F i n a n c i a l C

STARBUCKS STRATEGIC DECISION

ABOUT STARBUCKS Starbucks Corporation is an international coffee company and coffeehouse chain based in Seattle, Washington and was founded in 1971 by an English teacher Jerry Baldwin, history teacher Zev Siegel, and writer Gordon Bowker. It is a roaster, marketer and retailer of specialty coffee in the world. It is the largest coffeehouse company in the world, with 19,435 stores in 58 countries, including 12,781 in the United States, 1,241 in Canada, 1,062 in Japan, 976 in Great Britain and 645 in China. Starbucks purchases and roasts whole bean coffees that it sells, along with handcrafted coffee and tea beverages and a variety of fresh food items, through Company-operated stores. The Company also sells a variety of coffee and tea products and license its trademarks through other channels, such as licensed stores, grocery and national foodservice accounts. Many of the company's products are seasonal or specific to the locality of the store. Starbucks-brand ice cream and coffee are also offered at grocery stores. Success of starbucks was the result of its founders' passion for quality coffee as well as exotic tea and their good business sense helped them run a profitable business.The company depended mainly on word-of-mouth to get more people into its stores, then relied on the caliber of its product to give patrons a sense of discovery and excitement. It built customer loyalty cup by cup as buyers of its products developed their palates. However Howard Schultz purchased Starbucks when Jerry Baldwin and Gordon Bowker decided to sell the entire Starbucks operations in Seattle in 1987. STARBUCK'S PERFORMANCE TILL 2008 In 1987, Starbucks had 11 stores and 100 employees, and schultz had this dream to create a national brand around coffee and a unique experience in Starbucks' stores that, hopefully, they would be able to extend from the West Coast to around the country. And from that point on, the dream started becoming a reality, and it almost had a life of its own. What they were building seemed to work wherever they opened stores. They had a little bit of luck and business acumen and perhaps just the fortuitous opportunity that comes along with perfect timing. For 15-plus years or so, almost everything they did worked as they built this very unique brand around coffee and a values-based organization. The first Starbucks location outside North America opened in Tokyo, Japan, in 1996. Starbucks entered the U.K. market in 1998 with the $83 million acquisition of the then 60-

outlet, UK-based Seattle Coffee Company, re-branding all the stores as Starbucks. In September 2002 Starbucks opened its first store in Latin America, in Mexico City. In August 2003 Starbucks opened its first store in South America in Lima. These were all company-owned stores, not franchised. In order to keep the company in full control of the quality of its products and the character and location of its stores" franchising was avoided.Starbucks successfully went to Initial Public Offering (IPO) in June 1992, which turned into one of the most successful IPOs of the year. Being a public company, Starbucks was able to gain a leverage to accelerate the expansion of its network.
INTERNATIONAL PRESENCE OF STARBUCKS STORES

http://en.wikipedia.org/wiki/File:Starbucks_Map.svg

Starbucks has expanded rapidly in number, averaging five stores opening every week, into the 2000s. In recent years however, its endeavor of expansion has been coming to a screeching halt. Little by little, Starbucks has been losing some of the signature traits it had been founded on. In 2008, Mr. Schultz faced a difficult task: He had to slow down the company to make stores feel more like hip neighborhood coffeehouses while also delivering the steady growth that investors have come to expect from Starbucks. FACTORS UNDERMINING STARBUCKS PERFORMANCE 1. ECONOMIC DOWNTURN Economy appeared to have certainly dampened Starbucks' performance. As good times vanished in the Great Recession of 2008, Starbucks found itself in an economic climate that had most people reassessing their daily spending habits on luxury items. The companys revenues and profit tumbled as a result. As the economic doldrums persisted and customers continued to cut back, Starbucks was being forced to make more cuts. Shares of Starbucks had fallen more than 30% in 2008, amid a drastically tightening consumer spending environment and concerns of a U.S. recession.

2. AGGRESSIVE PACE OF NEW STORE OPENINGS It was not too long ago that the arrival of a Starbucks was a major event, a recognition that a town or neighborhood was worthy of the chic Seattle-based chain. But in the last several years, every street corner, airport concourse and roadside rest stop in America seemed to attract a Starbucks. In five years, Starbucks nearly tripled the number of stores worldwide, from 5,886 in 2002 to 15,011 in 2007. In February 2007, a leaked internal memo written by founder Howard Schultz showed that he recognized the problem that his own growth strategy had created: "Stores no longer have the soul of the past and reflect a chain of stores vs. the warm feeling of a neighborhood store." New store openings and new product launches fueled the stock price. But sooner or later chasing quarterly earnings growth targets undermined the its brand. The early adopters who valued the club-like atmosphere of relaxing over a quality cup of coffee found themselves in a minority. To grow, Starbucks increasingly appealed to grab and go customers for whom service meant speed of order delivery rather than recognition . Starbucks introduced new store formats like Express to try to cater to this second segment without undermining the first. But many Starbucks veterans had switched to Peets, Caribou and other more exclusive brands. And while Starbucks used to claim that its aggressive pace of new store openings wouldn't cannibalize sales at existing Starbucks, it got to a point where that clearly was no longer the case. Opening new stores and launching a blizzard of new products created only superficial growth. Such strategies took top management's eye off of improving same store sales year-on-year. This was the heavy lifting of retailing, where a local store manager has to earn brand loyalty and increase purchase frequency in his neighborhood one customer at a time. That store manager's efforts were undercut when additional stores were opened nearby. Eventually, the point of saturation was reached and cannibalization of existing store sales undermined not just brand health but also manager morale. It brings to mind the hilarious joke from the mockumentary "Best in Show" about a married couple meeting at Starbucks...but not at the same Starbucks. The woman said she was sitting at a Starbucks and saw her future husband across the street at another Starbucks. It's funny because it wasn't that far from reality. 3. STIFF COMPETITION Starbucks competitors in the coffee beverage sales included 7-Eleven, Dunkin Donuts, BIGGBY Coffee, Caribou Coffee, McDonald's, Panera Bread, and Einstein Bagels. Competitors such as McDonald's and Dunkin Donuts not only had extensive menus, but also the financial resources and position to leverage their strengths and thus threatened Starbucks profitability. A reason for the popularity of the McDonalds coffee bar was the convenience of being able to get breakfast and a premium roast coffee at the same place. Not only can the customers get breakfast and coffee in one place, they can get their drinks for less. McDonalds priced their drinks about 20% lower than Starbucks. Dunkin Donuts was another direct competitor that had essentially waged war against Starbucks in the coffeehouse market. The primarily doughnut oriented restaurant chain had decided to put ready to serve coffee at the top of its focus. With products such as the Dunkaccino, White hot chocolate, Coolatta, lattes and iced lattes, as well as regular and seasonal hot and iced coffee, they will directly compete with Starbucks. In late 2007, Dunkin Donuts made a surprising announcement: In a national taste test in 10 major U.S.

cities, the chain had put its most popular brew up against Starbucks. The taste test showed that of the sample tested more people preferred the taste of Dunkin Donuts coffee over Starbucks. Dunkin Donuts was also moderately priced to satisfy economic consumers. In terms of perception, 7-Eleven and Dunkin Donuts provided coffee in a "no-nonsense fashion", which attracted customers who were extremely price sensitive. http://blogs.indews.com/marketing/starbucks_competitors.php 4. DIVERSIFYING NON-COFFEE MENU As the company grew and customer traffic increased, Starbucks introduced many new products to broaden its appeal. It expanded its food offerings while introducing efficiencies like those automated espresso machines.These new products undercut the integrity of the Starbucks brand for coffee purists. They also challenged the baristas who had to wrestle with an ever-more-complicated menu of drinks. With over half of customers customizing their drinks, baristas hired for their social skills and passion for coffee, no longer had time to dialogue with customers. Starbucks also lost its focus on coffee and tried to peddle food, DVDs and other non-caffeinated beverages. The company tried to do too much...and alienated many core customers in the process. The brand experience declined as waiting times increased. Gradually, complaints surfaced that Starbucks felt more like a fast-food restaurant than a coffeehouse. Due to these factors, in the summer of 2007, its customer traffic declined for the first time since the company went public, sending the stock tumbling. By the end of its fiscal 2008, Starbucks stock, once seemingly invincible, had declined by over 50 percent. In 2008, When Starbucks reviewed some of its underperforming stores, Schultz was horrified to learn that the stores that they ultimately had to close had been open less than 18 months. When we look at thatthe money invested and the money that they had to write offthose decisions were made with a lack of discipline. STRATEGIC CHANGES BY THE STARBUCKS In 2000s, Starbucks faced a difficult operating environment, Howard schultz was on an ongoing drive to reinvent the way Starbucks was doing its business. He retook the reins in an effort to revive the corporation during a global economic crisis in 2008. He focused his efforts on the customer experience, recapturing some of the magic of the chains early years, when employee made the drinks by hand and customers were excited by top-notch coffee. Some initiatives that Starbucks was taking to enhance long-term fundamentals by slowing growth, controlling costs and investing in traffic-driving strategy" were: 1. CLOSURE OF STORES In January 2008, Starbucks ousted its chief executive, James L. Donald, and brought back Mr. Schultz to try to invigorate the company. Mr. Schultz laid off 1,000 employees to reenergize the brand and boost its profit and closed 600 underperforming locations in the United States amid growing economic uncertainty while scaling back the rate of store openings domestically. Starbucks had cut its forecast for 2008 U.S. store openings to 1,175 from 1,600.

These closings and layoffs effectively ended the companys period of growth and expansion that began in the mid-1990s. Starbucks seemed to be a mass brand attempting to command a premium price for an experience that was no longer special. To encounter this fundamental problem it had to cut prices (and that implies a commensurate cut in the cost structure) and also had to reduce distribution to restore the exclusivity of the brand. Sometimes, in the world of marketing, less is more. On January 28, 2009, Starbucks announced the closure of an additional 300 underperforming stores and the elimination of 7,000 positions. CEO Howard Schultz also announced that he had received board approval to reduce his salary. As part of the cuts, he reduced his salary to less than $10,000 a year, from $1.2 million.The company also took other cost-cutting measures, including renegotiating prices with landlords and suppliers, trimming vacation and personal days for hourly store employees and adjusting the way individual stores operate. For example, the company announced that stores where few customers order decaffeinated coffee after noon will no longer brew the coffee ahead of time and will instead make it on demand. While cutting costs, Starbucks tried to appeal to newly value-conscious customers."These decisions have been made to ensure the company is leaner and prepared to endure a worsening economic climate, Mr. Schultz said in a letter to employees. In a conference call with Wall Street analysts Schultz also said the new cuts were necessary because of the unprecedented dip in consumer confidence and the rapid weakening of the economy. At the same time, Starbucks moved aggressively to open stores overseas, where business remained robust. It planned to increase international store openings by 75 outlets to 975. 2. STARTED COMMUNITY WEBSITE "MY STARBUCKS IDEA" In early 2008, Starbucks started a community website "My Starbucks Idea" designed to collect suggestions and feedback from customers. Other users commented and voted on suggestions. 3. INTRODUCED LOYALTY PROGRAM In May 2008, a loyalty program was introduced for registered users of the Starbucks Card (previously simply a gift card) offering perks such as free Wi-Fi Internet access, no charge for soy milk & flavored syrups, and free refills on brewed drip coffee. It also introduced new discount programs like its $25 Gold Card, which offers 10 percent off on all items. On March 18, 2009, Starbucks Coffee Company held its Annual Meeting of Shareholders in Seattle where Howard Schultz, chairman, president and ceo, outlined the companys strategy to grow for the long term. Despite the challenging economic environment, Starbucks is profitable, has a strong balance sheet and generates solid cash from operations, said Schultz. Our customers connection with, and trust in the Starbucks brand remains at a high level. We are laserfocused on delivering the finest quality coffee and getting the customer experience right every time. Weve also been putting our feet into the shoes of our customers and are responding directly to their needs, said Schultz. Our customers are telling us they want value and quality and we will deliver that in a way that is both meaningful to them and authentic to Starbucks. During the Annual Meeting, Troy Alstead, executive vice president, chief financial officer and chief administrative officer, underscored the companys strong financial position and outlined a two-fold growth strategy for the company:

1. FOCUSSING ATTENTION ON INCREASING PROFITS IN EXISTING STORES BY: Aligning the companys cost structure to its current business strategy with a planned $500 million structural expense reduction in fiscal 2009; Improving operational efficiencies and making technology investments; Meeting customers needs for value and quality; and Investing in the tools and training store managers need. 2. MAKING STRATEGIC INVESTMENTS IN KEY INITIATIVES BY: Entering the $17 billion instant coffee market earlier this month with the launch of Starbucks VIA Ready Brew instant coffee; Growing its consumer products, licensed stores and foodservice channels; and Focusing on disciplined global store expansion in key markets. Our customers like the changes weve been making, even as the economic environment is impacting the way customers interact with companies and brands, said Schultz. The health of the company, the continued relevance of the brand and our disciplined goforward plan make us optimistic about Starbucks future. (http://news.starbucks.com/article_display.cfm?article_id=184) OTHER STRATEGIC CHANGES MADE WERE: 1. PRICING STRATEGIES For the first time in its history, Starbucks announced a modified pricing structure in July 2009. Impacted by the recession, Starbucks has suffered a loss of customer traffic to its stores and decided to lower its prices on some popular products; such as brewed coffees and lattes. It also redesigned its menu to feature lower priced brewed coffees, as well as offering promotions on iced drinks. 2. PRODUCT MIX Starbucks revamped its menu, adding a healthier selection of food. Fruit and yogurt parfaits and warm breakfast sandwiches were made part of its regular selection. Starbucks constantly searched for innovative ideas, products and experiences that could be offered to its customers. In addition to sales through its retail stores, Starbucks sold coffee and tea products directly to business units. Through its joint venture partnerships with Pepsi and Dreyers respectively, Starbucks also sold bottled Frappuccino coffee drinks and a line of coffee ice cream. 3. DISTRIBUTION STRATEGY In 2008, Starbucks operated 7,238 retail stores in North America and 1,979 stores internationally. The revenue from its company operated stores accounted for 84% of its total revenue. Despite the closure of 600 under-performing retail stores, Starbucks planned to open another 10,000 retail stores. In addition, Starbucks had been developing the companys brand through third parties outside the coffee house.

Specialty retail operations included licensed stores, packaged tea and coffee, branded products, foodservice operations and generated 16% of Starbucks total revenue in 2008. There were more than 7,400 licensed and franchised stores, while there are 9,000 company-operated stores. Located in places like airports and supermarkets, licensed stores generated licensing fees and royalties as well as revenue from supplying Starbucks coffee, teas and CDs. Starbucks also sold whole bean and ground coffees to foodservice operators like restaurants, offices, hotels and cafes, which accounted for 25% of companys specialty revenue. STARBUCKS' PERFORMANCE AFTER THE INCORPORATION OF STRATEGIC CHANGES The strategy sparked a comeback for the coffee powerhouse. Starbucks performance in the Q3 of fiscal 2009 marked its first earnings growth since Q1 2008 the company earned $152 million, compared to its loss of nearly $7 million just a year earlier. As Schultz remarked in Onward, for the first time in a long time, I felt as if we were winning. (http://thehiringsite.careerbuilder.com/2011/06/03/howard-schultz-on-how-starbucks-got-its-grooveback/ ) In 2010, Starbucks said its profit increased more than eightfold in the second quarter, as more customers visited its stores and spent more. Its international arm and sales outside its own stores both helped increase profits to $217.3 million. It's revenues increased to a record $10.7 billion, and its operating income increased to $1.4 billion, up from $562 million in fiscal 2009. It was a painful period for the company in early 2009, but the fortunes of the chain and Mr. Schultz improved greatly in 2010. The decision to close 600 stores was the right one. Starbucks seemed to be expanding just for the sake of growing -with little regard for profits or common sense. Thanks to more traffic in the stores and renewed earnings growth, shares of Starbucks had risen above $24 a share. Starbucks continued its strong performance in 2011, as more customers began to visit its stores around the globe. The Seattle-based company's 2011 fiscal year revenue increased 7 percent to $11.7 billion and its profit jumped nearly 32 percent to $1.25 billion, or $1.62 pershare. In February, 2011, schultz said that two years ago, the chain was concerned about competition from McDonald's and the like. Now, he believes, "I think weve done a very good job in creating the kind of experience that really does differentiate Starbucks from everybody else. (http://www.huffingtonpost.com/2011/08/02/starbucks-growth_n_916380.html) In March 2011, Starbucks marked its 40th anniversary with a redesigned logo and a spate of new products, including a new line of calorie-conscious food and two types of coffee that will be marketed for a limited time.
* Short-term liquidity measures on a definitive uptrend the past six quarters. * Debt as a percentage of total capitalization is at the lowest point since December quarter of 2007. * Returns on equity and assets at the highest levels in two years. * Same-store sales growth has returned, driven by the perfect blend of customer traffic and transaction value increases. Starbucks has succinctly raised prices on top-selling drinks (like my double espresso) with no apparent resistance by caffeine addicted patrons. * Operating cash flow on track to total $1.5 billion by fiscal year end. * The company just enacted its first dividend and upped the amount of shares available for repurchase. There is also a bit of good timing involved as the U.S. economic recovery has allowed

consumers to indulge their coffee habits once again.(http://seekingalpha.com/article/283187starbucks-steamy-performance)

Starbucks reported that it earned $382.1 million, or 50 cents per share, for the quarter that ended January 1, 2012. Thats up from $346.6 million, or 45 cents per share, in the same quarter the previous year. The companys total revenue increased 16 percent to $3.44 billion. The company delivered major gains in its consumer products business, which makes Via instant coffee, Starbucks ice cream and other items for sale in grocery stores and other retailers. Revenue from this segment increased 72 percent. It also benefited from the addition of 241 new stores during the quarter. Starbucks now operates 17,244 stores worldwide. FINANCIAL ANALYSIS Starbucks has experienced a rapid expansion and an incredible success until 2007 when the economy took a downturn for the worst. During 2007 and 2008, the share price of Starbucks Corporation decreased sharply by 54% compared to a high of $39.63 in May 2006, as investors believed that the company had overextended itself in a premium coffee market. In its first quarter of fiscal year 2008, Starbucks suffered a 3% decrease in transactions for the first time (Financial Post: Starbucks growth seen tied to economy July 2009). Coming to terms with the difficult operating environment, Starbucks announced to close 600 under-performing stores and lay off as many as 12,000 employees. The cost savings from downsizing its operations is expected to be $500-milion (Financial Post: Starbucks growth seen tied to economy July 2009). Starbucks is slowly making a come-back. Since October 2008, the stock has risen 87%, compared to the 31% increase for the NASDAQ. For its third quarter, which ended June 28th, the net earnings for the 13-week period were $151.5M, compared to a net loss of $6.7M in fiscal Q3 2008. Starbucks reported its improved performance for the fourth quarter and fiscal year ended September 27, 2009 and increased its FY10 earnings outlook by improving same store sales trends and increasing the cost savings efforts (BusinessWire: Starbucks Posts Strong Fourth Quarter and Fiscal Results). For fiscal 2009, consolidated net revenues decreased 6% to $9.8 billion from $10.4 billion in fiscal 2008, predominantly due to lower retail revenues. Company-operated retail revenues in fiscal 2009 declined 7% to $8.2 billion from $8.8 billion in fiscal 2008, primarily due to a 6% decline in comparable store sales, and the effects of a stronger U.S. dollar relative to the British pound and Canadian dollar. The decline in consolidated comparable store sales was driven by a 6% decline in the U.S. segment. (BusinessWire: Starbucks Posts Strong Fourth Quarter and Fiscal Results, parag 7) Fiscal 2009 Year in Review 52 Weeks Ended 27-Sep28-Sep-08 09 -45 1,669 $ 9,774.6 $ 10,383.0 $ 562.0 $ 503.9 5.7% 4.9% $ 894.4 $ 843.3 9.2% 8.1%

Change -1,714 -6% 12% 80 bps 6% 110 bps

Net New Stores Revenues (in $ millions) GAAP Operating Income (in $ millions) GAAP Operating Margin Non-GAAP Operating Income (in $ millions) Non-GAAP Operating Margin

(BusinessWire: Starbucks Posts Strong Fourth Quarter and Fiscal Results, Parag. 9) Fiscal Fourth Quarter 2009 Highlights:

Comparable store sales trends improved in U.S. and International segments on both sequential quarter and year-over-year basis. Consolidated same store sales improved to negative 1% from negative 5% in the previous quarter Operating margin improved 760 basis points to 8.2%. Non-GAAP operating margin improved 570 basis points to 10.4%. EPS of $0.20 compared to $0.01 in Q408 Non-GAAP EPS increased to $0.24, a 140% increase from $0.10 in the prior year period. (Business Wire: Starbucks Posts Strong Fourth Quarter and Fiscal 2009 Results November 2009, parag. 1). Full Fiscal Year 2009 Highlights: Cost savings initiatives delivered full-year savings of approximately $580 million, exceeding target by $30 million Operating margin improved 80 basis points to 5.7%. Non-GAAP operating margin improved 110 basis points to 9.2%. EPS increased 21% to $0.52 from $0.43 in the prior year; Non-GAAP EPS increased 13% to $0.80 from $0.71 in the prior year. Operating cash flow totaled $1.4 billion and free cash flow exceeded $900 million. (Business Wire: Starbucks Posts Strong Fourth Quarter and Fiscal 2009 Results November 2009, parag. 2). According to a recent poll conducted by ChangeWave Research, the consumers are planning to purchase more coffee from Starbucks over the current quarter, while expecting to reduce coffee purchase from McDonalds. While McDonalds remains a solid investment, Starbucks offers a different value proposition and has a greater potential based on its underlying fundamentals. The company has proved the pliability of its business over the past 12 months, while maintaining a strong position to take advantage during the economic recovery (Seeking Alpha: Starbucks: On Track for Steamy Returns? October 2009).