will pay more for quality </li></ul><ul><li>Customer focused marketing strategy: Young urban middle-class; Students between the age of 15 and 35 and Professionals </li></ul><ul><li>The entire process should be an experience rather than simply picking up coffee </li></ul>Initial Starbucks’ Operations Student International Business Council
    20. 20. <ul><li>“ The Third Place” (between home and work) </li></ul><ul><li>Launched their first TV campaign last winter </li></ul><ul><li>Marketing in-store: ambiance, music playing, seating, friendly people </li></ul><ul><li>iTunes and Starbucks entertainment. Customers can receive free songs in the store. They can also purchase songs playing at store on apple products. </li></ul>Marketing the Experience Student International Business Council
    21. 21. <ul><li>1. Summary of Issues </li></ul><ul><li>2. Financials </li></ul><ul><li>3. Current Operations </li></ul><ul><li>4. The Experience </li></ul><ul><li>5. Competitive Environment </li></ul><ul><li>6. Current Operation Problems </li></ul><ul><li>7. Schultz’s Vision </li></ul><ul><li>8. Plan to Achieve the Vision </li></ul>Agenda Student International Business Council
    22. 22. Starbucks Experience <ul><li>Store (Experience) </li></ul><ul><ul><ul><li>Warm atmosphere with brown and green toned interior </li></ul></ul></ul><ul><ul><ul><li>Ambiance includes music, comfortable seating for work or socializing, and friendly employees </li></ul></ul></ul><ul><ul><ul><li>Mix between classic and modern </li></ul></ul></ul><ul><ul><ul><li>Fixed temperature </li></ul></ul></ul><ul><ul><ul><li>Specific method of taking orders </li></ul></ul></ul><ul><ul><ul><li>Coffee aroma </li></ul></ul></ul>In-Store Experience Student International Business Council
    23. 23. Starbucks Experience <ul><ul><li>Menu (Product) </li></ul></ul><ul><ul><ul><li>Latin America, Africa/Arabia, Asia/Pacific, Dark Roast Blends, Multi-Region Blends </li></ul></ul></ul><ul><ul><ul><li>Espresso, Frappuccino, Macchiato </li></ul></ul></ul><ul><ul><ul><li>Teas </li></ul></ul></ul><ul><ul><ul><li>Classic Favorites </li></ul></ul></ul><ul><ul><li>The menu is diverse enough to appeal to a variety of tastes, even though each location is consistent in its look and feel. </li></ul></ul>Product Experience Student International Business Council
    24. 24. <ul><li>Starbucks offers luxury that is readily available. </li></ul><ul><ul><li>Daily coffee without losing the indulgence of the experience. </li></ul></ul><ul><ul><li>Ambiance, music playing, seating, friendly people. </li></ul></ul><ul><li>Customers experience personal service. </li></ul><ul><ul><li>Only automated task should be the printing of a receipt. </li></ul></ul><ul><ul><li>Employees know what regular customers want. </li></ul></ul><ul><ul><li>Grinding coffee in front of the customer. </li></ul></ul>Summary: The Experience Student International Business Council
    25. 25. <ul><li>1. Summary of Issues </li></ul><ul><li>2. Financials </li></ul><ul><li>3. Current Operations </li></ul><ul><li>4. The Experience </li></ul><ul><li>5. Competitive Environment </li></ul><ul><li>6. Current Operation Problems </li></ul><ul><li>7. Schultz’s Vision </li></ul><ul><li>8. Plan to Achieve the Vision </li></ul>Agenda Student International Business Council
    26. 26. <ul><li>Coffee is a 34 billion dollar industry in the United States </li></ul><ul><li>The coffee industry currently exceeds $70 billion annually, with over 400 billion cups consumed each year </li></ul><ul><li>Coffee, as a product, is actually the 2nd highest traded commodity globally, falling only shortly behind oil </li></ul>Source: Eimports.com, Packagedfoods, Boresha.com, Yahoo Finance Coffee Demographics Student International Business Council
    27. 27. Competitors <ul><li>Caribou Coffee is the second largest gourmet coffee chain </li></ul><ul><li>McDonalds provides an easy and accessible option for cheaper coffee </li></ul><ul><li>Dunkin’ Donuts is the largest coffee and baked goods chain in the world </li></ul>Primary Competitors Cariboucoffee.com, Dunkindonuts.com Student International Business Council
    28. 28. <ul><li>Caribou Coffee is the second largest gourmet coffeehouse operator (484 coffeehouses, including 52 franchised locations) </li></ul><ul><li>Caribou Coffee offers its customers high-quality gourmet coffee and espresso-based beverages, as well as specialty teas, baked goods, whole bean coffee, branded merchandise and related products </li></ul><ul><li>Caribou Coffee also sells products to club stores, grocery stores, mass merchandisers, office coffee providers, airlines, hotels, sports and entertainment venues, college campuses and other commercial customers. </li></ul><ul><li>Coffee comes from the finest Arabica beans </li></ul><ul><li>Amenities include free WiFi, meeting rooms, and drive thrus </li></ul>Source: cariboucoffee.com Caribou Coffee Student International Business Council
    29. 29. <ul><li>Offers low priced Premium Roast Coffee made from 100% Arabica beans and three flavors of iced coffee in over 9,000 stores </li></ul><ul><li>McDonalds- plans to add Starbucks-style coffee bars to nearly 14,000 of its American restaurants, drinks are estimated to be roughly $.50 less than Starbucks pricing </li></ul><ul><li>In 2007, began introducing McCafe concept restaurants in select locations in the US with comfy couches, cappuccinos and pastries </li></ul><ul><li>Consumer Reports rated McDonalds coffee more highly than that offered by Starbucks </li></ul>Sources: moneycentral.com McDonald’s Student International Business Council
    30. 30. Source: PRNewswire via COMTEX, www.dunkindonuts.com <ul><li>Dunkin' Donuts (the largest coffee and baked goods chain) sells more hot regular coffee, iced coffee, donuts, and bagels than any other quick service shop in America. </li></ul><ul><li>They are known for simplicity and their unique orange and red cups </li></ul><ul><li>100% Arabic coffee beans (flavorful, smooth & mellow) </li></ul><ul><li>Espresso, frappuccino, and iced coffee also available </li></ul>Dunkin’ Donuts Student International Business Council
    31. 31. <ul><li>McDonalds </li></ul><ul><ul><li>Premium Roast was voted better tasting than Starbucks or Dunkin Donuts </li></ul></ul><ul><ul><li>McDonalds have more drive-thrus than any competitor </li></ul></ul><ul><ul><li>McDonalds does not rely on coffee sales to support their business, allowing them to jump into the coffee industry sell coffee with a much lower profit margin </li></ul></ul><ul><li>Dunkin Donuts offers cheaper coffee than Starbucks along with a large selection of baked goods </li></ul><ul><li>Caribou’s stores are larger, and usually in prime locations </li></ul><ul><li>Cheaper, more available, basic coffee has led to customers substitute away from Starbucks </li></ul>Source: Consumer Reports, Belfast Telegraph 2.2.07 Advantages of the Competition Student International Business Council
    32. 32. <ul><li>1. Summary of Issues </li></ul><ul><li>2. Financials </li></ul><ul><li>3. Current Operations </li></ul><ul><li>4. The Experience </li></ul><ul><li>5. Competitive Environment </li></ul><ul><li>6. Current Operation Problems </li></ul><ul><li>7. Schultz’s Vision </li></ul><ul><li>8. Plan to Achieve the Vision </li></ul>Agenda Student International Business Council
    33. 33. The Loss of the Experience <ul><li>Starbucks interactive cup brewer for small-businesses detracts from “The Third Place” </li></ul><ul><li>Selling in grocery stores diverts attention from the stores </li></ul><ul><li>Brand recognition can be tied to the grocery store and not the actual Starbucks store </li></ul><ul><li>Prepackaged products inhibit the incentive to make a trip to the store </li></ul>Source: Business Week 2-19-08 Losing the Experience Student International Business Council
    34. 34. Problems Inhibiting the Experience <ul><ul><li>Change to automatic espresso machines when Schultz was gone </li></ul></ul><ul><ul><li>Baristas were no longer required to hand-make many drinks </li></ul></ul><ul><ul><li>Less emphasis on personal interaction between baristas and customers </li></ul></ul><ul><ul><li>The present stores lack the influence from the original inspiration of the Pike’s Place location </li></ul></ul><ul><ul><ul><li>As a result, customers are no longer inclined to stay and enjoy the experience </li></ul></ul></ul>Losing the In-Store Experience Student International Business Council
    35. 35. <ul><li>The average number of transactions per US location fell 1% in the last quarter of 2007 </li></ul><ul><li>The brand is starting to lose its reputation as a quality, worthwhile experience </li></ul><ul><ul><li>Higher prices </li></ul></ul><ul><ul><li>Less interaction with the barista </li></ul></ul><ul><ul><li>Less personal attention </li></ul></ul><ul><ul><li>Starbucks commercializing their brand in grocery stores. </li></ul></ul>Losing Reputation Source: Business Week 2-19-08 and PR Week 2-15-08 Student International Business Council
    36. 36. <ul><li>1. Summary of Issues </li></ul><ul><li>2. Financials </li></ul><ul><li>3. Current Operations </li></ul><ul><li>4. The Experience </li></ul><ul><li>5. Competitive Environment </li></ul><ul><li>6. Current Operation Problems </li></ul><ul><li>7. Schultz’s Vision </li></ul><ul><li>8. Plan to Achieve the Vision </li></ul>Agenda Student International Business Council
    37. 37. <ul><li>Starbucks has been a company that relies on their reputation </li></ul><ul><ul><li>Quality </li></ul></ul><ul><ul><li>Availability </li></ul></ul><ul><li>The brand speaks for itself </li></ul><ul><ul><li>The Starbucks experience and numerous locations allow customers to indulge anywhere, anytime </li></ul></ul>Foundational Values Student International Business Council
    38. 38. <ul><li>Howard Schultz’ s strategy: </li></ul><ul><ul><li>Slow down US store expansion </li></ul></ul><ul><ul><li>Close under-performing stores </li></ul></ul><ul><ul><ul><li>closing 100 stores </li></ul></ul></ul><ul><ul><li>“Spruce up” existing stores </li></ul></ul><ul><ul><li>Introduce new products (Pike Place Roast) </li></ul></ul>Recovery Strategy Source: Business Week 2-19-08 and 3-10-08 Student International Business Council
    39. 39. <ul><li>New Expresso Machines to better view the barista & barista training. </li></ul><ul><li>Free WiFi through AT&T </li></ul><ul><li>Bought Coffee Equipment Co. and Clover Brewing System </li></ul><ul><li>Discontinuance of warm breakfast. </li></ul><ul><li>Starbucks Artisan chocolate. </li></ul><ul><li>National Training Day - 2/26/08 </li></ul><ul><li>Made Fortune 100 Best Companies to Work for in 2008 </li></ul><ul><li>“ Skinny” drinks </li></ul>Innovations post-Schultz Return Student International Business Council
    40. 40. <ul><li>1. Summary of Issues </li></ul><ul><li>2. Financials </li></ul><ul><li>3. Current Operations </li></ul><ul><li>4. The Experience </li></ul><ul><li>5. Competitive Environment </li></ul><ul><li>6. Current Operation Problems </li></ul><ul><li>7. Schultz’s Vision </li></ul><ul><li>8. Plan to Achieve the Vision </li></ul>Agenda Student International Business Council
    41. 41. <ul><ul><li>Shifting the focus of operations back to Starbucks’ target market </li></ul></ul><ul><ul><li>Renewing the commitment to Schultz’ vision </li></ul></ul><ul><ul><li>Regaining “The Experience” and ensuring Starbucks is “The Third Place” between home and work </li></ul></ul>Moving Forward Student International Business Council
    42. 42. <ul><li>Revamp the experience of “The Third Place” and improve the quality of personal service to encourage customers to return to Starbucks </li></ul><ul><li>Increase revenues by maintaining the “Starbucks Experience,” which adds value to the coffee and justifies the higher price </li></ul><ul><li>Focus on premium products (specifically specialty drinks unique to Starbucks) </li></ul><ul><li>International expansion of licensed stores adds to the bottom line </li></ul>Goals Student International Business Council
    43. 43. <ul><li>Revamping Starbucks quality standards </li></ul><ul><li>New quality standards for freshness, hand-scooping, and smaller brewed coffee batches with no more than 30-minute hold times </li></ul><ul><li>The introduction of Pike Place Roast </li></ul>Quality Improvements Student International Business Council
    44. 44. <ul><li>Partners </li></ul><ul><ul><li>Choose employees who will implement Starbucks’ core values and who are highly knowledgeable about coffee and its production </li></ul></ul><ul><ul><li>Spend more money and time on training employees </li></ul></ul><ul><ul><li>Hire fewer part time workers </li></ul></ul>Experience Improvements Student International Business Council
    45. 45. <ul><li>Store Environment </li></ul><ul><ul><li>Offer free taste testing on select nights for the coffees and the higher-priced specialty drinks </li></ul></ul><ul><ul><li>Have live music and readings on select nights </li></ul></ul><ul><ul><li>Use La Marzocca machines as opposed to automated espresso machines in order to engage the customer in the drink making experience </li></ul></ul><ul><ul><li>Brew coffee in-store to regain the aroma </li></ul></ul><ul><ul><li>Remove Tip Jars </li></ul></ul><ul><ul><li>Emphasizing the coffeehouse as a gathering place </li></ul></ul>Sprucing up “The Third Place” Student International Business Council
    46. 46. <ul><li>Reduce spending on materials from unnecessary/unpopular products </li></ul><ul><li>Seek to cut costs from straws, recyclable cups, napkins, shot glasses (glass to metal/plastic), etc </li></ul><ul><li>Eliminate the 25 cent discount for bringing reusable cups. </li></ul><ul><li>Digitize process of information management (store orders placed to suppliers) </li></ul><ul><li>Curve domestic expansion that contributes to increasing costs. </li></ul><ul><li>Cut down on seasonal gifts (Advent tree). </li></ul><ul><li>Decrease spending on print-media advertising as well as the seasonal TV ad campaign </li></ul>Decreasing Costs Student International Business Council
    47. 47. <ul><li>Improve quality and experience to prevent customers from pulling away from Starbucks. </li></ul><ul><li>To counter cheaper prices of competitors, match the perceived value of Starbuck’s coffee with the high price. </li></ul><ul><li>Ensure that customers are paying for a premium coffee and that their experience will draw them back to Starbucks in the future. </li></ul>Increasing Revenues Student International Business Council
    48. 48. Short-Term Expansion Timeline 2007 2008 2009 Followed by a 25% increase in 2009. (About 840 stores opened) We propose a 20% increase in 2008. (About 560 stores opened) There was a 13% increase in the international growth rate of licensed stores Decrease to 1% growth in 2008 (About 490 stores opened) Decrease the growth of domestic licensed stores to 2% growth in 2008 (About 820 stores opened) <ul><ul><li>This will help decrease expenses domestically. </li></ul></ul>Student International Business Council
    49. 49. <ul><li>Questions? </li></ul>Student International Business Council

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