MBA MGMT D31 Nisanart Thadabusapa

IndividuaI Case Study: Starbucks D540068

SCHULTZ'S STRATEGIC VISION OF STARBUCKS

As a new private company in 1987, Starbucks Corporation (hereinafter referred to as "the Company or "SBUX) was
led by the new CEO, Howard Schultz. From the beginning, Schultz had a strategic vision of SBUX becoming a
nationaI company with vaIues and guiding principIes that empIoyees couId be proud of and the most
recognized and respected brand name in worId and aIso being admired for its corporate responsibiIity. These
values are "to buiId a company with a souI" and to pursue "the perfect cup of coffee" by using the best beans
and roasting them to perfection for customer experience.

Since 1987, SBUX has implemented several business strategies with the objectives to gain access in larger markets.
Strategic alliance and join venture strategy is one of the key growth strategies the Company implemented in order to
gain access in larger markets, especially outside North America. The Company started its international operation
since its first international SBUX store in 1996. nternational expansion began ever since.

During the Dot Com Crash 2000 till the Subprime 2008, besides economic depression, top management changes
have significantly affected the Company's performance. Under Donald's lead in 2006, the Company faced the risk of
over expansion. With his objective of opening 40,000 stores worldwide and his rapid store expansion strategy, the
Company took its eye off operations and became distracted from the core of their business. SBUX' original values of
Schultz were overlooked and his original strategic vision was disregard. The Starbucks brand had become less of a
luxury and more of a commodity, hurting its original image of Starbucks and causing its stores to be weaker
candidates for the third place of its customers. Distressing investors, SBUX's share price during 2007 had been
steadily declining until the return of Howard Schultz as the CEO in early 2008.

Upon Schultz's return, a major restructuring and revitalization initiative was taken to retransform SBUX back to the
Company Schultz had envisioned before he stepped down in 2000 (i.e. Starbucks experience) and to push the
Company to the new era of differentiation and innovation. His transformation agenda for SBUX had three objectives:
"strengthen the Core, elevate the Experience, and invest and grow.

As of 2010, Howard SchuItz's strategy vision for Starbuck has not yet changed. He stiII hoIds on to the same
strategic vision with the originaI key vaIues. These simple phrases have given Starbucks direction to a highly
successful enterprise.

Howard Schultz has committed to his strategic vision seriously since the beginning and it is not IikeIy that this
strategic vision wiII undergo further evoIution unIess he pIans to change SBUX into a totaIIy different kind of
business. Schultz's original strategic vision should be the anchor that holds all the rest together. SBUX's strategy
may need to change in response to internal or external changes to ensure that the vision will be achieved. Schultz's
transformation strategy after the crisis aims to ensure that Starbucks will achieve the original strategic vision, which
has given SBUX direction to a highly successful enterprise with different pathways from strategies implemented in
Schultz's first era. Cost cutting and labour efficiency initiatives as well as innovation (e.g. the introduction of Starbucks
VA instant coffees) was made the guiding strategy for this new era.

STARBUCKS' KEY POLICIES, PRACTICES, BUSINESS PRINCIPLES, AND PROCEDURES UNDERLYING ITS STRATEGIES

The main business practices that Schultz always holds on to is to incIude his peopIe in the decision-making
process and to cement the trust between management and empIoyees because he believes that employees have
a significant impact on customers' experience at Starbucks store. Health care coverage, a stock option plan for all
part-time and full-time partners as well as its competitive pay scales and comprehensive benefits for both full-time and
part-time partners are key policies to win employee loyalty and commitment to the Company's mission. To ensure that
all partners hold on to the same strategic vision, the Company provides employee training programs to ingrain the
Company's values, principles, and culture and to pass on their knowledge about coffee and their passtion about
Starbucks and intiates partner recognition programs to recognize partner contribution.

Store expansion strategy in mid-90s and even now requires the Company to prepare for future needs. With Schultz's
foresight, the key expansion procedure includes (i) hiring executives who are knowIedgeabIe beyond what is
currentIy needed (ii) buiIding production faciIities beyoud current need, and (iii) instaIIing support systems
for a strong foundation for rapid, profitable growth in the future. However, this is a risky move to make since many
companies have gone out of business when demand does not correspond with increased supply.

Coffee roasting operations is aIso another key procedure of SBUX to ensure quaIity standards of aII
Starbucks coffee products are met. The Company's quality control policy is very strict. t discards the entire batch of
inventory if one single bean is found to be under quality standards. Moreover, for coffee beans used to prepare
beverages in store, the life cycle is only 3 months but limited to only 7 days after the bag is opened. This is to ensure
MBA MGMT D31 Nisanart Thadabusapa
IndividuaI Case Study: Starbucks D540068

the high quality standards of Starbucks' products. Another key policy is to offer no flavored coffee beans in order to
ensure the quality taste and aroma of the original beans and thus, quality of Starbucks products.

Last but not least, SBUX is very enthusiastic when it comes to Corporate Social Responsibility ("CSR). Starbucks'
coffee purchasing strategy reveals its high commitment level to CSR. Key poIicies underlying this strategy include (i)
fair trade prices paid for raw materiaIs (i.e. the Company uses future contracts to hedge against price fluctuations
to ensure that small farmers receive enough margins for living) and (ii) work directIy with growers/ suppIiers of
coffee beans, teas, and cocoa to promote environmentaI-friendIy cuItivation methods that protect biodiversity
and are environmentally sustainable. Starbucks also promotes recycling and tries to contribute positively to the
environment.

STARBUCKS' VALUES AND ITS STRATEGY

The two key values include "to buiId a company with a souI" (i.e. Starbucks experience "third place beyond home
and work with unique character and value) and to pursue "the perfect cup of coffee" (i.e. with the best quality).
By doing so, the Company focuses so much on controlling the quaIity of Starbucks products and building a cuIture
common to aII Starbucks stores. n order to ensure the quality of the products, the Company emphasizes so much
on its raw materials' suppliers as well as the production procedures to ensure that every single bean is of high quality
standards.

n addition, the Company has its own in-house team of architects and designers to ensure that each store will convey
the right image and character of Starbucks. This is in order to ensure the Starbuck experience for every customer in
every Starbucks store. n order to keep the Company in full control of the quality of its products and the character as
well as the location of its stores (i.e. to ensure Starbucks' values in all stores), the Company avoids franchising.

Under its store expansion strategy, the Company decided to make use of licensing rather than franchinsng since
licensing permits tighter controls over the operations of licensees to ensure the consistency of products and the
Starbucks Experience. Most licensees are prominent retailers with in-depth market knowledge and access. All
licensed store must follow Starbucks' detailed operating procedures and all partners in licensed stores must receive
the same trainings as those in company-operated stores.

Declinging stock price in FY07 was due to the distorted image of the original Starbucks and the losing Starbucks
Experience across all Starbucks stores for its customers. One of the main themes of the transformation strategy was
to bring back the Starbucks' value of being the thrid place for its customers with an objective for long-term sustainable
profitability.

FINANCIAL ANALYSIS (REFER TO FNANCAL FGURES N APPENDX)

n FY2005, it was the first year under Donald's leadership. Rapid store expansion was implemented. Accordiing to
Figure 4 of the Appendix, number of stores openings had accelerated from FY05-FY07 before the Company faced the
issue of over expansion in FY07. The fear of Starbucks becoming much like a commodity rather than its original
premium chain and Donald's failure of maintaining the Starbucks experience distressed investors. The stock price has
steadily declined until the return of Howard Schultz in early 2008. Suffocated by the Subprime crisis in 2008 - a weak
customer traffic, which resulted in high fixed operating expenses, and the costs associated with the store closures and
other actions in its transformation strategy, the Company faced a sharp decline in operating margin and EPS of more
than 50% from FY07(see Figure 1 and Figure 5). The transformation initiative was to reinvest in its partners to ensure
that they still hold Starbuck's vision and to cut expenses that were not consumer-facing. Rigorous cost-containment
initiatives to improve the bottom line in FY08 resulted in strong free cash flow of 274 millions for the Company to
invest in its transformation agenda in the near term (i.e. FY09-FY10).

At the end of fiscal 2009, nearly all of the approximately 800 US company-operated stores and 61 stores in Australia
had been closed (see Figure 3). According to the case, cost reduction (i.e. headcount reductions and store closures)
initiatives in FY09 proceeded as planned with costs of $580 million removed from the cost structure of SBUX. Gross
margin expansion (i.e. 55.8% in FY09 over 30% increase fro FY08) was primarily due to the improved labor
efficiency. However, with store closures, the Company was charged for restructuringing charges (i.e. lease exit and
related costs associated with store closures) under operating expenses, resulting in only 5.7% operating margin (see
Figure 1 and Figure 2).

The Company continues to maintain a strong financial performance, with no short term debt outstanding at the end of
FY09 and with cash and liquid investments totaling $666 million (see Figure 7). Current ratio of 1.29 in FY09 from 0.8
in FU08 (see Figure 6) suggests an improvement in the liquidity position of SBUX with strong cash and liquid
investments. Debt-to-Equity ratio of 0.18 in FY09 as compared to 0.22 in FY08 (see Figure 6) suggests that the
Company's financial position is highly solvent. SBUX is still able to use external fundsin order to take lesser risk of its
MBA MGMT D31 Nisanart Thadabusapa
IndividuaI Case Study: Starbucks D540068

investment in future operations.This strong financial position along with free cash flow generation of $943 million have
provided Starbucks with the financial flexibility to implement its restructuring plans and to make ongoing investments
in its core businesses.

EVALUATION OF HOWARD SCHULTZ'S TRANSFORMATION AGENDA FOR STARBUCKS DURING 2008-2010

The transformation initiatives aim to (i) improve the current state of its U.S. business, (ii) reignite the emotional
connection with customers, and (iii) invest for long-term success. believe that this transformational initiatives will
have an positive impact on the long-term Starbucks business, but the short-term impact is minimal. The stronger
financial position of SBUX in FY09 was mostly due to the cost reduction (i.e. headcount reductions and store closures)
and labor efficiency initiatives. Other initiatives have only a minimal impact on its short-term earnings. The customer
rewards program, for instance, has proven to increase sales in a near term. But the future is different story for this
initiative.

The introduction of the Mastrena espresso machine is clearly an investment for long-term success. However,
friendilers and better trainned baristas will reconnect the emotional link with customers more than an espresso
machine ever could do. The initiative to ethically source coffees to build stronger emotional connection with customers
does not sound very strong for a near-term success. But it is a good long-term investment. Moreover, social media
initiative was to introduce a website where customers can submit their ideas on how Starbucks can improve its
business. This could possibly help Starbucks to reconnect with customers but it would take sometimes to do so. For
the least, this initiative is not for a near-term success. Further, since the vast majority of Starbucks beverages come
from espresso drinks, not brewed coffee. Therefore, investment in the improved brewed coffee seems to be a sound
investment for the futuer rather than in a short term. Lastly, the acquisition of the Clover Brewing machines is also a
good long-term investment because these new high-end brewers only appeal to cofee specialists and they only make
single cups of coffee on-demand. These brewers will make profit in a long run. However, as in a near term, it does not
have an immidiate impact on sales during FY08-10.

All in all, think that Howard Schultz has done a great job in retransforming Starbucks back to a highly profitable
company with unique characters and values.

KEY ISSUES IN THE MID-2010

O Intense competition with respect to product quality, service, convenience, and price could lead the Company to
reduced profitability. n the US, large competitors in the fast-service restaurant sector on selling high-quality
specialty coffee beverages (i.e. McDonalds and Dunkin Donuts) could adversely affect SBUX's financial
performance. n the internatinoal markets, well-established competitors could delay SBUX's growth.
O Increases in the cost of high-quaIity Arabica coffee beans in FY2010
1
could have an adverse impact on our
business and financial results. The price volatility of high-quality Arabica has a significant impact on SBUX's ability
to enter into fixed-price purchase commitments.
O HighIy dependent on the financiaI performance of the US operating segment significant improvement in
FY09-FY10 was due to the restructuring efforts (mostly done in FY09) and improve sales. f the improvements are
not sustainable going forwards or the sales declines, the business of SBUX could be adversely affected.
O SBUX's future growth depends so much on the internationaI operating segment. t is, therefore, very
important for SBUX to be successful internationally. Some factors (e.g. tastes, product preference) that are critical
to the success of nternational segment are different from those affecting the US operating segments. SBUX is
also exposed to many risks of conducting business abroad, such as foreign currency fluctuations, political
instability, difficulty in ensuring the consistency of product quality and service, due to distance, language and
cultural differences.

RECOMMENDATIONS

O Expand its gIobaI presence Since this is the future source of SBUX's income, the ability to understand the
internatinal context is important. The BRC nations are going to play a major part in the future of Starbucks as they
begin to grow. These nations have millions of target customers and it is important that Starbucks has a strong
market presence in these areas.
O Secure a Iong-term suppIy of the premium quaIity Arabica to ensure that the Company will have enough
supplies for many years to come.
O Continue paying dividends with more than $1 billion in cash and cash equivalent as of FY2010 and consistent
dividend pay-outs since Q2 in FY2010, the Company will be exposed to risk of scaring-off investors if they stop
paying out dividents in the following quarters with no good reasons. And by consistently paying out dividends,
SBUX will continue attracting new dividend-seeking investors.

1
http://www.ft.com/cms/s/0/41b4ddbe-dcff-11df-884a-00144feabdc0.html#axzz1ZhcqX07
MBA MGMT D31 Nisanart Thadabusapa
IndividuaI Case Study: Starbucks D540068

Appendix
Figure 1: Important FinanciaI Figures of SBUX for FY2005-FY2009
Unit: USD MiIIion FY2005 FY2006 FY2007 FY2008 FY2009
Revenue 6,369 7,787 9,411 10,383 9,775
Gross Margin% 22 21.3 23.3 19.2 55.8
Operating ncome 781 894 1,054 504 562
Operating Margin% 12.3 11.5 11.2 4.9 5.7
Net Income 494 564 673 316 391
Earnings Per Share 0.61 0.71 0.87 0.43 0.52
Dividends
Shares (Million) 815 793 770 742 746
Book Value Per Share 2.56 2.81 2.97 3.36 4.08
Operating Cash Flow 924 1,132 1,331 1,259 1,389
Capital Spending -644 -771 -1,080 -985 -446
Free Cash FIow 280 360 251 274 943
Working Capital -18 -406 -459 -442 455

Figure 2: SBUX Gross Margins VS Operating Margins (FY2005-2009)

Figure 3:Stores Opened during the Year (net of cIosures)

Stores Opened during the Year (net of cIosures)
United States FY2005 FY2006 FY2007 FY2008 FY2009
Company-operated stores 580 810 1065 445 -474
Licensed stores 596 733 723 438 35
InternationaI
Company-operated stores 177 240 286 236 89
Licensed stores 319 416 497 550 305
TotaI Store Openings (net of cIosures) 1672 2199 2571 1669 -45

Figure 4: TotaI Stores Openings in the US and InternationaIs (FY2005-FY2009)

22.00
21.30
23.30
19.20
55.80
12.30
11.50 11.20
4.90
5.70
0
10
20
30
40
50
60
FY2005 FY2006 FY2007 FY2008 FY2009
Gross Margin% Operating Margin%
1672
2199
2571
1669
-45
1176
1543
1788
883
-439
496
656
783 786
394
-1000
-500
0
500
1000
1500
2000
2500
3000
FY2005 FY2006 FY2007 FY2008 FY2009
MBA MGMT D31 Nisanart Thadabusapa
IndividuaI Case Study: Starbucks D540068

Appendix (Con't)
Figure 5: Growth Rate - Year Over Year (FY2005-FY2009)

FY2005 FY2006 FY2007 FY2008 FY2009
Operating Income % 27.95 14.52 17.9 -52.19 11.53
EPS % 28.42 16.39 22.54 -50.57 20.93

Figure 6: Important FinanciaI Ratios

FY2005 FY2006 FY2007 FY2008 FY2009
Current Ratio 0.99 0.79 0.79 0.8 1.29
Debt/Equity 0.24 0.22 0.18

Figure 7: BaIance Sheet (PartiaI) (FY2006-FY2009)

Unit: USD MiIIion FY2006 FY2007 FY2008 FY2009
Current Assets
Cash
Cash and cash equivalents 313 281 270 600
Short-term investments 141 157 52 66
TotaI cash 454 439 322 666
Receivables 224 288 330 271
nventories 636 692 693 665
Deferred income taxes 89 129 234 287
Prepaid expenses 127 149 169 147
TotaI current assets 1530 1696 1748 2036
FY2006 FY2007 FY2008 FY2009
Current IiabiIities
Short-term debt 701 711 714 0
Accounts payable 341 391 325 267
Taxes payable 128
Accrued liabilities 662 757 630 643
Deferred revenues 232 297 368 389
Other current liabilities 152 154
TotaI current IiabiIities 1936 2156 2190 1581