The Starbucks Business Model - Starbucks Company Breakdown

Introduction to Starbucks

This section introduces Starbucks as a successful global brand with 30,000 stores worldwide. It highlights the initial perception of Starbucks and its growth over time.

The Rise of Starbucks

• Starbucks is a global brand with 30,000 stores across the planet.

• Despite initial parodies and misconceptions, Starbucks has achieved tremendous success.

• The first Starbucks store opened in Seattle in 1971 and was started by three college friends who shared a love for coffee.

• Inspired by the coffee shop culture of Milan, Howard Schultz transformed Starbucks from a simple store into cafes, aiming to educate Americans on the cafe experience.

• In 1987, Schultz acquired Starbucks and played a crucial role in its growth from a handful of locations in Seattle to over 15,000 stores globally by 2007.

Success Factors of Starbucks

This section explores the factors that contribute to Starbucks' success, including its presence on every corner and its ability to create loyalty through convenience.

Creating Loyalty through Convenience

• Starbucks' success is attributed to its widespread presence on every corner, creating a network effect and making it part of people's everyday experience.

• Convenience plays a significant role in creating loyalty among customers. Having numerous stores allows easy access for consumers.

Howard Schultz's Return and Starbucks' Transformation

This section discusses the impact of the Great Recession on Starbucks and how Howard Schultz's return helped transform the company by focusing on consumer experience, working conditions, and store performance.

The Great Recession and Schultz's Return

• During the Great Recession, consumers re-evaluated their discretionary purchases, impacting Starbucks.

• Howard Schultz returned to Starbucks to focus on three key factors: consumer experience, working conditions, and closing underperforming stores.

Expanding Offerings beyond Coffee

• Under Schultz's leadership, Starbucks expanded its offerings beyond coffee to include sandwiches, CDs, DVDs, books, etc.

• This shift transformed Starbucks from solely a coffee retailer into a broader retail experience.

Revenue Streams of Starbucks

This section explores the different revenue streams of Starbucks and how they contribute to its overall success.

Company Operated Stores

• Company operated stores are where customers order their coffee brews and breakfast sandwiches. They drive 81% of total net revenues in fiscal 2020.

• 75% of company operated store revenue comes from beverages.

Licensed Stores

• Licensed stores are located within grocery stores or other brick-and-mortar locations. They contribute 10% of total net revenue in fiscal 2020 but have lower gross margins due to licensing agreements with owners.

Other Segment

• The "Other" segment includes sales from customers outside company-operated and licensed stores, as well as royalties received from Nestle under the global coffee alliance.

Business Segmentation of Starbucks

This section discusses how Starbucks segments its business to showcase international growth separately from its core American market.

Business Segments

• Starbucks' business is segmented into four categories: Americas, Channel Development, Licensed Stores, and Corporate.

• This segmentation allows Starbucks to highlight its international growth while differentiating it from the core American market.

Starbucks Brand and Menu

This section discusses the Starbucks brand and menu offerings in different regions.

Starbucks Brand

• Starbucks maintains consistency in its brand, focusing on coffee, community, and connection.

• The brand is coffee-forward and emphasizes the care provided by baristas to customers.

Menu Offerings

• In many Asian countries and parts of Europe, cheesecake is a popular item on the Starbucks menu.

• However, this is not the case in the United States as it does not align with customer preferences.

Financial Breakdown for Fiscal Year 2020

This section provides a breakdown of financial contributions from different segments in fiscal year 2020.

Revenue Breakdown

• America's segment contributed $16.4 billion in revenue, representing 70% of total revenues.

• International segment drove $5.1 billion in revenue, accounting for 22% of total revenues.

• Channel development segment totaled $1.9 billion in revenues.

• Corporate and other added $66 million in revenues.

Operating Profit Breakdown

• America's segment generated $1.8 billion in operating profit.

• International segment achieved $354 million in operating profit.

• Channel development segment recorded $687 million in operating profit.

• Corporate and other had a negative operating profit of $1.3 billion due to unallocated corporate expenses.

Competitive Advantages of Starbucks

This section highlights two main competitive advantages that Starbucks has cultivated.

Supply Chain Advantage

• Starbucks excels at reducing risk and cost through its supply chain management.

• It sources Arabica coffee beans globally to ensure consistent quality at scale.

• By leveraging its purchasing power as the largest coffee bean purchaser, Starbucks can manage the cost of beans and guarantee supply.

Brand Advantage

• Starbucks invests less in marketing compared to competitors because customers rely on the brand when making decisions.

• The brand loyalty is built through a quality experience, proper training for staff, and employee benefits like healthcare and stock grants.

• Starbucks prioritizes its people, both employees and customers, which aligns with its brand promise.

Store Operations and Gross Profit Margin

This section discusses store operations, customer experience, and gross profit margin.

Store Operations

• Starbucks offers an in-store experience with amenities like desks, lounge chairs, free Wi-Fi, and power outlets to encourage customers to stay longer.

• They maintain quality across all stores by licensing rather than franchising their locations.

• Targeting prime locations for maximum traffic levels is a key aspect of store operations.

Gross Profit Margin

• Store operating costs comprise 40% to 45% of net revenue each year.

• Product and distribution costs, along with store operating costs and depreciation/amortization, contribute to a rough gross profit margin of 15% to 20%.

• Starbucks does not report a separate gross profit line but includes product and store operating costs under operating expenses (opex).

Future Focus for Starbucks

This section highlights the importance of maintaining quality and consistency as Starbucks faces competition from other coffee shops.

Maintaining Quality

• To sustain historical growth, Starbucks needs to focus on delivering quality and consistent experiences across all stores.

• Howard Schultz emphasized the passion, authenticity, and magic that make up the Starbucks brand.

Final Thoughts

• As newer coffee shops emerge and competition remains fierce among chains, Starbucks must continue prioritizing quality and experience.

• The transcript concludes with a personal anecdote about ordering a cappuccino with no foam and the importance of getting it right.