Starbucks International

All's Not Well with Starbucks

IN MARCH 2003, FORTUNE CAME our WITH ITS ANNUAL LIST OF FORTUNE 500 COMPANIES.

For Howard Schultz, Chairman of Starbucks Corp., this list was special as Starbucks feaÐ'¬tured in the list. It was a dream come true for the Seattle-based entrepreneur.

Though the U.S. economy was reeling under recession and many major retailers were reporting losses and applying for bankruptcy, Starbucks announced a 31 % increase in its net earnings and a 23% increase in sales for the first quarter of 2003. Analysts felt that the success of Starbucks showed that a quality product speaks for itself. The fact that Starbucks spent less than 1 % of its sales on advertising and marketing strengthened this view. In addition to being a popular brand among customers, Starbucks was also considered the best place to work due to its employee-friendly policies.1 Exhibit 1 shows Starbucks' income statement. See Starbucks' 2002 Annual Report, at http://www.starbucks.com/aboutus/financials.asp, for complete financial statements.

This case was written by K. Subhadra, under the direction of Sanjib Dutta, ICFAI Center for Management Research (ICMR). It is intended to be used as the basis for class discussion rather than to illustrate either effective or ineffecÐ'¬tive handling of management situations. This case was compiled from published sources. Copyright Ð'© 2003, ICFAI Center for Management Research (ICMR), Hyderbad, India. This case cannot be reproduced in any form without the written permission of the copyright holder, ICFAI Center for Management Research (ICMR). Reprint permission is solely granted to the publisher, Prentice Hall, for the books, Strategic Management and Business PolicyвЂ"10th Edition (and the International version of this book) and Cases in Strategic Management and Business PolicyвЂ"10th Edition by the copyright holder, ICFAI Center for Management Research (ICMR). This case was edited for SMBP and Cases in SMBP-lOth Edition. The copyright holder is solely responsible for case content. Any other publication of the case (translation, any form of electronics or other media), or sold (any form of partnership) to another publisher will be in violation of copyright law, unless ICFAI Center for Management Research (ICMR) has granted an addiÐ'¬tional written reprint permission. Reprinted by permission of ICFAI Center for Management Research (ICMR), Hyderabad, India. Website: www.icmrindia.org

SECTION D International Issues in Strategic Management

Exhibit 1 Consolidated Statement of Earnings Starbucks Corporation (Dollar amounts in milÐ'¬lions, except per share data)

Year Ending

Sept. 29 2002 Sept. 30 2001 Oct. 1

2000

Net revenues:

Retail $2,792,904 $2,229,594 $1,823,607

Specialty 496,004 419,386 354,007

Total net revenues 3,288,908 2,648,980 2,177,614

Cost of sales and related occupancy costs 1,350,011 1,112,785 961,885

Store operating expenses 1,121,108 875,473 704,898

Other operating expenses 127,178 93,326 78,445

Depreciation and amortization expenses 205,557 163,501 130,232

General and administrative expenses 202,161 151,416 1 10,202

Income from equity investees 35,832 28,615 20,300

Operating income 318,725 281,094 212,252

Interest and other income, net 9,300 10,768 7,110

Internet-related investment losses - 2,940 58,792

Gain on sale of investment 13.361 - -

Earnings before income taxes 341,386 288,922 160,570

Income taxes 126,313 107,712 66,006

Net earnings $ 215,073 $ 181,210 $ 94,564

Net earnings per common share вЂ" basic $ 0.56 $ 0.48 $ 0.25

Net earnings per common share вЂ" diluted $ 0.54 $ 0.46 $ 0.24

Weighted average shares outstanding:

Basic 385,575 380,566 371,191

Diluted 397,526 394,349 385,999

Ratios (%)

Cost of sales (%) 41.0 42.0 44.2

Operating income margin (%) 9.7 10.6 9.7

Net profit margin (%) 6.5 6.8 4.3

Source: Starbucks Corporation "2002 Annual Report."

However, analysts felt that the success of Starbucks was due to its profitable domestic operations. It was reported that most of Starbucks' international operations were running into losses. In May 2003, Starbucks' Japanese operations reported a loss of $3.9 million (Japan constituted the largest market for the company outside the United States), and the company also performed badly in Europe and the Middle East. Analysts pointed out that Starbucks' international operations were not as well planned as its U.S. operations. They also observed that the volatile international business environment made it difficult for the company to effecÐ'¬tively manage its international operations.

Many analysts felt that it was important for the company to focus on its international operations. With the U.S. market getting saturated, Starbucks would be forced to look outside the United States for revenues and growth.

Background Note

The history of Starbucks dates to 1971, when Jerry Baldwin, Zev Siegl, and Gordon Bowker launched a coffee bean retailing store named Starbucks to sell specialty whole-bean coffee in Seattle. By 1981, the number of