Starbucks: Where Is The Next Frontier?

3100 words - 12 pages

STARBUCKS1.1WORLD'S BIGGEST COFFEE SHOPThis coffeehouse icon evolved like a fairy tale, from a small, entrepreneur venture that turned into a global powerhouse, through marketing a common pedestrian commodity - coffee, turning it into a premium product.Starbucks is a name synonymous with cappuccinos, lattes and espresso. It has created an industry of its own - the speciality coffee retail in US.Since it was listed in 1992, the stock has appreciated a whopping 2200%. As of closing on 14 December 2007, the share price is USD21.23. (FT.com, 17 Dec 2007) Starbucks' shares sell at 52 times the company's earnings, making it slightly more expensive than Google's (which trades at 51 times) (Fortune, 2 Nov 2006).Overall, in comparison with other retailers, Starbucks is still recording positive results, but not the stellar performance as expected.Fourth-quarter earnings rose 35%, with a net income of USD158.5 million or 21 cents per share. Revenues increased 22% to USD2.4 billion. (FT, 16 Nov 2007).Operating margin has dropped from 10.4% from 10.9% due to increase in building costs and renovations. Current same-store sales growth stands at 4%, where 3% came from increase in value per customer transaction. This figure is possibly masked by the 9 cents per cup price hike in July 2007. Less than 1% came from number of store transactions. (BusinessWeek, 1 Aug 2007)Current concerns of Wall Street and Starbucks management are warranted with the uncertainty of the US economy. The most hard-core evidence is its first quarterly fall in foot traffic. (FT, 16 Nov 2007). 2007 is the third straight year of declining revenue growth (BusinessWeek, 18 Jul 2007).Things are definitely changing for this coffee giant. Traditionally it had shunned tv commercials but it has recently announced its first television advertising campaign (FT, 16 Nov 2007).1.2ITS OMNIPRESENCEThere are a total of 6,700 stores in US, with 1,065 opened in 2007 (FT, 16 Nov 2007). Starbucks has grown from 17 shops in Seattle to about 13,700 outlets in 39 countries, opening an average of 20 stores per week.The cycle to plan and build a new store is 16 weeks and the investment is recouped in three years.There are 40 million customers who visit Starbucks weekly. (BusinessWeek, 22 Sep 2006). A typical customer visits Starbucks 18 times per month. Such high frequency is not applicable to any other retailers (Fortune, 14 Apr 2003).Despite the constant negativism in the market about Starbucks' point of saturation, there is a large pool of untapped customers. According to the National Coffee Association, only one out of six Americans drink speciality coffee daily (out of 52% of US adults that drink coffee daily, only 16% drink specialty coffee). Speciality coffee is a USD12 billion business. (Fortune, 12 Jun 2007).Starbucks has less than 7% share of total coffee consumption in US and less than 1% worldwide. Majority of adults only drink two cups of coffee a day. (BusinessWeek, 9 Sep 2002).1.3ITS COSTSAlthough...

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