Drinks MarketWatch

COMPANY SPOTLIGHT: STARBUCKS

Starbucks Q1 net earnings down, to cut 6,000 jobs

Starbucks has reported net earnings of $64.3 million, or $0.09 per diluted share, for the first quarter ended
December 28, 2008, compared to $208.1 million, or $0.28 per diluted share, in the same period of fiscal 2008. The
company anticipates that its labor efficiency initiatives could result in a reduction of as many as 6,000 store
positions over the course of fiscal 2009.

For the first quarter of fiscal 2009, consolidated net revenues were $2.6 billion, a decrease of 6%, compared with $2.8
billion for the first quarter of fiscal 2008.

Starbucks plans to close approximately 300 additional underperforming company-operated stores, approximately 200 in the
US and the remainder in international markets. These stores are in addition to the approximately 600 US and 61 Australian
market store closures announced in July 2008. The majority of the new store closures are expected to occur during the
remainder of fiscal 2009.

Starbucks has further reduced its fiscal 2009 new company-operated store openings target in the US to 140 new stores
from its previous target of 200 new stores. Internationally, the company now plans to open 170 new stores in fiscal 2009,
down from the company's previous expectation to open 270 new stores. Accordingly, capital expenditures for fiscal 2009
are now expected to be approximately $600 million, a $100 million reduction from the company's previous estimate.

The company has also lowered its net new licensed store opening target, and is now expecting to open approximately 125
net new licensed stores in the US and approximately 360 net new licensed stores internationally.

As part of the effort to align the company's non-retail support organization with the current operating environment,
Starbucks plans a global workforce reduction that will result in approximately 700 non-store partners being separated from
the company in the US and internationally; about half of these job cuts will be at the company's support center in Seattle.

The cost reduction initiatives announced now, combined with $400 million in targeted cost savings announced in early
December 2008, increase Starbucks fiscal 2009 cost reduction target to $500 million. This target consists of anticipated
savings resulting from store closures, reduction of support staff and infrastructure, supply chain efficiencies, store
operations improvements, and various other initiatives across the business.

The company's cost reduction initiatives delivered approximately $75 million of benefit in the first fiscal quarter, and are
expected to deliver approximately $100 million in the second quarter, approximately $150 million in the third, and
approximately $175 million in the fourth quarter of fiscal 2009.

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Business background
Starbucks Corporation specializes in the sale of coffee and other beverages. The company purchases and roasts
high-quality whole bean coffees and sells them, along with fresh coffees, Italian-style espresso beverages, cold
blended beverages, a variety of complementary food items, coffee-related accessories and equipment, a selection
of premium teas and a line of compact discs, primarily through company-operated retail stores. As of February
2008, the company operates 7,087 company-operated stores and 4,081 licensed stores spread across 50 states in
the US. Further, the company operates in 43 countries outside the US, with 1,796 company-operated stores and
2,792 joint venture and licensed stores.

The company derives its revenues from three operating segments: US, international and global consumer products group
(CPG).

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 Starbucks' core business. International specialty operations primarily include retail store licensing operations in
more than 30 countries and foodservice accounts in Canada and the UK. The CPG segment includes the company's
grocery and warehouse club business, as well as branded products operations worldwide.

In the FY2007, Starbucks opened 1,342 company-operated stores, including 11 Seattle's Best Coffee stores and four Hear
Music retail stores. Also, the company operated approximately 2,300 Drive Thru locations. All Starbucks stores offer a
choice of regular and decaffeinated coffee beverages, a selection of Italian-style espresso beverages, cold blended
beverages, iced shaken refreshment beverages, a selection of teas and packaged roasted whole bean coffees. Starbucks
stores also offer a selection of fresh pastries and other food items, sodas, juices, bottled water, coffee-making equipment
and accessories, a selection of compact discs and seasonal novelty items. Smaller Starbucks stores and kiosks sell a line
of coffee beverages, a limited selection of whole bean coffees and a few accessories, such as travel tumblers and logo
mugs. A selection of prepared sandwiches and salads were carried in approximately 4,800 US and 1,600 International
stores in FY2007.

Specialty operations focus to develop Starbucks' brands outside the company-operated retail store environment through a
number of channels. In certain situations, Starbucks has an equity ownership interest in licensee operations. On September
2007, Starbucks operated 3,891 license stores in the US and 2,615 licensed retail stores outside the US.

The company, through a licensing relationship with Kraft Foods (Kraft), sells a selection of Starbucks, Seattle's Best Coffee
and Torrefazione Italia branded packaged coffees and Tazo teas in grocery and warehouse club stores throughout the US.
Kraft manages all distribution, marketing, advertising and promotion of these products. Starbucks sells packaged coffee
and tea internationally both directly to warehouse club customers, such as Costco and through an expanded licensing
relationship with Kraft. In FY2007, Starbucks's coffees and teas were available in approximately 34,000 grocery and
warehouse club stores, with 30,000 in the US and 4,000 in International markets.

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Starbucks licenses the rights to produce and market Starbucks branded products through several partnerships both
domestically and internationally. The North American Coffee Partnership, a joint venture with the Pepsi-Cola Company, in
which Starbucks is a 50% equity investor, manufactures and markets ready-to-drink beverages including bottled
Frappuccino beverages and Starbucks DoubleShot espresso drinks. Other partnerships produce and market branded
products in these categories, superpremium ice cream (joint venture with Dreyer's Grand Ice Cream), premium coffee
liqueur (license agreement with Beam Global Spirits & Wine) and chocolate (license agreement with The Hershey
Company). Internationally, Starbucks licenses Starbucks Discoveries, a ready-to-drink chilled cup coffee beverage, in
Japan, Taiwan and South Korea.

The company sells whole bean and ground coffees, including the Starbucks, Seattle's Best Coffee and Torrefazione Italia
brands, as well as a selection of premium Tazo teas and other related products, to institutional foodservice companies that
service business and industry, education, healthcare, office coffee distributors, hotels, restaurants, airlines and other
retailers. The majority of the company's direct distribution accounts are through national broadline distribution networks with
SYSCO Corporation and United States Foodservice. Starbucks foodservice sales, customer service and support resources
are aligned with those of SYSCO Corporation and US Foodservice. Starbucks and Seattle's Best Coffee are the only super
premium national-brand coffees actively promoted by SYSCO Corporation.

Table 2: Key Facts

Address: Products and Services Include:

2401 Utah Avenue South
Seattle Coffee
Washington 98134 Handcrafted beverages
USA Fresh Food
Telephone: 1 206 447 1575 Starbucks entertainment
Fax: 1 206 447 0828 Global consumer products
Website: www.starbucks.com Starbucks card
Ticker: NASDAQ National Market Ticker: SBUX Brewing equipment
Employees: 172,000
Turnover: $9,411.5m
Financial year end: September

Source: Datamonitor DATAMONITOR

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SWOT Analysis

Table 3: SWOT Analysis

Strengths Weaknesses

Strong brand image High reliance on the US operating segment

Wide geographic presence Declining profits in Q3'3008

Opportunities Threats

Closure of underperforming stores Rising labor wages in the US

Investment in new stores Economic slowdown in the US and UK
Increasing online sales

Source: Datamonitor DATAMONITOR

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Strengths

Strong brand image

Starbucks is a global brand. High quality products and a consistently-positive consumer experience have helped the
company build a strong brand image. Starbucks, for instance, was ranked 85th in the 100 Top Brands 2008 ranking of
Business Week and Interbrand, an international branding consulting firm. The BusinessWeek-Interbrand combine valued
the Starbucks brand at $3,879 million in 2007, up from $3,099 million in 2006, an increase of 7%.

Starbucks uses innovative and cost effective marketing strategies to build its image including billboards, freestanding
inserts in newspapers products and samplings, as well as innovative schemes such as paying for a day of free parking in a
downtown area. This strong brand image helps the company to attract new customers to its stores, which leads to
additional revenues.

Wide geographic presence

Starbucks has large scale of operations in the US and international (non-US) markets. The company operates 7,087
company operated stores and 4,081 licensed stores spread across 50 states in the US. Furthermore, the company
operates in 43 countries outside the US, with 1,796 stores across Australia, Canada, Chile, China (Northern China,
Southern China), Germany, Ireland, Puerto Rico, Singapore, Thailand and the UK.

The company is also involved in 2,792 joint venture and licensed stores in Austria, the Bahamas, Bahrain, Brazil, Canada,
China (Shanghai/Eastern China), Cyprus, Czech Republic, Denmark, Egypt, France, Greece, Hong Kong, Indonesia,
Ireland, Japan, Jordan, Kuwait, Lebanon, Macau S.A.R., Malaysia, Mexico, the Netherlands, New Zealand, Oman, Peru,
Philippines, Qatar, Romania, Russia, Saudi Arabia, South Korea, Spain, Switzerland, Taiwan, Turkey, UAE and the UK.
This wide geographic presence provides access to new markets and reduces the company's business risks.

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Weaknesses

High reliance on the US

Starbucks' financial performance is highly dependent on its US operating segment, which contributed 78% of total revenues
in FY2007. In Q3 2008, the US operating segment contributed 79% of total retail revenues. Any substantial decline in these
operations could materially adversely affect the company's business and financial results.

Declining profits in Q3 2008

Although the company recorded robust financial performance in recent years, Starbucks recorded a decline in operating
and net profit in Q3 3008. Operating profits declined from $245.2 million in Q3 2007 to an operating loss of $21.6 million in
Q3 2008. Net profits also declined, from $158.3 million in Q3 2007 to a net loss of $6.7 million in Q3 2008. The decline was
primarily due to higher cost of sales and declining consumer traffic in US stores. The decline in profits could limit the
company's investments in growth opportunities.

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Opportunities

Closure of underperforming stores

Starbucks planned to close some of its store operations in the US as part of its transformation strategy. The company
decided to close approximately 600 underperforming stores in the US market. The stores identified for closure are spread
across the US markets with approximately 70% of them opened since the beginning of FY2006. These stores are identified
as unprofitable at the store level and are also not projected to provide acceptable returns in the foreseeable future. Store
closures would strengthen the US store portfolio and enable Starbucks to focus on enhancing the value for its partners and
customers.

Investment in new stores

Starbucks plans to open significantly new stores in the US during 2009-11. The company plans to open approximately 250
company-operated stores in each of the three years. Also, the company plans to continue to accelerate its international unit
expansion by new store openings which include: approximately 1,050 in 2009; 1,150 in 2010; and 1,300 in 2011. The total
store count in the US would be approximately 21,500 stores by the end of FY2011. Consequently, the company's
international store would grow from approximately 30% to over 40% of the global store portfolio. The new store openings
would help the company to expand its geographic presence.

Increasing online sales

Online retail spending is increasing extensively. Retail e-commerce revenue (excluding travel) is expected to record $146
billion in 2008, an increase of 14.3% over 2007. Further, from 2007-2012, sales are expected to increase at an 11.3%
average annual growth rate. StarbucksStore.com offers the lineup of Starbucks whole bean and ground coffees, including
seasonal, promotional and the very special Starbucks Black Apron Exclusives coffees. Through an easy-to-shop and
efficient website, StarbucksStore.com offers premium coffee with affordable delivery. Increasing online retail spending in
the US would boost revenues of the company.

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Threats

Rising labor wages in the US

Labor costs are rising 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 are resulting in an increase in labor costs, which could
materially impact the company's results of operation. The federal minimum wage rate in the US, which remained at $5.15
per hour since 1997, has increased to $5.85 per hour from July 2007. The federal minimum wage rate is further expected to
rise to $6.55 an hour in July 2008, and then to $7.25 an hour effective July 2009. The US is the key market for Foot Locker
contributing about 75% to the company's total revenues. The company employs 172,000 people. Increased labor costs
would increase overall costs and may affect the company's margins.

Economic slowdown in the US and UK

The US and Europe are the two key markets for the company. According to IMF, the real GDP growth rate for the US would
decline from 2.02% in 2007 to 0.05% in 2009. Against the background of recent turmoil in financial markets, very weak
housing market indicators and consumer sentiments, IMF has recently lowered its projections for the US growth in 2008.
Further, the growth in the UK is also expected to fall from 3.0% in 2007 to 1% in 2008. Economic downturn in the US and
UK would cause reduction in the spending by the clients. A weak economic outlook for the US and UK would impact the
performance of the company.

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