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Starbucks Corporation: An Analysis

Starbucks Corporation: An Analysis Darah Clark ECO 201: Milestone Three Southern New Hampshire University

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Starbucks Corporation: An Analysis Costs of Production

According to World Coffee Portal’s 2020 U.S. coffee shop market report, “Starbucks Corporation has a 40% share of the U.S. coffee shop market” ahead of other brands such as Dunkin’ Donuts and Peet’s Coffee (3, A. & 3, A., 2020). Since Starbucks leads the U.S. in coffee consumption sales, they have accrued a variety of costs to continue successful operations. Examples of daily costs for this expanding coffee house chain are coffee beans (unroasted/ roasted), dairy, transportation and shipping fuel, rent for buildings, merchandise as well as packaging and other store/warehouse upkeep supplies. The table below shows the cost of goods sold (COGS) and the Operating Expenses for Starbucks over the past 5 years.

Figure 3.1: Starbucks Cost of Goods Sold 2006-2020: SBUX. (n.d.). Retrieved November 27, 2020, from https://www.macrotrends.net/stocks/charts/SBUX/starbucks/cost-goods-sold As seen in the annual income report, there is a trend of increase in revenue (COGS) and Gross Profit (Operating expanses) from 2015 until 2019. However, we see a decrease in sales and profits from 2019 into 2020, and this could be a direct correlation to the recent Corona virus

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pandemic that’s negatively impacted businesses globally. Due to recent natural disasters or environmental changes like wild fires and tsunamis, increased heat temperatures and reduced rainfall, the coffee bean production has reduced drastically. According to the United States Department of Agriculture 2020 coffee market and trade report, “World bean exports and production were both lowered by over 2 million bags in the main coffee producing countries such as Vietnam, Colombia, Honduras, Mexico and Brazil. In addition, both European and United States coffee bean imports are reduced by over 3 million bags combined, resulting in 72.5 million on lower consumption and stocks buildup for 2020” (Coffee, 2020). In order to analyze the profit trends for Starbucks over the years, it is essential to subtract overall costs, both fixed and variable, from total revenue. Chapter 11 from the textbook Microeconomics explains variable costs as, “the costs that change as output changes, and fixed costs are costs that remain constant as output changes” (Hubbard, R. G., O'Brien, A. P., 2019). As mentioned above, examples of fixed costs for Starbucks are land costs, rent agreements, roasting equipment. Some and examples of the variable costs for Starbucks are coffee beans, dairy prices and transportation and shipping fuel prices. According to Starbucks annual income report, “Starbucks gross profit for the quarter ending September 30, 2020 was $4.226 Billion, a 8.27% decline year-over-year” (Starbucks, 2006-2020). The table below illustrates the decline in overall profitability for the year 2020 due to the impacts of increased prices for coffee beans and fuel, as well as Starbucks Corporation’s business decision to temporary close down stores. These decisions were made to decrease health hazards for employees and customers and cut down on operating and store production costs as well as counteract the increase in imported good expenses.

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Starbucks Corporation: An Analysis

Figure 3.2: Journal, W. (2020). SBUX | Starbucks Corp. Annual Income Statement - WSJ. Retrieved November 27, 2020, from https://www.wsj.com/market-data/quotes/SBUX/financials/ annual/income-statement

Overall Market Starbucks Corporation is the leading coffeehouse chain in the United States with, “14,875 new stores and according to Allegra’s World Coffee report, Starbucks and Dunkin’ accounted for 80% of the new store opening in the U.S. over the past year” (3, A. & 3, A., 2020). The main top competitors for Starbucks in the coffee shop market include Dunkin’ Donuts, McDonald’s and JAB Holding owned brands such as Panera, Peet’s and Caribou. In fact, “78% of the U.S. coffee shops are either Starbucks, Dunkin’ or JAB brand locations” (3, A. & 3, A., 2020). The figure below shows the three main leading coffee shop brands, the market size for coffee shops and the total market value and annual market growth for coffee shops in the United States.

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Figure 3.3: 3, A., & 3, A. (2020, June 29). Nearly Four of Every Five US Coffee Shops are Now Starbucks, Dunkin' or JAB Brands. Retrieved November 27, 2020, from https:// dailycoffeenews.com/2019/10/25/nearly-four-of-every-five-us-coffee-shops-are-now-starbucksdunkin-or-jab-brands/

While each of these coffee companies demonstrate financial success, the key difference between Starbucks and its main competitor Dunkin’ Donuts is the business model the company chooses to follow. Dunkin’ Donuts locations are almost entirely composed of franchises, while Starbucks stores are “disproportionately located outside the U.S., as corporate-owned and operated stores that account for roughly 60% of stores in the U.S and half of its locations overseas” (Delventhal, 2020). This means that the cost of goods sold (COGS) and operating expenses make up a larger percentage of sales for Starbucks because, “COGS is so much more prominent in Starhuck’s expense structure, its profits are more severely impacted by any changes in coffee bean prices”

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(Delventhal, 2020). While both brands have shown increases in total revenue over the past 5 years, it is clear in Figure 3.4 that Starbucks leads the market in overall profitability (Gross Profit) by a much higher margin than its second place competitor.

Figure 3.4: Stock Comparison Tool. (n.d.). Retrieved November 27, 2020, from https:// www.macrotrends.net/stocks/stock-comparison?s=gross-profit

In any market industry there is a threat of being overtaken by competition and therefore barriers to entry are created to help minimize the negative impact on a specific firm and maximize their economic profits. “Three important barriers to entry are economies of scale, ownership of a key input, and government-imposed barriers” (Hubbard, R., O'Brien, A. P., 2019). I believe the barriers to entry for the coffeehouse market are low because there are multiple firms that can compete selling to coffee drinking customers, however Starbucks remains top of the list with their domination in quality and quantity expansion throughout the global coffee market. There is a low threat of new entrants (competition) because although it can easy for a local coffee

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shop or franchise store to open on a nearby street, Starbucks continues to have a global size impact on the coffee market with lower overall costs and higher profits. Starbucks also has a strict contractual policy with their suppliers to ensure sustainable and ethically produced products are used in their coffee beverages. The added benefit of owning most coffee roasting and production equipment cuts greater outside costs for Starbucks that smaller coffee companies just can’t afford. The only real competition to Starbucks overall is the threat of substitutes, such as other hot and cold beverages like tea, juice, kombucha, smoothies and other non-alcoholic or alcoholic beverages. Companies that could offer any of these products with lower pricing may be able to impact Starbuck’s profitability but only if they can compete with their premium customer service and loyal customers to the top coffeehouse products. The best market structure that represents Starbucks Corporation is monopolistic competition, because “its barriers to entry are low and many firms compete by selling similar, but not identical, products” (Hubbard, R., O'Brien, A. P., 2019). While the prices of Starbuck’s coffee beverages may be slightly above the surrounding coffeehouse substitutes, customers can trust they are receiving high quality products, enthusiastic customer service, and an inclusive experience at affordable prices. As mentioned earlier, Starbucks has three main competitors, (Dunkin’ Donuts, McCaffe, and JAB brands) that produce similar items but are still different in pricing, experience and products. Slight changes in any of these qualities (such as price increase or limited product selection) may impact the company to a minimal degree but will not impact its success in the coffeehouse market.

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Starbucks Corporation: An Analysis Recommendation

As seen in the data tables above, Starbucks has continuously seen an increase in overall profits, stores, and merchandise sales while maintaining the company mission, “to inspire and nurture the human spirit – one person, one cup and one neighborhood at a time (Starbucks Company Profile, 2020). Even with less coffee being imported due to natural weather circumstances, and mandatory store closures as a result of the global pandemic and health guidelines, Starbucks Corporation continues to lead the coffeehouse industry above its coffee competitors. Coffee will continue to be in demand regardless of the threat of substitutes or coffee supply concerns, and Starbucks should continue to see a rise in market growth and their sales despite these potential challenges. Starbucks has gained its success by offering more than just their premium coffee and tea products, it provides an inclusive experience that benefits every customer and that will continue to move them forward and remain at the top of the industry. As of June 2019, “Starbucks has a total of 30,000 stores across 80 markets” and it is recommended that Starbucks continues to increase their store quantities and locations to maximize customer interaction and product reputation (Starbucks Company Profile, 2020). This will ultimately continue to increase the company’s profits and increase the lead over other coffeehouse companies. Even though Starbucks leads the coffeehouse market over their next competitors with more stores and higher profits, it is essential that they do not let their services and products slip in quality if they want to stay at the top. Starbucks has made critical changes such as offering wine and beer beverages, late night snacks and increased their loyalty program discounts and promotions to separate them from other coffeehouse options. While Dunkin’ and McCaffe tend

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to target more fast-food and lower income customers, Starbucks tends to target younger and higher income customers. This target audience differ from those of Starbuck’s competitors because they are looking to have more of an intimate experience to meet with friends, conduct business, finish school work or just enjoy a relaxing atmosphere with high quality service and products. Starbucks will remain the top coffeehouse company in the market by, staying innovative in ways to provide this excellent customer service, offering new marketing techniques to engage with customers and continue buying and selling high quality coffee, tea or food items. Each year, Starbucks releases “new” beverage combos and flavors to continue growing their product options as well as selling new merchandise variations for customers. This is a great way to maintain and increase customers every season and provide a unique advantage over other franchised coffee companies. Overall, even though Starbuck’s coffee is an inelastic demand, coffee beverages will remain an elastic demand and customers will ultimately be more sensitive to changes in the pricing and availability of their caffeinated beverage. Starbucks Corporation can continue their success in the coffeehouse market by maintaining their promise of premium products and service even if that requires maintaining slightly higher prices than competitors. As seen in Figure 3.2, even after seeing less in overall profits from the previous year in 2019 (likely because of the global pandemic causing store closures), Starbucks still saw an increase in new stores openings worldwide and a positive gross profit percentage. Even if pricing remains the same and customer numbers decrease for the company, Starbucks can continue their success by incorporating new flavors throughout the seasons, variable beverage products, food items, purchase locations (grocery stores, online sales, etc) and continuing to deliver high quality products and services.

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This reputation for providing a positive and inclusive experience with every visit or taste of their products is what gained Starbucks such rapid success, and it will ultimately be what continues to expand their accomplishments worldwide.

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Starbucks Corporation: An Analysis Reference List

Coffee: World Markets and Trade. (2020, June). Retrieved November 27, 2020, from https:// apps.fas.usda.gov/psdonline/circulars/coffee.pdf Delventhal, S. (2020, August 28). Starbucks vs. Dunkin': Which Coffee and Snack Chain Is Better? Retrieved November 27, 2020, from https://www.investopedia.com/articles/ markets/120215/starbucks-vs-dunkin-donuts-comparing-business-models.asp Hubbard, R. G., O'Brien, A. P., Serletis, A., & Childs, J. (2019). Microeconomics. Toronto: Pearson Canada. Journal, W. (2020). SBUX | Starbucks Corp. Annual Income Statement - WSJ. Retrieved November 27, 2020, from https://www.wsj.com/market-data/quotes/SBUX/financials/ annual/income-statement Starbucks Company Profile. (2020). Retrieved November 29, 2020, from https:// www.starbucks.com/about-us/company-information/starbucks-company-profile Starbucks Cost of Goods Sold 2006-2020: SBUX. (n.d.). Retrieved November 27, 2020, from https://www.macrotrends.net/stocks/charts/SBUX/starbucks/cost-goods-sold Stock Comparison Tool. (n.d.). Retrieved November 27, 2020, from https:// www.macrotrends.net/stocks/stock-comparison?s=gross-profit 3, A., & 3, A. (2020, June 29). Nearly Four of Every Five US Coffee Shops are Now Starbucks, Dunkin' or JAB Brands. Retrieved November 27, 2020, from https:// dailycoffeenews.com/2019/10/25/nearly-four-of-every-five-us-coffee-shops-are-nowstarbucks-dunkin-or-jab-brands/

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