Starbucks Strategies for Profitability

1. Introduction

Major objective of this study is to shed light on the strategies and efforts made by Starbuck to solve its problems related to profitability. In order to do a careful analysis of internal initiatives is undertaken to have an idea about the success of these initiatives to return to a stable pace of profitability growth by Starbucks. To have growth in profitability Starbucks needs to generate competitive advantage among the rival firms. Starbucks will have to take into account overall trends of industry, so that long run profitability growth can be assured. Both the internal and external factors faced with the firm are analyzed separately in order to have a reliable future position.

1.1. Positive Aspects related with Starbucks and Recommended Strategy

Starbucks provides healthy working environment to its employees and have detailed and employee friendly stock option plans. Moreover, the major strengths of Starbucks lie in the attractive shop design and comfortable shop environment. Starbucks aims to become a top coffee outlet not only at regional level but also at international level. So the strategy of globalization will help Starbucks to increase its profitability. In order to successfully implement this strategy performance targets for managers will have to be set so that they are provided with the incentive to improve their performance.

1.2. Objectives of Starbucks

• Clean supply of coffee.
• Create readily happy clients all the period.
• Provide an incredible work place and handle pride and one another with respect.
• Accept diversity being an important element in the manner we do company.
• Make use of the greatest requirements of quality towards the buying.
• Lead positively to the towns and our environment, and notice that success is important to our potential success.

2. Issues faced by the Firm

2.1. Internal Issues

Limited Product Range: Starbucks offers a product range comprised of single source and approximately thirty products , Coffee machines, advanced candy, coffee cups, coffee accessories card, a stored value card, coffees, containers frap-puccino caffeine products, coffees, coffee liqueurs, type of ice creams, audio, publications, movies, house Starbucks and gifts.

Limited Advantages provided to Employees: Many conflicts among workers have been observed since in various outlets of Starbucks all over the world and the main reason was low-pay and extended work hours. As the burden of work remains high the employees feel overworked and hence they find it difficult to continue working at Starbucks.

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2.2. Insufficient Growth of Alternatives Available

When the business was started there were just 17 coffee shops but now the outlets are running in 39 nations all over the world having almost 12,240 outlets. The worldwide rate of growth associated with coffee shops is too high as compared to that of Starbucks. This fact leads to create a severe anxiety for Starbucks and limits the growth opportunities available to the firm.

2.3. Customer Relationships

The clients of Starbuck are not that much diversified and belong to almost similar group. On the other hand it not the case with other international coffee brands. Another consideration is attached with the Starbucks connection with their clients. Starbucks is regarded as very awesome coffee brand when consumer considerations are concerned. In the region of Beijing where Starbucks recently closed an outlet due to ethnic differences among manufacturers can also be regarded as a threat to the future growth of a business.

Some revolutionary anti-capitalism activists left the Starbucks becoming former clients, but additionally Starbucks and especially small people even not approved within the company’s feel uneasy or shops. Because of Starbucks rapid development, the manufacturer so dropped its unique hospitality for customers and continues to be commoditized.

Major Issue Faced by Firm

On the basis of above discussion it is found that major issue for Starbucks is limited growth opportunities which may be result of weak customer relationships.

3. Analysis of Financial Ratios

1. Liquidity ratios: Tells us about the ability of a firm to pay its short term debt obligations. The most commonly used liquidity ratios are current ratio, quick ratio and cash flow ratio.

Current ratio (C_r) = Current Assets/Current Liabilities

Current ratio shows that how much of current assets a firm has in order to be able to pay its short term debt.

For the year 2009 C_r =403.60 / 309.30 = 1.30

For the year 2010 C_r =476.10 / 318.50 = 1.49

Conclusion: The current ratio is 1.30 in the year 2009 which shows that the firm had current assets of $ 1.30 in order to pay liability of $1. In the year 2010 the firm had $ 1.49 to pay the liability of $1. The improvement in current ratio is indicating that the position of firm in the form of current assets to finance its debt has been improved.

Quick ratio ( Q_r)= (Current assets-Inventory-Prepaid) / current Liabilities

Quick ratio shows that how much of convertible assets a firm has in order to be able to pay its short term debt.

For the year 2009 Q_r =403.60- 119.20-44.30 / 309.30 = 240.3 / 309.30 = 0.77

For the year 2010 Q_r = 476.10 – 115 – 47.30 /318.50 = 313.8 / 318.50 = 0.98

Conclusion: The current ratio was 0.77 in the year 2009 which shows that the firm had convertible assets of $ 0.77 in order to pay liability of $1. In the year 2010 the firm had $ 0.98 to pay the liability of $1. The improvement in quick ratio is indicating that the position of firm in the form of convertible assets to finance its debt has been improved.

Cash ratio (Ch_r) = Cash/ Current Liabilities

Cash ratio shows that how much of cash a firm has in order to be able to pay its short term debt.

For the year 2009 Ch_r = 54.50 / 309.30 = 0.17

For the year 2010 Ch_r = 76.70 / 318.50 = 0.24

Conclusion: The cash ratio was 0.17 in the year 2009 which shows that the firm had cash of $ 0.24 in order to pay liability of $1. In the year 2010 the firm had $ 0.24 to pay the liability of $1. The improvement in cash ratio is indicating that the firm has more cash to pay back its debt has been improved in 2010 as compared to 2009 which is a good sign for Starbucks.

2. Leverage Ratios: These ratios tell us about financial structure of company. The sources of fiancé of a business are shown by leverage ratios. It shows the components of debt financing, equity financing and self financing of a firm.

Debt to equity ratio = Total Debt / Total equity.

It shows the components of debt and equity in firm’s capital structure.

For the year 2009 (DE_r) = 1827.80/ -1033.60 = -1.76

For the year 2010 (DE_r) = 1783.10/ -696.40 = -2.56

Conclusion: negative value of equity is showing that the value of an asset used to secure a loan is less than the outstanding balance on the loan. The value of assets is far below the outstanding balance on the loan used to purchase those assets which is sign of possible financial distress of the firm. Debt to equity ratio is greater than 1 showing that the component of debt is much higher than that of equity in firm’s capital structure. The debt component has been decreased in 2010 as compared to 2009.

Debt to asset ratio (DAr)= Total asset / Total assets.

It shows how much of firm’s assets are financed through debt i.e. components of debt and equity in firm’s capital structure.

For the year 2009 ( DAr) = 1827.80/ 794.20 = 2.30

For the year 2010 (DAr) = 1783.10/ 1086.70 = 1.64

Conclusion: The ratio of 2.30 in 2009 is showing that component of debt in total assets is almost two and a half times that of equity. However this ratio is decreased in 2010 which is showing that equity level of debt has been decreased in firm’s capital structure as compared to 2009 which is a good sign for this firm as there is a risk of financial distress and bankruptcy associated with high levels of debt burden.

4. Diagnosis of Firm Performance

1. Profitability Ratios: Profitability ratios reflect the performance of a company it shows that whether firm performance is improving or deteriorating.

Return on Assets = (Net profit / total assets) * 100.

This ratio shows that how much profit is being generated by firm’s assets or what is the contribution of firm’s total assets in its profitability.

For the year 2009 ROA = (48.80 / 794.20) * 100 =6.14 %

For the year 2010 ROA = (327.30 / 1086.70) * 100 = 30.1 %

Conclusion: ROA of 6.14% in the year 2009 is showing that every $ 100 invested generates $ 6.14 as profit. ROA has been improved in the year 2010 as now each $ 100 invested will generate & 30.1 as profit. So the profitability is improved in the year 2010 which is a good sign.

2. Net Profit Margin = Net Profit / Sales

It reflects the amount of each sales dollar left over after all expenses have been made. This ratio helps a company determine how much actual profit is made from each sale earned. The higher the net profit margin, the better the company is doing at turning sales into profit.

For the year 2009 NPM = (48.80 / 1295.90) * 100 = 3.7 %

For the year 2010 NPM = (327.30 /1321.40) * 100 = 24.76 %

Conclusion: Net profit margin has been greatly increased in the year 2010 as compared to that of 2009 which is a strong positive signal. The improvement may be because of strong sales or decreased costs and overhead.

On the basis of above calculated ratios it can be concluded that overall financial position of the firm has been improved in 2010 as compared to 2009. However there is high risk of financial distress due to heavy debt burden.

5. Solutions for Issues faced by Starbucks

Changing associated with an exterior atmosphere of the organization led to cause various problems related to the business and contributed to to the closing of the shops of the organization within the USA. These problems are mainly related to the businesses connection, the critique firm’s fair-trade guidelines and the additional governmental problems affecting the business. To cope up with these problems the organization requires a detailed strategy to resolve these issues. Major solutions for problems faced by Starbucks are as follows:

• Steps to face numerous current competitors, or to minimize the risk of fresh competitors entering the marketplace
• Revolutionize the political and financial atmosphere.
• Adjustments in consumer preferences or styles

Selection of Best Alternative available

Among the above mentioned solutions the most feasible one is to make adjustments in the products offered by the firm, to best suit the tastes of consumers. For this purpose Starbucks will have to keep in view the products sold by other firms of same industry because these products are substitutes of those offered by Starbucks. The firm will have to introduce more differentiated products because differentiated and unique products always remain successful to attract more and more customers.

6. Conclusion

Keeping in view the above discussion it can be concluded that Starbucks severely needs to boost the worldwide reputation of the company in order to achieve its growth targets. Pursuing a careful strategy related to the enhancement of growth opportunities, Starbucks may become able to return to a profitable growth path as they have available opportunities for continued growth of their business. Coffee business is growing all over the world including US industry, a market is growing more saturated and hence the competition is rising at international levels.

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