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Starbuck Valuation Report....

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Starbucks Written Report Company Valuation Project

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Table of Contents I.

Executive Summary …………………………………………………………………..…3

II.

Industry/ Firm Description ……………………………………………………...…4 - 13 Industry Overview …………………………………………………………………....…..4 Starbucks and Competitors Overview ………………………………………………...5 - 6 Key Value Drivers …………………………………………………………………….6 - 7 SWOT Analysis ………………………………………………………………...……8 - 13

III.

Financial Statement and Trend Analysis ……………...…………………………14 - 18 Trend Analysis ……………………………………………………………………...15 - 18

IV.

Analysis of Firm Riskiness ……………………………..…………………………19 - 21 Analysis ………….………..………………………………………………………..19 - 20 Beta and Industry ……….………..……………...………………………………………21

V.

Firm Valuation ……….………..…..………………………………………………22 - 24 Dividend Discount Model ……….………..……………………………………..…22 - 23 Valuation Using Multiples ……….………..……………………………………..…23 - 24 Calculation of Intrinsic Stock Price ……….………..…………………………………...24

VI.

Conclusion ……….………..…………………………….…………………………24 - 25

VII.

Appendix & Work Cited ……….………..………………………………..………24 - 30

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I.

Executive Summary Starbucks began in 1971 at the Pike Place Market in Seattle, delivering freshly roasted

coffee to inspire and nurture the human spirit, one customer at a time. Since then, the company has expanded to 31,256 locations all across the world while providing an array of beverages, treats, and pastries1. Starbucks has become one of the leading companies in the food and beverage industry. Some strengths that play a part in the company’s success are its strong brand image and high standard of quality products. On the other hand, some weaknesses include high pricing and multiple occasions of product recall. Starbucks’s current stock is valued at $118.34 per share2. Some strengths associated with Starbucks include their diversification of business operations and their social impact goals that benefit their employees and customers (Starbucks). While it is a large brand with large goals, Starbucks has weaknesses and its biggest one is price. Starbucks undoubtedly has one of the highest prices in the coffee industry, and customers might go to cheaper options such as their competitors McDonald's McCafe, and Dunkin' Donuts3. Starbucks has the opportunity to lower its prices in order to cater to all social classes. Threats to the Starbucks chain include their competitions’ low-price coffee. Customers might not want to pay $4-$7 for a Starbucks drink, especially when competitors are starting to add similar customizations for a much cheaper price. We calculated Starbucks intrinsic price to be $24.19

Starbucks. (n.d.). About us. Retrieved April 09, 2021, from https://www.starbucks.com/about-us Yahoo Finance - https://finance.yahoo.com/quote/SBUX Rapier, Graham. “Starbucks Gets Away with Expensive Coffee in the Morning - but It's Losing out to Cheaper Competition in the Afternoons (SBUX).” Business Insider, Business Insider, 26 June 2018, markets.businessinsider.com/news/stocks/starbucks-stock-price-expensive-coffee-in-morning-losing-to-cheaper-com petition-afternoons-2018-6-1027320203. 1

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The Dividend Discount Model was used to calculate the value of Starbucks stock. We calculated the growth rate, which was 7.98%, and the rate of return, which was 9.5%4. We concluded that the current value of Starbucks stock was determined to be $103.73. With Starbucks currently being valued at $118.84 as of April 16th, it is currently overvalued.

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Industry/ Firm Description Retail Coffee Industry Overview Starbucks is categorized into the retail coffee industry along with its competitors. The

retail coffee industry includes physical coffee shops, as well as producing prepackaged coffee grains. Coffee is considered one of the most consumed beverages in the world 5. As coffee consumption continues to rise across the globe, the market begins shifting towards higher-end options. This shift is what leads consumers to continue to buy from high-end shops, such as Starbucks. The demand for higher quality coffee allows corporations to charge much higher prices. Customization has also been a critical factor in the high demand for coffee. The ability to virtually create your drink that fits your taste allows customers to personalize drinks, and in turn, are willing to pay more for that service 6. The coffee industry is worth over $100 billion worldwide, and on average, 500 billion cups of coffee are consumed worldwide every year. The coffee industry grows at a compound annual rate of 5.5%, which means the market is snowballing 7.

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Bloomberg. (n.d.). Bloomberg.com. Retrieved April 16, 2021, from https://www.bloomberg.com/markets/rates-bonds Conway, Jan. “Topic: Coffee Market in the United States.” Statista, 12 Feb. 2021, www.statista.com/topics/1248/coffee-market/. Mohammed, Shah. “How Did Starbucks Build Its Sustainable Competitive Advantage?” Medium, Medium, 30 July 2020, shahmm.medium.com/how-did-starbucks-build-its-sustainable-competitive-advantage-79ff5eedb5ff. 5

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Menke, A. (2018, April 19). The Global Coffee Industry. https://globaledge.msu.edu/blog/post/55607/the-global-coffee-industry#:~:text=Accordi

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Starbucks and Competitors Overview Starbucks main competitors are Dunkin Donuts, McDonald’s, and Costa Coffee 8. With most of its competitors being privately owned, Starbucks can take on the financial market. They can sell stocks and raise capital, which their competitors can’t do. Starbucks charges much higher prices than any of its competitors but is still able to generate increased revenue. McCafe is known for having simple coffee with minimal customization options, which reflects in their low prices. Starbucks offers a higher selection of drinks and different add-ins to personalize the beverage, reflecting in their high prices 9. This chart compares Starbucks and McCafe because they compete in the same market and are both publicly traded companies 10. Starbucks

McCafe

Source

5- year growth rate

80.59%

71.13%

Google Finance

Beta

0.87

0.62

Yahoo Finance

Debt Ratio (2020)

79.01%

71.93%

dun&bradstreet

Revenue

$23.52 Billion

$21.08 Billion

dun&bradstreet

We found the 5-year growth rate from 2016 to 2020 on Google Finance which helped us understand which company was growing at a faster rate11. We calculated the debt ratio by dividing total debts over total assets, which was found on Dun & Bradstreet. We were also able to find the revenues on Dun & Bradstreet. After analyzing all of this information, we concluded

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Craft - https://craft.co/starbucks/competitors Hawley, Julia. “Who Are Starbucks' Main Competitors?” Investopedia, Investopedia, 28 Aug. 2020, www.investopedia.com/articles/markets/101315/who-are-starbucks-main-competitors.asp.

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https://www.dnb.com/business-directory/company-profiles.mcdonalds_corporation

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Google Finance - https://www.google.com/finance/quote/SBUX:NASDAQ

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that Starbucks is performing at a much higher rate than its competitor. Starbucks is able to grow at a steady rate while also generating high revenue.

Key-Value Drivers There are several key value drivers that allow Starbucks to be a successful, profitable business, even during a pandemic. Starbucks ranked 114 in the Fortune 500 list of 2020 12. One of Starbucks’ key-values is inclusivity and diversity within all levels of the company 13. They vowed to set inclusion goals to ensure that at least 30% of corporate and 40% of retail and manufacturing are BIPOC by 2025. Starbucks is also jumping on the trend of increasing their company-wide minimum wage to $15 14. This will ensure employee retention while creating a more diverse work environment. Overall, Starbucks is taking large internal steps that their competitors aren’t doing. These actions will also attract more potential employees and influence more people to shop with a company that has high morals. The second key-value driver is their steps to address climate change. Starbucks has been implementing a climate change strategy since 2004 15. Compared to their competitors, they are becoming one of the largest purchasers of renewable energy. Many consumers tend to shop with companies that take steps to save the planet. They also offer discounts on drinks if you present a Starbucks reusable travel cup. This motivates people to purchase reusable cups, which directly

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https://fortune.com/company/starbucks/fortune500/ Starbucks. (2021). Retrieved 15 April 2021, from https://stories.starbucks.com/stories/2020/our-commitment-to-inclusion-diversity-and-equity-at-starbucks/ 14 Puhak, Janine. “Starbucks to Raise Minimum Wage to $15 for US Employees over Next Three Years.” Fox Business, Fox Business, 11 Dec. 2020, www.foxbusiness.com/lifestyle/starbucks-raise-wage-15-us-emplyoees. 15 Tackling Climate Change. (2021). Retrieved 15 April 2021, from https://www.starbucks.com/responsibility/environment/climate-change 13

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cuts the use of plastic cups. Overall, Starbucks is doing its part, as a major corporation, to save the planet. The third key-value driver is their remarkable customer service. As mentioned before, Starbucks promotes reusable cups in exchange for discounted drinks. This forms a sense of loyalty between company and customer because the discounts will push them to keep coming. Starbucks is also expanding its plant-based menu to cater to a larger market. Many people choose to eat plant-based diets for personal preference or dietary needs, so having a large menu will be appreciated across all customers. Starbucks also offers their members “stars'' when they spend money at the shop and these stars can be redeemed for free drinks and free customizations. This creates customer loyalty because everyone wants to reach enough stars for a free drink16. Starbucks does a great job with keeping its customers happy because it's one of the largest coffee chains in the world. Overall, Starbucks is moving in the right direction because its customers are willing to spend $5-$6 on a cup of coffee. Their customers are not just buying coffee, they are buying a personalized journey that is saving the planet.

16 Mertes, Alyssa. “How Starbucks Gets Customer Service Right, Every Time.” Promotional Products Blog, 19 Mar. 2021, www.qualitylogoproducts.com/blog/building-community-starbucks-gets-customer-service-right/.

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SWOT Analysis Strengths Established in 1971, Starbucks is one of the leading companies in the food and beverage industry. The company's strengths contribute to its success, such as its brand image, performance, growth, supply chain, acquisitions, diversification, the standard of products, strategy, employee treatment, loyalty program, and corporate social responsibility. The company's size, the magnitude of customers, and locations worldwide have increased year after year. In 2020, the brand valued at 11.5 billion dollars 17. In 2020, Starbucks brought in annual revenue of 19.16 billion dollars, placing the company in a solid financial position in the market18. Since opening in 1971, there are now 31,256 locations around the world 1. Not only do they have locations around the world, but their supply chain is also known to be extensive and diverse. Starbucks sources its coffee beans from Latin America, Africa, and Asia-Pacific 1. Another strength of theirs is they have acquired various companies, including Seattle's Best Coffee, Teavana, Tazo, Evolution Fresh, Torrefazione Italia Coffee, and Ethos Water 1. Starbucks is also known for the diversification of its business operations: implementing creative food items and merchandise. For example, they implemented coffee cubes where the ice cubes are made out of coffee to provide a more potent coffee flavor in their drinks 19. The quality of these said products is consistent throughout each location which in return strengthens the

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Starbucks: Brand value worldwide 2020. Retrieved April 08, 2021, from http://www.statista.com/statistics/1033406/starbucks-brand-value-worldwide/ 18 Lock, P. (2021, March 24). Starbucks revenue worldwide 2019. Retrieved April 08, 2021, from http://www.statista.com/statistics/266466/net-revenue-of-the-starbucks-corporation-worldwide 19 May, A. (2017, May 18). Starbucks' coffee ice cubes could save summer drink orders. Retrieved April 08, 2021, from http://www.usatoday.com/story/news/nation-now/2017/05/18/starbucks-coffee-ice-cubes-pack-caffeine-prevent-dilut ion/329549001/

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company. Another operation included in their strengths is reinvestment and efficient operations, which consist of the company reinvesting their profit into new locations and strategic planning20. The company's treatment of employees allows for more areas as more people want to work there. Starbucks is listed as one of Fortune's Top 100 places to work. For example, in recent news, the company has decided to increase U.S. employees' mental health benefits 21. While providing benefits to their employees, the company also takes care of their customers through incentives such as a loyalty program. For every dollar spent, the customer receives two stars allocated to their account. Once the customer reaches a certain number of stars, they receive freebies like drinks, money off their drinks, and merch1. Last but most importantly, Starbucks' corporate social responsibility sets them apart in their industry. For instance, their social impact goals for 2020 include1: ● Creating more employment opportunities for people of color and veteran families. ● Strengthening communities through community service. ● Minimizing their environmental footprint by implementing greener retail (energy efficiency, more sustainable power).

20 Team, T. (2016, September 19). Let's look at starbucks' growth strategy. Retrieved April 08, 2021, from http://www.forbes.com/sites/greatspeculations/2016/09/19/lets-look-at-starbucks-growth-strategy/?sh=773e2f913d7 1%29 21 Wiener-Bronner, D. (2019, September 05). Starbucks plans to improve US employees' mental health benefits. Retrieved April 08, 2021, from http://www.cnn.com/2019/09/05/business/starbucks-mental-health

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Weaknesses With strengths come weaknesses as Starbucks is such a big brand. The first weakness is their pricing, in which a majority of their products are found at other coffee establishments for cheaper1. Additionally, many of these products can be easily imitated as they are not unique, and places such as McDonald's McCafe and Dunkin' Donuts offer the same products. As mentioned priorly in the strengths section, the standard for products is identical throughout all locations. However, this is also a weakness because consumers' preferences change depending on the area. For instance, Starbucks in Italy should not have the same products as Starbucks in the U.S. because they have different preferences. In 2018, there was heavy criticism towards the company due to the amount of taxes they paid in the previous year in the U.K. It was researched by the Financial Times; they only paid $5.9 million in taxes from profits of $213 million. Starbucks was under significant scrutiny, which led to some losses of consumers22. Although the company has many important social initiatives, several environmental and social activists have accused them of unethical procurement practices. For example, it was revealed the farms in which Starbucks sourced coffee beans had children as young as eight working full labor days23.

22 Selby-Green, M. (2018, September 19). Starbucks' EU unit paid just 2.8% in UK tax last year. Retrieved April 08, 2021, from http://www.businessinsider.com/the-european-division-of-starbucks-paid-28-uk-tax-last-year-2018-9 23 Guardian. (2020, March 01). Children as young as eight picked coffee beans on farms supplying Starbucks. Retrieved April 08, 2021, from http://www.theguardian.com/business/2020/mar/01/children-work-for-pittance-to-pick-coffee-beans-used-by-starbuc ks-and-nespresso

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One of their last weaknesses is the rate at which they have recalled their products. Over the course of many years, Starbucks has recalled highly-demanded products, such as their coffee presses, which has negatively impacted their brand image and customer base1.

Opportunities As an ever-growing company, Starbucks has many opportunities to expand and grow. The expansion into developing markets like Europe, China, and India is an excellent opportunity for Starbucks. Additionally, the company can diversify its menu in these locations for that specific area, attracting new customers and generating more profit. Starbucks can also partner with different brands to introduce new products; thus, strengthening their brand recognition and market share. Although the company is at the forefront of coffee trends and technology, there is always room for growth. They can use trends online and implement the latest technology into their business model to deliver coffee efficiently while attracting new customers. Another opportunity is to differentiate their pricing to cater to all the social classes since they are considered expensive. They can alter their business model to make it more affordable while still generating a profit. During this pandemic, many consumers have moved away from buying coffee to lower the risks of infection. Therefore, Starbucks should strengthen its online channel (social media presence, websites, and online purchases) to keep their customers while remaining safe during the pandemic. Additionally, since the beginning of the pandemic, consumers have been using more food delivery apps. This could be an opportunity for Starbucks to create their own delivery service to improve customer experience. Like Pret a Manger, the

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company can start a coffee subscription service where customers pay a monthly fee to get several coffees24.

Threats While there are many opportunities for Starbucks, the company faces many threats. One major threat is their competition with low-price coffee sellers. These coffee sellers with low costs could potentially threaten Starbucks' future stability. Another competition source is big companies such as Dunkin' Donuts and Mcdonald's, multinational companies that cover a wide range of products and areas. Most of the Starbucks products lack individuality, which manyanother threat can imitate. As a result of the pandemic, many small businesses struggled, which led to many ditching their large multinational chain coffee houses to support local coffeehouses. If this continues post-pandemic, Starbucks may start to struggle with customer loyalty. In March 2018, a California judge ruled that Starbucks and many other companies had to provide warning labels on all their products. This was to prevent a violation of the use of chemicals that could cause cancer25. Additionally, in 2018, Starbucks received heavy criticism when two African-American men were arrested after not using the restroom because they did not buy anything. The CEO later released an apology statement and changed the rules where anyone could use the restrooms26.

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Pret a Manger. (n.d.). How does Pret's coffee subscription work? Retrieved April 09, 2021, from https://www.pret.com/en-GB/your-pret-coffee 25 CNBC. (2018, November 06). California judge rules that coffee Requires cancer warning. Retrieved April 09, 2021, from https://www.cnbc.com/2018/03/30/california-judge-rules-that-coffee-requires-cancer-warning.html 26 Stevens, M. (2018, April 15). Starbucks C.E.O. Apologizes AFTER arrests of 2 black men. Retrieved A...