2. Adam Berger, Justin Buchman, Donald Chase & Suzana Hsu Starbucks Presented by: THE FRAPPUCCINOS

3. The Frappuccinos Presentation Outline  Introduction to Starbucks  Industry Overview  Company Overview  Site Analysis  Recommendations for Improvement  Focused Recommendation for Improvement  Final Action Plan  Impact Analysis  Wrap Up

4. The Frappuccinos Introduction to Starbucks  Company started in 1971 in Seattle, Washington  Grew from 55 stores in 1989 to over 2,200 stores today  Products sold include: - beverages- pastries - whole coffee beans- coffee-related retail items

5. The Frappuccinos Industry Overview

6. The Frappuccinos Industry Definition  Specialty Eatery Industry –Fits within the largest segment of disposable income spending -- food and beverages –Steady growth in this segment in the 1990’s has led to an abundant number of new companies –As demand for convenience has made eating out a normal routine, the demand for specialty food services has increased in recent years

7. The Frappuccinos Industry and Competitive Analysis  Market Structure –Monopolistic Competition  Competitive Activity –Many companies are in the market and competition is fierce –Competitors use location, product mix, and store atmosphere differentiation to establish market niche  Industry Costs and Capital Structure –Low to moderate costs for each location –Major start-up expenditures are property and equipment –Major operating costs are labor and cost of sales

8. The Frappuccinos Industry PEST Analysis  Political Influences –Relationships between coffee producing nations and US –State & Local government controls  Economic Influences –Constant demand for food and beverages –Changes in disposable income could influence purchase levels  Social Influences –Consumer preferences could shift from coffee to other beverages  Technological Influences –Use of technology can improve operational efficiencies

9. The Frappuccinos Company Overview

10. The Frappuccinos Starbucks Corporate Strategy  Maximize market penetration  Provide a relaxing, attractive social atmosphere  Offer high-quality products  Create a great working environment  Achieve profitability

11. The Frappuccinos Starbucks SWOT Analysis  Strengths –Largest market share in industry –Differentiated atmosphere  Weaknesses –Aggressive expansion could lead to managerial / financial problems  Opportunities –Whole bean sales in supermarkets  Threats –Lack of ownership of coffee farms can lead to price fluctuations

12. The Frappuccinos Company Financial Performance (1998 FY)  Revenues $1,308.7 million (% of Sales)  Gross Margin 195.7 million 15%  Pre-tax Profit Margin 116.4 million 8.9%  Net Income 68.4 million 5.2%  Return-on-Assets 8.7%  Return-on-Equity 11.0%  Debt-to-Equity 0.04  12 mo. Revenue Growth 28.4%

13. The Frappuccinos Company Financial Performance (1998 FY)

14. The Frappuccinos Site Analysis

15. The Frappuccinos Site Characteristics  Leased store located on Central Street in Wellesley  Store has over 1,000 square feet of retail space and 1,000 square feet of office and storage space in the basement  Second most profitable store in the fourteen store region  Located one block away from Commuter Rail train station and in busy retail shopping area  Only one direct competitor (Au Bon Pain) in the area

16. The Frappuccinos Site’s Operational Results (1998 FYTD – 11 Months)  Financial Operations 1998 1997 %  Total Sales $760,576 $796,688 (4.5%) COGS 242,593 262, 945 (7.7%) C/M 517,983 533,743 (3.0%) Fixed Exp. 367,746 431,923 (14.9%) EBIT $150,237 $101,820 47.6% –No money spent on independent advertisement –Local entertainment budget underutilized

17. The Frappuccinos

18. Site 7-S Analysis

19. The Frappuccinos Site 7-S Analysis  Strategy –Store’s strategy is to create a comfortable Third Place environment –Serve customer a customized high-quality product –Achieve high level of profitability by focusing on high-margin items while generating add-on sales –Minimize overall expenses by focusing on controllable expenses

20. The Frappuccinos Site 7-S Analysis –Corporate organization is tall with four levels of management above store management  Structure –Functional in structure and relatively flat

21. The Frappuccinos Site 7-S Analysis  Staffing –Location has one manager, an assistant manager and 16 partners –Benefits package includes health, dental, and vision care, stock options, free shift drinks, and a free pound of coffee each week –Raises are based on semi-annual performance evaluations with raises ranging from 0-5% –Bonuses are not utilized, but the location has given away non monetary rewards

22. The Frappuccinos Site 7-S Analysis  Systems –Corporate headquarters exercises controls over individual sites –Total Quality Management is specifically built into their processes –Utilizes a large amount of information technology (IT) –Internal controls for the store are determined by the manager based in part on information provided by the IT system

23. The Frappuccinos The use of IT at Starbucks Corporate IT System Individual Stores Sales, Inventory, Staffing Sales, Inventory, Staffing Individual Stores Inventory, Orders, Transfers Vendors, Distributors, Mgmt., Channel Members Orders, Budgets, Future Sales

24. The Frappuccinos Site 7-S Analysis  Skills –Most important skills include “people skills” and drink preparation ability –Partners receive training to learn about products, brewing methods, and sales techniques –Retraining mainly occurs during new product roll- outs, although this site does not use regular meetings, but instead one-to-one discourse

25. The Frappuccinos Order Cycle Times Take Customer’s Order Bottleneck Order? Pastry?.53 Min Yes No Pastry?.40 Min.27 Min Yes No Bottleneck Capacity 114 / Hr

26. The Frappuccinos Site 7-S Analysis  Style –Basic management style is Laissez Faire –Management motivates through reviews and raises –Work duties are assigned by shift supervisors –Employees are allowed to use initiative and empowered to make decisions

27. The Frappuccinos Site 7-S Analysis  Shared Values (from Mission Statement) –Provide a great work environment –Treat each other with respect and dignity –Embrace diversity –Apply the highest quality standards for products –Develop enthusiastically satisfied customers –Contribute to the community and environment –Recognize that profitability is essential to future success

28. The Frappuccinos Alignment of Store with Corporate Strategy  Contrary to the mission statement focus, the reduction of staffing levels appears to be more important than developing satisfied customers  The relevance of the benefits package is misaligned considering the average age of employees  The high turnover rate of partners and managers is detrimental to customer environment

29. The Frappuccinos Recommendations

30. The Frappuccinos Recommendations For Improvement 1. Revamp the employee reward system 2. Tighten focus on creating the “Third Place” environment 3. Focus profitability measures on profitable sales, not just reduction in staffing

31. The Frappuccinos Revamp Employee Reward System  Large percentage of the staff are under the age of twenty  Benefits package focuses on medical, dental, and vision care, as well as the employee stock options  Outside of hourly wage, and semiannual raises, there are few monetary rewards

32. The Frappuccinos Improve “Third Place” Environment  Site has a very high employee turnover rate  Manager “promoted” to a another store in hopes of improving their poor performance  Site has very poor handicapped accessibility  Condition of restroom in each of our visits was poor and had no baby changing area

33. The Frappuccinos Focus Profitability Measures on More Than Just Staffing  Store is underperforming on some high margin product segments  Too high a focus on minimizing direct labor as a key to achieve profitability  Focus on high-margin items and profitable add-on sales  By increasing pastry sales by 33%, store would realize a $16K increase in contribution

34. The Frappuccinos Focused Recommendation Improve “Third Place” Environment

35. The Frappuccinos Pros and Cons of Discounted Opportunities Revamp the Employee Reward System Pros –Employees are motivated with more incentive to perform –Lower employee turnover rates –Positive reinforcement which leads to higher feelings of job satisfaction Cons –Pay and benefit structures dictated by corporate HQ –Cost of benefits would additional benefits lower site profitability –New reward system requires additional management

36. The Frappuccinos Pros and Cons of Discounted Opportunities (Cont.) Focus Profitability Measures on More Than Just Staffing Pros –Higher staffing levels benefit other employees –Better customer service –Improved customer focus could lead to higher sales Cons –Staffing is a cost that will decrease profitability –Upper-level management perception of low employee productivity –Employees may get in each other’s way

37. The Frappuccinos Three-Step Action Plan For Improvement  Decrease employee turnover rate –Focus on hiring older employees where benefits package is more appropriate –Base raises on performance rather than maximizing raises for economic reasons –Develop and actively maintain a reward system for employees (i.e. employee of the month) –Develop a system of regular employee communications / meetings

38. The Frappuccinos Action Plan (cont.)  Improve site accessibility and cleanliness –Upgrade front door and restrooms for handicapped accessibility –Add a baby changing station –Redesign restroom to separate cleaning supplies from bathroom or move cleaning supplies to another location –Focus employee attention on restroom cleanliness

39. The Frappuccinos Action Plan (cont.)  Enhance Starbuck’s differentiated atmosphere –Utilize entertainment budget to hire outside entertainers, have book / poetry readings, etc. –Display the store’s collection of games and activities more prominently –Make the location more of a “scene”

40. The Frappuccinos Impact Analysis - Benefits  By focusing on the initial recruitment and hiring stage, and by rewarding employees based on merit current turnover rates will be reduced.  By focusing on site accessibility and cleanliness, the physical facility will not detract from atmosphere.  By improving Starbucks’ atmosphere, it will become a more attractive place to go.

41. The Frappuccinos Potential Risks  Customers may not react positively to the changes being made  Not enough available employees to meet re- aligned hiring needs  Claims of age discrimination and negative affect on sales in youth demographic  Costs associated with planned change

42. The Frappuccinos Wrap-Up  Starbucks is the market leader in a growing market segment  Starbucks is known world-wide for its high- quality food products and differentiated “Third Place” atmosphere  The Wellesley location embodies the ideals of the corporate mission and has been very profitable, but there are still opportunities for improvement

43. The Frappuccinos Conclusion / Questions