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FINA3311
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Prince Mohammad Bin Fahd University
Starbucks is a multinational coffeehouse and roaster reserves chain based out of America. The company has its headquarters in Seattle, Washington. The company has more 32000 stores as of 2020, out of which about 50% are company operated while the rest are licensed stores. The company’s offerings include multiple variations of coffee, tea and other beverages as well various pastries and snacks. Gordon Bower, Zev Sigel and Jerry Baldwin founded Starbucks in the year 1971. Starbucks was later sold to Howard Schultz, who was responsible for the company’s aggressive expansion. As of 2021, Starbucks is ranked 125th on Fortune 500 list. Starbucks announced its initial public offering (IPO) in the year 1992. The aim of this report is to analyze the financial statements of the company for the past three years. The financial ratios and stock price changes of Starbucks will also be covered in this section. The report will also discuss current market conditions as well as some changes and trends. Moreover, the various strengths, weaknesses, and risks of the company will be examined. Lastly, the report will provide some suggestions for the company to improve its performance in the coming days.
Starbucks primarily operates in the retail coffee shop industry. Over the past few years, the industry has been able to take advantage of the rapid economic development, declining unemployment, and increasing customer spending. Thus, the industry was able to witness steady growth each year. However, the outbreak of the Covid-19 pandemic in 2020 had a negative impact on the industry. As stay-at-home orders were implemented around the world, coffee shops witnessed a fall in demand as people were no longer travelling to work and stopping at coffee shops. Even though some coffee chose to remain open, they still saw a fall in sales and profits. This resulted in many coffee shops having to lay off their employees or even close permanently in some cases (IBIS World, 2021). However, coffee shops like Starbucks are expected to reopen once again as the pandemic starts to subside. Even at the beginning of 2021, the governments around the world had started easing restrictions as the pandemic gradually started to slow down. Notably, the coffee shop industry is expected to grow at a CAGR of 8% in the next four years (Comunicaffe, 2017).
Starbucks’ consolidated revenues witnessed a decline of 11% in 2020, falling to $23.5 billion compared to $26.5 billion, recorded in the previous year. This was due to the temporary closure of a number of the company’s licensed as well as self-operated stores as well as a fall in customer traffic due to Covid-19. The following sections will discuss the Starbucks’ financial performance in detail (Starbucks, 2020. p. 25).
Starbucks’s net profit margin declined from 18% in 2018 to 14% in 2019 and then further declined to 4% in the following year. The decline in 2019 was caused as the company had recorded additional profits in 2020 from the acquisition of its joint venture in East China as well as the sale of its Tao brand (Starbucks, 2019. p. 25). However, the decline in 2020 was due to the impact of the Covid-19 pandemic which resulted in lower sales, reduced traffic and restructuring costs (Starbucks, 2020. p. 26).
Starbucks’s operating profit margin declined from 16% in 2018 to 15% in 2019 and then further declined to 7% in the following year. The decline in 2019 was caused by the partner investments, higher salaries and wages, licensing of its CPG business to Nestle as well as well as other investments (Starbucks, 2020. p. 25). However, the decline in 2020 was due to the deleverage of sales and the additional expenses that were incurred due to Covid-19, which includes enhanced pay for retail stores partners and catastrophe pay. However, the decline was somewhat offset by the efficiencies in supply chain (Starbucks, 2020. p. 26).
In 2018 and 2019, Starbucks’ Return on Assets (ROA) was constant at 18.7%. However, in 2020, the figure declined to 3.2% (Starbucks, 2020. p. 47, 48). ROA is a measure of a company’s efficiency in using its total assets to generate profits or earnings. Starbucks’ ROA declined significantly in 2020 as the company’s total assets increased significantly during the year, while there was a sharp decline in net profits due to the impact of the Covid-19 pandemic which resulted in lower sales, reduced traffic and restructuring costs.
Starbucks’s current ratio declined from 2.2X in 2018 to 0.92X in 2019 but again increased to 1.06X in the following year. The current ratio is the measure of a company’s liquidity or its ability to meet its short-term obligations by making use of its liquid assets. Thus, the current ratio trend implies that there was a decline in Starbucks’ liquidity in 2019 but it improved somewhat in 2020. This was because the company’s current assets declined in 2019, while current liabilities have been increasing in the past three years. This also shows that Starbucks was able to improve its liquidity position despite the uncertainty of the pandemic.
Starbucks’s debt to total assets ratio increased from 0.38X in 2018 to 0.58X in 2019 but again declined to 0.5X in the following year. As the name suggest, it is a measure of the amount of debt on a company’s balance sheet, compared to the total assets. The company’s debt increased in 2019 as it issued long-term date during the year in the form of various senior notes. However, in 2020, even though Starbucks took on additional debt, the company’s debt to total assets ratio decline due to the significant increase in total assets. This implies that Starbucks’ ability to service its long-term obligations improved in 2020 (Starbucks, 2020. p. 39).
Starbucks’s asset turnover ratio increased from 0.92X in 2018 to 0.99X in 2019 but again declined to 0.79X in the following year. The asset turnover ratio measures a company’s ability to make use of its total assets to generate sales or revenue. The trend shows that although the company’s operational efficiency improved in 2019, it again decline in 2020. This was due to the decline in sales during the year caused by the temporary closure of a number of the company’s licensed as well as self-operated stores as well as a fall in customer traffic due to Covid-19 (Starbucks, 2020. p. 25).
The above chart shows the movement of Starbucks’ stock price in the past three years. It can be observed from the chart that the company’s stock witnessed a significant amount of volatility in the past three-year period. Notably, the stock price fell as low as $58.03 on 16 March 2020, which was when the outbreak of the pandemic was declared officially. However, since then Starbucks’ stock has witnessed an overall growth trend and closed at $112.92 on 3 October 2021.
Along with the aforementioned changes in the coffee shop industry due to the outbreak of the covid-19 pandemic, the industry has witnessed some other changes and trends as well. Notably, one of the trends that have emerged within the industry is molecular nitrogenation which allow coffee shops to offer a creamier and smoother experience without the addition of extra calories. Consumers are also asking for better presentation which has resulted in many baristas creating custom images and text in latte and cappuccino foam. Another trend that has emerged is the increased demand for healthier blends of coffee. Most of the coffee shops are now offering coffee blends that help in boosting the immune system and metabolism, while improving the overall health of a person. Moreover, customers who are environmentally conscious are asking for sourcing practices that are sustainable and do not harm the environment in any way. Lastly, there is increased demand for bottled tea and coffee these days as we live in a society that is always on the go (Linchpin, 2021).
One of the main strengths of Starbucks Corporation is its strong position in the market. The company has more than 40% market share in the United States while having operations in more than 80 countries. It is one of the most recognized brand names in the coffee shop industry and makes effective use of its brand name by licensing the brand logo and merchandising products. Moreover, Starbucks’ strong position in the market allows it expand into international markets more easily which gives it an edge over the competition. The company has been able to establish strong economies of scale over the past few years due to its robust supply chain network (Chuang, 2019). The company’s focus on providing the highest quality of products, even sacrificing higher production, has helped it building a loyal customer base.
Across the world, the Starbucks are located in some of the most strategic locations. The company targets locations that have high visibility and are likely to get a high amount of traffic as they are located near busy areas shopping malls, college campuses, and office buildings. There stores are also highly aesthetic and cool which helps in attracting the young crowd that likes posting pictures on social media (Wu, 2017). Starbucks offers free wi-fi, premium quality service and feeling of community which makes it the ideal hangout place for people of all ages. Another one of Starbucks’ assets is its highly trained and knowledgeable employee pool, which translates into high-quality customer service. Moreover, the company invests heavily in technology to ensure that it stays up to date with the latest technology trends. Lastly, Starbucks’ focus on environmental and social responsibility has helped it build a lot of goodwill among the customers (Goh et al., 2020).
A major weakness of Starbucks is its expensive products. Even the company’s offerings are highly differentiated; people will still choose to switch to cheaper options if the economic conditions are unfavourable. Moreover, it will have less appeal in developing countries where the standard of living is low (Akachi & Canning, 2015). Moreover, the company’s aggressive expansion strategy has led to a saturation in the coffee shop market which in turn leads to self cannibalization and hurts the company’s long-term growth targets. This can be seen especially in the United States where the company operates more than 8000 stores. In line with the previous point, the company generates a significant portion of its revenue from America which makes it dependent on the country’s growth and economy. Since the American coffee culture is different from that of other countries, the company’s culture might not be accepted in every country that it tries to expand in.
One of the most significant risks to Starbucks is the threat of competition. The company faces an intense amount of competition in the coffee shop industry from major players like Tim Horton’s, Dunkin Donuts, and McDonalds and also from smaller independent coffee shops. Starbucks’ biggest competitor is Dunkin Donuts which has a market share of 23%, second only to Starbucks. Another risk for the company is the risk related to macroeconomic conditions. The company’s performance was severely impacted by the outbreak of the Covid-19 pandemic. The company expects its operations will continue to be affected by the pandemic and the extent of the impact will depend on the future developments which are highly uncertain and out of the company’s control. Other factors that could have a negative impact on the performance of the company are increase in real estate prices in both domestic and international markets, the risk of wars or political instability, and the risk of natural disasters (Kumaresan, 2019). If the company fails to meet its financial targets, it will reduce investor confidence in the company’s stock and increase volatility of the stock price. As the company is a global business, any exchange rate fluctuations will negatively impact Starbucks’ earnings potential. Lastly, a shift in consumer tastes and lifestyle choices towards more healthier or cheaper options are likely to dampen the financial performance of Starbucks.
The biggest growth potential for Starbucks is in the international markets. Emerging markets like India, Mexico, Brazil, and South Africa are witnessing rapid economic development and a growing middle-class population. The company should invest more in expanding in these countries tailor its product and pricing strategies after accounting for the local needs, lifestyle, and culture of the community. There is opportunity for growth in the Fresh Juice and tea product lines, which is why the company should focus on developing these products along with its core portfolio of coffee products. Moreover, due to the customer shift towards healthier food and beverage options, Starbucks should customize its menu to have more healthy offerings. Since, the urban coffee shop market in the United States is already saturated; the company should invest in penetrating the untapped rural markets. Another sector that has high potential for growth is the packaged coffee products. The company should develop a solid relationship with major retailer to ensure access to premium shelf space and focus on improving the overall effectives of its distribution channels. Another thing to note is that Starbucks invests very little in marketing and advertisements, and instead relies on positive word of mouth (Haskova, 2015). However, due to the growing competition in the coffee shop industry, Starbucks should invest a little more in marketing and sales initiatives. Lastly, Starbucks should improve the capabilities of its mobile application which will help in speeding up payments processing and lead to reduced wait times for customers.
It can be concluded from the above discussion that Starbucks has been severely impacted by the outbreak of the Covid-19 pandemic. The pandemic has disrupted the company’s operations around the world due to which Starbucks’ financial performance took a significant hit in 2020. Notably, both revenues and profitability witnessed a significant decline during the year. However, the company was able to maintain a decent amount of liquidity and leverage in 2020, despite the uncertainties of the pandemic. The company is normally able to capitalize on its strong brand market position and brand value to drive performance. Moreover, the company’s focus on providing the best quality products and premium service has helped it in maintaining a loyal customer base. Nevertheless, the company expects its operations will continue to be affected by the pandemic and the extent of the impact will depend on the future developments which are highly uncertain and out of the company’s control. However, coffee shops like Starbucks are expected to reopen once again as the pandemic starts to subside. Even at the beginning of 2021, the governments around the world had started easing restrictions as the pandemic gradually started to slow down.
Chuang, H. J. (2019). Starbucks in the World. HOLISTICA–Journal of Business and Public Administration, 10(3), 99-110.
Goh, S. Y., Kee, D. M. H., Ooi, Q. E., Boo, J. J., Chen, P. Y., Alosaimi, A., & Ghansal, M. (2020). Organizational culture at Starbucks. Journal of the Community Development in Asia (JCDA), 3(2), 28-34.
Haskova, K. (2015). Starbucks marketing analysis. CRIS-Bulletin of the Centre for Research and Interdisciplinary Study, 1, 11-29.
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Kumaresan, R. (2019). The Effects of Macroeconomics Factors towards the Starbucks Corporation.
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Akachi, Y., & Canning, D. (2015). Inferring the economic standard of living and health from cohort height: Evidence from modern populations in developing countries. Economics & Human Biology, 19, 114-128.
Wu, H. C. (2017). What drives experiential loyalty? A case study of Starbucks coffee chain in Taiwan. British Food Journal.
Comunicaffe. (2017). Global cafés and bars market is expected to grow at a CAGR of almost 8%. Comunicaffe International. Retrieved 3 October 2021, from https://www.comunicaffe.com/global-cafes-and-bars-market-is-expected-to-grow-at-a-cagr-of-almost-8/.
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