Drinks MarketWatch

COMPANY SPOTLIGHT: STARBUCKS

Starbucks, Arla Foods collaborate to sell RTD drinks in Europe

Starbucks has entered into an agreement with Arla Foods for the manufacture, distribution and marketing of
Starbucks-branded premium ready-to-drink coffee beverages in Europe.

Arla Foods will manufacture, distribute and market Starbucks premium milk-based ready-to-drink (RTD) coffee beverages
that are made with the same Arabica coffee blends that are used in the handcrafted coffee beverages available at
Starbucks retail stores around the world.

Rich DePencier, vice president of Starbucks global consumer products international, said: "Starbucks global consumer
products business allows us to extend the Starbucks experience to consumers beyond our retail stores while broadening
our distribution channels globally. The success we have had bringing ready-to-drink coffee products to consumers in North
America and Asia demonstrates the global potential of the business and we are proud to join with Arla Foods to bring our
premium RTD beverages to consumers in Europe."

Business Background
Starbucks specializes in coffee and other related beverages. The company sells coffee, Italian-style espresso beverages,
cold blended beverages, and complementary food items, a selection of premium teas, and coffee-related accessories and
equipment. As of September 2008, the company operated 9,217 company operated stores and 7,463 licensed retail stores
worldwide.

Starbucks operates in three segments: the US, international and global consumer products group (CPG). The company
also reports its revenues by product type: beverage, food, coffee-making equipment and other, and whole bean coffees.

The US and international segments both include company-operated retail stores and certain components of specialty
operations. Specialty operations within the US include licensed retail stores, foodservice accounts and other initiatives
related to the company's core business.

International specialty operations primarily comprise retail store licensing operations in more than 30 countries and
foodservice accounts in Canada and the UK. As of September 2008, the international segment had a total of 3,134 licensed
retail stores. The largest markets within the international segment based on number of retail stores, currently are Canada,
Japan and the UK.

The CPG segment includes packaged coffee and tea as well as branded products sold worldwide through channels such
as grocery stores, warehouse clubs and convenience stores. In FY2008, Starbucks coffees and teas were available in
approximately 37,000 grocery and warehouse club stores, 33,000 of which were in the US and 4,000 in international
markets. The company operates primarily through joint ventures and licensing arrangements with consumer products
business partners.

Drinks MarketWatch BFCM0374/ Published 03/2010

© Datamonitor. This brief is a licensed product and is not to be photocopied Page 29

Drinks MarketWatch

Table 2: Key Facts

Address: Products include:

2401 Utah Avenue South
Seattle Italian-style espresso beverages
Washington 98134 Cold blended beverages
USA Fresh food like sandwiches and pastries
Telephone: 1 206 447 1575 Premium teas
Website: www.starbucks.com Coffee-related accessories and equipment
Ticker: SBUX (NASDAQ National Market)
Employees: 176,000
Turnover: $10,383m
Financial year end: September

Source: Datamonitor DATAMONITOR

SWOT Analysis

Table 3: SWOT Analysis

Strengths Opportunities

Strong brand equity lends a competitive edge Strategic transformation initiatives in FY2009
Wide geographic presence Launch of Starbucks VIA Ready Brew instant coffee
Strong research and development capabilities ensure product quality Licensing agreements

Weaknesses Threats

Class-action lawsuits threaten brand image Consumer spending adversely impacted by global economic
Heavy restructuring and store operating expenses impact profits downturn
Increased minimum wages in the US
Increasing health consciousness among American consumers

Source: Datamonitor DATAMONITOR

Drinks MarketWatch BFCM0374/ Published 03/2010

© Datamonitor. This brief is a licensed product and is not to be photocopied Page 30

Drinks MarketWatch

Strengths

Strong brand equity lends a competitive edge

The Starbucks brand is the company's core strength. Starbucks has built a reputation globally for the quality of its products
and its consistently superior consumer experience. Since 1971, Starbucks has been committed to ethically sourcing and
roasting high quality arabica coffee in the world. The company was ranked 85th amongst the 100 Top Brands 2008 by
Business Week. Owing to its premium brand, Starbucks enjoys a high degree of customer loyalty and gains a significant
competitive advantage over lesser known coffee brands.

Wide geographic presence

Starbucks has been operating outside the US since 1987. The company has operations in the Asia Pacific region, China,
the Europe Middle East Africa (EMEA) region, and Latin America. As of September 2008, the company operated 1,979
company-operated retail stores and 3,134 licensed retail stores in these international markets.

Starbucks Coffee International (SCI) opened its first store outside North America in Tokyo, Japan in 1996. Since then,
Starbucks has offered its services in nine countries throughout the Asia Pacific region, including Australia, Indonesia,
Japan, Malaysia, New Zealand, Philippines, Singapore, South Korea and Thailand. Additionally, the company operated
more than 660 Starbucks locations throughout Greater China, a region including China, Hong Kong, Macau and Taiwan.
Starbucks also operates in several countries in the EMEA region, of which the UK represented the largest market,
accounting for nearly 700 of the 1,500 locations throughout the region. Within Latin America, Starbucks operates in seven
countries including Argentina, the Bahamas, Brazil, Chile, Mexico, Peru and Puerto Rico.

In line with its long term strategy, Starbucks continues to expand its presence globally through licensing partnerships. For
instance, in March 2009, the company, in partnership with Kraft Foods, planned to launch packaged Starbucks coffee in
France and Germany. A strong geographic presence reduces the business risk associated with specific markets, and also
expands the company's revenue generating capacity.

Strong research and development capabilities ensure product quality

The core strength behind Starbucks's brand is the quality of its products. The company has a strong research and
development team which is responsible for the technical development of food and beverage products and new equipment.
The company recently launched Starbucks VIA Ready Brew instant coffee developed using its proprietary technology to
preserve the coffee's freshness.

Starbucks invests substantial amount of resources on technical research and development activities including customary
product testing and product and process improvements. In FY2008, Starbucks spent approximately $7.2 million on
technical research and development activities, an increase of 10.7% over 2006. Starbucks's focus on quality and product
innovation helps sustain the brand value of the company.

Drinks MarketWatch BFCM0374/ Published 03/2010

© Datamonitor. This brief is a licensed product and is not to be photocopied Page 31

Drinks MarketWatch

Weaknesses

Class-action lawsuits threaten brand image

Starbucks has been involved in certain lawsuits. A class-action lawsuit was filed by a former employee in 2004, alleging
that the company violated the California Labor Code by allowing shift supervisors to receive tips. In March 2008, Starbucks
was ordered to pay California baristas more than $100 million. The company was ordered to pay back tips, with interest,
that the company had handed over to shift supervisors. Similar suits have been filed in Minnesota and Massachusetts.

In February 2009, another class-action lawsuit was filed against the company by an employee for laptop data breach. In
connection with this lawsuit, Starbucks offered its employees one-year's free credit monitoring and protection for its lapse in
security. Such incidents erode consumer trust and can significantly erode Starbucks's brand value.

Heavy restructuring and store operating expenses impact profits

Starbucks's profitability took a hit in 2008 because of restructuring expenses. In spite of more than 10% increase in revenue
in FY2008, Starbucks's operating profit took a hit. The company recorded an operating profit of $503.9 million during
FY2008; this represented a 52.2% decline over 2007. The drastic decline was mainly the result of restructuring charges,
primarily related to the significant US store closures; higher cost of sales including occupancy costs and store operating
expenses. Consequently, the net profit declined annually by 53% in FY2008. If Starbucks is unable to successfully
implement its transformation initiatives and continues to suffer declining profits, it would affect the company's growth plans
and also hamper investor confidence.

Opportunities

Strategic transformation initiatives in FY2009

Although Starbucks anticipates declining comparable store sales for FY2009 due to the ongoing global downturn, the
company has put in place certain significant actions to streamline its businessincluding underperforming store closure
plans, restructuring of the Australia store base, new store openings in key international markets and certain new food and
beverage offering.

Starbucks intends to align the company's cost structure to its current business strategy with a planned $500 million
structural expense reduction in FY2009. The company plans to close approximately 395 underperforming company-
operated stores in the US by FY2009. Starbucks also planned to restructure its Australian business by closing 61 company-
operated stores, focusing on the remaining 23 stores in three key metro areas. In addition, the company also plans to
reduce approximately 1,000 open and filled positions to rationalize its infrastructure for the reduced number of stores. As
per company estimates, the combination of the US and Australia store closures and head count reductions will result in a
pre-tax benefit to operating income of approximately $200-210 million in FY2009.

Drinks MarketWatch BFCM0374/ Published 03/2010

© Datamonitor. This brief is a licensed product and is not to be photocopied Page 32

Drinks MarketWatch

Starbucks plans to be cautious in its approach to new store openings, as it factors in the current global economic climate.
Internationally, Starbucks is planning to open approximately 700 net new stores in FY2009, two-thirds of which are
expected to be licensed.

Starbucks is looking for new ways to meet customers' needs for value as well as quality, in the current difficult economic
times. For example, in March 2009, Starbucks introduced a selection of popular coffee and breakfast pairings for $3.95; this
offer provides customers with an average savings of as much as $1.20, and with ethically traded coffee and quality
ingredients.

These strategic initiatives are expected to help the company contain costs and earn considerable revenues even in a
difficult economic environment.

Launch of Starbucks VIA Ready Brew instant coffee

Starbucks entered the $17 billion instant coffee market with the launch of Starbucks VIA Ready Brew instant coffee in
March 2009. Starbucks VIA Ready Brew replicates the body and flavor of Starbucks coffee in an instant form. Unlike many
instant coffees which use chemicals and by-products, Starbucks VIA Ready Brew is natural roasted coffee, made without
preservatives. In developing Starbucks VIA Ready Brew, the company developed a proprietary (patent-pending) technology
to preserve the coffee's taste, quality and freshness. This instant coffee is currently available at Starbucks, Target stores
and Barnes & Noble Cafés in Chicago and Seattle in the US. The launch of the new innovative instant coffee is expected to
bring incremental revenues for the company in the near term.

Licensing partnerships

Starbucks licenses the rights to produce and market its branded products through partnerships, both domestically and
internationally. In August 2008, Starbucks, in partnership with PepsiCo and Unilever entered a licensing agreement for the
manufacturing, marketing and distribution of Starbucks super-premium Tazo Tea ready-to-drink (RTD) beverages including
iced teas, juiced teas and herbal infusions in the US and Canada. The company entered a similar agreement with Unilever
to distribute Starbucks ice cream in September 2008.

Starbucks has also licensed the rights to produce and distribute Starbucks branded products to two partnerships in which
the company holds 50% equity interests: The North American Coffee Partnership with the Pepsi-Cola Company develops
and distributes bottled Frappuccino beverages and Starbucks DoubleShot espresso drinks, and Starbucks Ice Cream
Partnership with Dreyer's Grand Ice Cream develops and distributes superpremium ice creams. Through these licensing
partnerships, Starbucks would leverage the partners' capabilities to enhance its presence in existing markets.

Drinks MarketWatch BFCM0374/ Published 03/2010

© Datamonitor. This brief is a licensed product and is not to be photocopied Page 33

Drinks MarketWatch

Threats

Consumer spending adversely impacted by global economic downturn

As a retailer dependent upon consumer discretionary spending, Starbucks will face an extremely challenging FY2009. All
major western including the US, the UK, Germany, France, Italy, Spain, Japan and Australia are in the grip of recession
and are forecast to remain so through 2009. Even the key emerging market economies are currently experiencing
downturns, including China, Middle East and Brazil.

The global economic downturn has led to a severe decline in consumer confidence. Consumers also have less money for
discretionary purchases as a result of job losses, foreclosures, bankruptcies and reduced access to credit. A decrease in
consumer confidence and the resultant curbed consumer spending would result in decreases in customer traffic and
average value per transaction. Starbucks's business is highly sensitive to changes in customer traffic, and the current
economic downturn would put downward pressure on the company's margins.

Increased minimum wages in the US

In recent times, tight labor markets, increased overtime, government-mandated increases in minimum wages and a higher
proportion of full-time employees have resulted in an increase in labor costs, which could materially impact the company's
operating margins. The federal minimum wage rate in the US, which remained at $5.15 per hour since 1997 reached $6.55
per hour in July 2008. It is expected to further rise to $7.25 an hour from July 2009. Starbucks employed about 143,000
people in the US, as on September 2008. Increased labor costs would increase overall costs and affect the company's
operating margins.

Increasing health consciousness among American consumers

Starbucks's products contain caffeine, dairy products, sugar and other active compounds, the health effects of which are
the subject of increasing public scrutiny. It is suggested that excessive consumption of caffeine, dairy products, sugar and
other active compounds can lead to a variety of adverse health effects.

Particularly in the US, there is increasing consumer awareness of health risks, including obesity, due in part to increasing
publicity and attention from health organizations, as well as increased consumer litigation based on alleged adverse health
impacts of consumption of various food products. Increasing health awareness among American consumers could
significantly reduce the demand for the company's beverages and food products.

Drinks MarketWatch BFCM0374/ Published 03/2010

© Datamonitor. This brief is a licensed product and is not to be photocopied Page 34

Copyright of MarketWatch: Drinks is the property of Datamonitor Plc and its content may not be copied or
emailed to multiple sites or posted to a listserv without the copyright holder's express written permission.
However, users may print, download, or email articles for individual use.