The University
[Instructor’s Name here]
References 12
Appendix A . 13
1.0 Starbucks at 20 Percent Net Revenue Growth
1.1 Net Revenue Growth of 20 Percent
1.1.1 Current State
Statista (2016) ranked Starbucks as the 2015 top leading coffeehouse chain globally in terms of revenue with its revenue of $21.095 billion, followed far behind by Costa Coffee ($1.809 billion) and McCafe ($1.462 billion). It also has the largest store chain of 23,043 stores worldwide. As of fiscal year 2015, Starbucks had a total number of 23,043 stores globally, 12,235 (53%) of which are company-operated stores and 10,808 (47%) are licensed stores (Starbucks, 2015). Net revenues from company-operated stores reached $15.197 billion, a 17.10 percent increase from the previous year’s, while that from licensed stores $1.862 billion, 17.20 percent increase from the previous year’s, representing an average per-store net revenue of $1,242.09 and $172.28, respectively. Its four-year growth (2011-2015) in total revenues, including “CPG (consumer packed goods), foodservice, and other” (with a 2014-2015 grow of 11.81%), is currently 63.78 percent or an average of 15.94 percent annually.
Meanwhile, from 2008 to 2011, between 56 percent and 60 percent of consumers ageing 18 years and older drink specialty coffee every day (SCAA, 2012; cf. ICC, 2014). People who prepared coffee at home daily comprised 86 percent of the consumers (Statista, 2016). These figures indicate a still large market for coffee drinkers. In the United States in 2015, 62 percent of regular coffee drinkers purchase from a coffee outlet instead of preparing it at home, spending $21 on coffee per week. In 2014, some 16.78 million people in the U.S. had visited a coffee house or a coffee bar for breakfast monthly. This explains the persistent value that the U.S. market has for Starbucks and its invariably high focus of stores, both company-operated and licensed, in this market in the Americas region. The potential for more revenues remains high.
1.1.2 Future state (10 Years Later)
Although the industry growth average in 2015 is 3.5 percent (GEC, 2015), the annual growth of 15.94 percent, however, can still be improved to 20.00 percent considering the fact that the revenues from stores alone is already at least 17.10 percent annually.
1.2 Adaptive Challenges
In order to increase the annual net revenue from 15.94 to 20.00 percent with 10 years, net revenues from the stores (i.e. company operated and licensed stores) must reach a mean annual growth to roughly 21.00 percent (or >4.06%), assuming that the net revenue for “CPG, foodservice, and other” (Starbucks, 2015) stays at the same growth trajectory of 11.81 percent. Consequently, net revenues in company-operated stores must be increased to $31.914 billion and in licensed stores to $3.910 billion by 2025. Thus, at the same per store net revenue rate of $1,242.09 and $172.28, respectively, the number of stores globally must also be increased to at least 25,694 and 22,696 stores, respectively, to achieve the 10-year target.
1.3 Adaptive Measures
1.3.1 Measure 1: Increase store net revenue growth
1.3.1.1 Description: The net store revenue growth can either be accomplished through an incremental increase or an outright increase within a period of time, e.g. within two five-year periods. Nevertheless, the store net revenue must be increased by at least 4.06 percent or to a minimum of 21.00 percent annually in the next 10 years.
1.3.1.2 Benchmark: Net revenues from company operated stores must be increased to at least 21.16 percent (17.10% + 4.06%) and from licensed stores to at least 21.26 percent (17.20% + 4.06%) within the next 10 years, that is, towards 2025, monitored annually.
1.3.1.3 Milestones: 2016-2020: +2% (>19.80%); 2021-2025: +4 cumulative (>21.00%). In a rare but possible case when the minimum target in five-year milestone period is reached before the end of the fifth year, target adjustments must be conducted accordingly.
1.3.2 Measure 2: Increase store net revenue in both store types
1.3.2.1 Description: The actual net revenues in each store category must be increased in a clear and specific amount. The company-operated and licensed stores must be increased to a net revenue of $31,914.3 billion and $3,910.0 billion, respectively, by 2025.
1.3.2.2 Benchmark: Company-operated stores (>$31,914.3 billion); licensed stores (>$3,910.0 billion) by 2025. These figures must be adjusted if surpassed within five years.
1.3.2.3 Milestones: 2016-2020: >$15,957.2 billion, >$2,955.0 billion (respectively); 2021-2025: >$31,914.3 billion; >$3,910.0 billion (respectively). In a rare but possible case when the minimum target in five-year milestone period is reached before the end of the fifth year, target adjustments must be conducted in order to establish a new higher target per milestone.
1.3.3 Measure 3: Increase number of stores globally
1.3.3.1 Description: An increase in the number of stores by category is a key action in order to achieve the overall adjustment challenge in Future 1. Conservatively, the number of target stores globally must be computed under a presumption that the net revenue per store per category established based on the 2015 annual report does not change or, more accurately, assumed not to change so that if it does change it will not downwardly affect the target.
1.3.3.2 Benchmark: Company-operated stores (>25,694); licensed stores (>22,696)
1.3.3.3 Milestones: 2016-2020: >18,965; >16,752 (respectively); 2021-2025: >25,694; >22,696 (respectively). In the possible occasion when the minimum target in five-year milestone period is reached before the end of the fifth year, target adjustments must be conducted in order to establish a new higher target per milestone.
2.0 Starbucks in a Strategic Chain Growth Balance
2.1 Strategic balance in store chain growth
2.1.1 Current state
In the fiscal year 2015, Starbucks has a total net stores of 23,043 with 12,235 company-operated stores (53%) and 10,808 licensed stores (47%) (Starbucks, 2015). The Americas region had a total of 14,803 net stores (64%), the CAP (China and Asia Pacific) 5,462 net stores (24%), the EMEA (Europe, Middle East and Africa) 1,625 net stores (7%), and other region 416 net stores (2%). In its largest market, the Americas, the United States has the highest number of stores at 12,521 net stores (7,559 company-operated stores and 4,962 licensed stores), or 85% of the region and 54% of its global total; thus, even larger than the other regions combined.
In its markets outside the Americas, China showed great promise for company-operated stores a net new stores opened of 203 with only nine closures for 2015 (Starbucks, 2015). It is practically the largest international markets before 1,009 Japanese licensed stores were transferred to company-operated stores. Among licensed stores, Mexico was the most promising market in the Americas with largest new openings in 2015 next to the U.S. In the CAP region, China also appeared to be strong with the highest new licensed stores opening for the year. Moreover, the Philippines also has significant promise due to its consistent no-closure performance in 2015 and low closure level in 2014. Meanwhile, Taiwan may still grow.
2.1.2 Future state (10 years later)
2.1.2.1 Company-operated stores: There will be inevitable operational challenges among company-operated stores when located outside the Americas, making it logical that a concentration of these stores should be within the region. However, China’s already strong growth in this store type will not add operational problems in further expansion in this market. An additional 3,000 stores may be pursued in the next 10 years to keep up with the expanding Chinese population. The Brazilian market may also be increased by 900 stores while the American market, due to its higher net revenue outcomes, allocated additional 2,000 stores.
2.1.2.2 Licensed stores: In the U.S., these stores must be downwardly controlled due to its 15 times lower net revenue outcomes than company-operated stores and its strong potential to cause overcrowding. New store openings must be capped at 500 stores in the next 10 years along with China for similar reasons. Meanwhile, Mexico must be encouraged to grow by another 1,000 new stores. The Philippines may also be increased by 300 stores along with Taiwan.
2.2 Adaptive Challenges
The problem with Starbucks’s current market strategy is its overdependence in the United States market, which can result to overcrowding. In the fiscal year 2015, it has a total net company-operated stores of 7,559 (Starbucks, 2015), which is 61.78 percent of its total company-operated stores of 12,235 globally and a glaring imbalance of market focus. The same phenomenon can be observed in its licensed stores with 4,962 net stores of global total of 10,808 stores, or 45.91 percent. This overcrowding phenomenon can result to inter-store cannibalism of customers (Cooper, 2014) wherein each Starbucks store competing with other Starbucks stores for virtually the same customer base.
In the Americas, the counterbalancing strategy must be focused on keeping a strong growth in its net revenues among company-operated stores and much less among licensed stores to avoid overcrowding effect while contributing less into the overall net revenues. This approach, however, is tricky without specific market data for individual store performances. Nevertheless, a reasonable estimate may be done. The Brazilian market must be encouraged to grow in company-operated stores while the Mexico market in licensed stores, consistent with the current Starbucks policy in the store type encouraged in these markets. So far, there is no reliable evidence to support a different policy, which can favor an opposite store type mix.
Evidence indicate that growth can be better expected in the CAP region, primarily driven by the Chinese market. However, like the U.S. market, danger of overcrowding with low net revenue outcomes is possible. Thus, a focused growth on company-operated stores is reasonable to pursue. Auxiliary growth can also be encouraged in two Asian markets: the Philippines and Taiwan. These minor markets had the more sturdy performances, which can be enhanced.
2.3 Adaptive Measures
2.3.1 Counterbalancing in the Americas region
2.3.1.1 Description: This counter balancing strategy in the Americas consist of slowing down licensed store growth in the United States and increasing moderately its company-owned stores. Meanwhile, current policy will be followed in increasing the number of company-operated stores in Brazil and licensed stores in Mexico.
2.3.1.2 Benchmark: (a) Company-operated stores (annually): United States (+200 stores) and Brazil (+90 stores); (b) Licensed stores (annually): United States (+50 stores) and Mexico (+100 stores);
2.3.1.3 Milestones
(a) United States
Company-operated stores: 2016-2020 (+1000 stores); 2021-2025 (+2000 stores)
Licensed stores: 2016-2020 (+250 stores); 2021-2025 (+500 stores)
(b) Brazil (company-operated stores): 2016-2020 (+450 stores); 2021-2025
(+900 stores)
(c) Mexico (licensed stores): 2016-2020 (+500 stores); 2021-2025 (+1000 stores)
2.3.2 Strong focused growth in China
2.3.2.1 Description: China must be focused towards strong growth due to its large market size and spending power of the Chinese. This focused will towards growth more in company-operated stores and less in licensed stores.
2.3.2.2 Benchmark: Company-operated stores: +300 stores annually; Licensed stores: +50 stores annually.
2.3.2.3 Milestones
(a) Company-operated stores (annually): 2016-2020 (+1500 stores); 2021-2025 (+3000 stores)
(b) Licensed stores (annually): 2016-2020 (+250 stores); 2021-2025 (+500 stores)
2.3.3 Auxiliary growth in the Philippines and Taiwan
2.3.3.1 Description: An auxiliary growth in the CAP region must be focused in stable markets, such as the Philippines and Taiwan, with licensed stores.
2.3.3.2 Benchmark: Licensed stores (annually): the Philippines (+30 stores) and Taiwan (+30 stores).
2.3.3.3 Milestones
(a) The Philippines (annually): 2016-2020 (+300 stores); 2021-2025 (+600 stores)
(b) Taiwan (annually): 2016-2020 (+300 stores); 2021-2025 (+600 stores)
3.0 Starbucks with a Highly Enhanced Product Mix
3.1 Highly enhanced product mix
3.1.1 Current state
In the fiscal year 2015, Starbucks’s retail sales by product types in company-operated stores consist of beverages (73% of its retail sales), food (19%), packaged and single-serve coffees and teas (3%), and other products, which consist of ready-to-drink beverages, serveware, and coffee-making equipment and the like (5%) (Starbucks, 2015). Beverages and other products kept their respective mix levels from the previous year; the food increased by one percent as packages and single-serve coffees and teas equally declined. (Starbucks does not report product mix for licensed stores perhaps to inadequate access to data.)
As its investors expect quick growth, Starbucks aimed to keep growing as its one-year-old stores continue to grow sales at six percent annually (Cooper, 2014). Its primary strategy was to revise and expand its menus across its two major product mix: beverages and food. Menu expansion is the core element of the company’s U.S. market growth strategy, which turned out to be drawing in more customers when traditionally there should be a foot traffic lull (Cooper, 2014) and resulted to a one percent increase in its product mix (Starbucks, 2015).
3.1.2 Future state (10 years later)
Based on the outcomes that an increase in food menu had helped increase the drawing power of Starbucks, the food strategy must be maintained and, yet, tested for market response. In the next 10 years, unless higher or lower levels prove more profitable and better traffic drawer, an increase in food net revenue be allowed to reach up to 25 percent and up to 70 percent in beverage net revenue, a mix that will still maintain the core coffee products of Starbucks.
3.2 Adaptive Challenges
Observers, like Cooper, however, feared that the premium coffee branding in Starbucks’s name may degenerate into a snack bar image with its increased menu innovation in the next 10 years (Cooper, 2014). Moreover, it can result to a choice overload wherein more food choices in the menu can demotivate customers from deciding to purchase than when offered only fewer choices (Basili & Vannucci, 2015; cf. Chernev, Bockenholt, & Goodman, 2015). Further, it complicates the supply chain and employee training performance. Starbucks’s long track of high profitability and growth due to coffee sales as the global preeminent coffee must be protected at all cost. In the absence of accurate list of recipes in the food menu, it may suffice that the bottom 10 percent of the food products in the menu must be removed and replaced with another 10 percent or less new food products to test in order to maintain an equilibrium in the current list of foods. The data is also inadequate to decide how many food produces should be considered as a minimum or maximum.
3.3 Adaptive Measures
3.3.1 Measure 1: Allow beverage mix share decrement to 70 percent
3.3.1.1 Description: Within the next 10 years, the product mix share may be allowed to decline from 72 percent to 70 percent. These adjustments, however, must not be actively sought for by under-promoting the product; but instead by allowing the food products to increase its product mix share in the Starbucks portfolio.
3.3.1.2 Benchmark: 73% -3% in 10 years, incrementally declined
3.3.1.3 Milestones: 2016-2020 (≥72%); 2021-2025 (≥70%)
3.3.2 Measure 2: Allow food mix share increment to 25 percent
3.3.2.1 Description: This is the key adjustment product in this area. Menu may be allowed to increase in food offering list to achieve a significant increase in foot traffic than otherwise, which has inevitable subsidiary impact on beverage sales too. The measure must be implemented under two conditions: (a) Foot traffic and net revenue continue to increase up to the maximum of 25 percent (any decline in foot traffic and net revenue growth may indicate a need to lower down the maximum product mix share); (b) Training issues and personnel burden of learning will not increase to the point of deterioration (otherwise, introduction of new food offering must be discontinued and the list cut down to manageable limits).
3.3.2.2 Benchmark: 19% +6% interest, incrementally increased 3% every five years
3.3.2.3 Milestones: 2016-2020 (20-22%); 2021-2025 (23-25%)
3.3.3 Measure 3: Pursue the most salable food list
3.3.3.1 Description: It makes no sense to retain food offerings in the menu when these items ranks at the lowest 10 percent of the list. It is also doubly foolhardy to increase unendingly the food menu by introducing new food offerings without removing the bottom 10 percent in the list. Thus, each quarter, all stores must submit their list of food offerings with corresponding sales value, ranked from the highest to the lowest in sales. Starbucks head office can collate electronically all these reports into a global ranking list from which the bottom 10 food offerings in the list must be removed from the global list. New offerings must not be allowed to reach more than the number of items in the bottom 10 percent of the list that were removed during an evaluation period. The lower the replacement food items the better in order to continually prune the list to its barest minimum comprising the most salable of all food items in the menu.
3.3.3.2 Benchmark (quarterly): -10% bottom ranked food items in the menu; add <10% of food items equivalent to the actual number of items removed from menu.
3.3.3.3 Milestones: 2016-2020 (≤5% of listed food); 2021-2025 (≤5% of listed food).
References
Basili, M. & Vannucci, S. (2015). Choice overload and height ranking of menus in partially-
ordered sets. Entropy, 17(1), 7584-7595.
Chernev, A., Bockenholt, U., & Goodman, J. (2015). Choice overload: A conceptual review and
meta-analysis. Journal of Consumer Psychology, 25(2), 333-358.
Cooper, T. (2014, June 24) 3 Glaring problems with Starbucks U.S. strategy. The Motley
Fool.com. Retrieved from: http://www.fool.com/investing/general/2014/06/24/3-glaring-problems-with-starbucks-us-strategy.aspx.
GEC. (2015). Food & beverage industry economic outlook survey: Key findings. Norwalk, CT:
GE Capital.
ICC. (2014). World coffee trade (1963-2013): A review of the markets, challenges, and
opportunities. London: International Coffee Council.
SCAA. (2012, March). Specialty coffee facts & figures. Santa Ana, CA: Specialty Coffee
Association of America.
Starbucks. (2015). Fiscal 2015 Annual Report. Washington, DC: Starbucks Corporation.
Statista. (2016). Revenue of selected leading coffeehouse chains worldwide in 2015 (in millions
U.S. dollars). Statista.com. Retrieved from: http://www.statista.com/statistics/270091/coffee-house-chains-ranked-by-revenue/ (7 May 2016)
Appendix A
References
Basili, M. & Vannucci, S. (2015). Choice overload and height ranking of menus in partially-
ordered sets. Entropy, 17(1), 7584-7595.
Chernev, A., Bockenholt, U., & Goodman, J. (2015). Choice overload: A conceptual review and
meta-analysis. Journal of Consumer Psychology, 25(2), 333-358.
Cooper, T. (2014, June 24) 3 Glaring problems with Starbucks U.S. strategy. The Motley
Fool.com. Retrieved from: http://www.fool.com/investing/general/2014/06/24/3-glaring-problems-with-starbucks-us-strategy.aspx.
GEC. (2015). Food & beverage industry economic outlook survey: Key findings. Norwalk, CT:
GE Capital.
ICC. (2014). World coffee trade (1963-2013): A review of the markets, challenges, and
opportunities. London: International Coffee Council.
SCAA. (2012, March). Specialty coffee facts & figures. Santa Ana, CA: Specialty Coffee
Association of America.
Starbucks. (2015). Fiscal 2015 Annual Report. Washington, DC: Starbucks Corporation.
Statista. (2016). Revenue of selected leading coffeehouse chains worldwide in 2015 (in millions
U.S. dollars). Statista.com. Retrieved from: http://www.statista.com/statistics/270091/coffee-house-chains-ranked-by-revenue/ (7 May 2016)
