Presentation is loading. Please wait.

Presentation is loading. Please wait.

Starbucks Entertainment March 29 th 2008 Sanghoon Lee Jinwoo Park Kyungwon Kim Hanup Park 1.

Similar presentations


Presentation on theme: "Starbucks Entertainment March 29 th 2008 Sanghoon Lee Jinwoo Park Kyungwon Kim Hanup Park 1."— Presentation transcript:

1 Starbucks Entertainment March 29 th 2008 Sanghoon Lee Jinwoo Park Kyungwon Kim Hanup Park 1

2 2 Defining Our Vision

3 3 Profitability should be Starbucks entertainment’s priority Vision of Starbucks Entertainment Strategic HarmonyInternational Entry Solution “The finest coffee experience” Positive Influence on coffee sales? Profit oriented business! Group Vision Starbucks Entertainment Purchase to experience Initiatives to turn around Profit Harmony Maximize the profit while the main coffee business receives the spotlight

4 4 Starbucks would emphasize on the image of complex cultural space Coffee House & Music Store ?? VS. Complex cultural space Diluting music store image Vision of Starbucks Entertainment Strategic HarmonyInternational Entry Solution

5 5 Starbucks need to focus more on digital music as time goes by Profit Margin Growth Potential Store Look Antipathy of other retailers HighLow Music Store Strong LowHigh Coffee Shop None Vision of Starbucks Entertainment Strategic HarmonyInternational Entry Solution

6 6 Starbucks will create a blue ocean market through the digital music Vision of Starbucks Entertainment Strategic HarmonyInternational Entry Solution Blue oceanRed ocean Blue ocean + Mobile carrier Red ocean

7 7 Strategy for - England - Korea Where to Enter ? Business Model - Forecast - Implication - Most relevant market - High potential market How to Enter ?Profitability ? Investment AdequacyExpansion Candidates Our Solution Vision of Starbucks Entertainment Strategic HarmonyInternational Entry Solution

8 8 Expansion Candidates Selection

9 High Potential Group 9 Country Selection Japan United Kingdom China South Korea Taiwan Mexico Philippines Germany Thailand Malaysia Australia Turkey Spain Greece Indonesia New Zealand Singapore France Switzerland Global Presence Store number / Population Music industry market size Lucrative Group Addressable MarketFinal Selection Selection Criteria Hours Stayed in Starbucks Compulsive Buying Tendency Criteria to select Country Selection Lucrative GroupHigh Potential Group

10 10 Country Selection High Recognition Regression Line (Cut-off line) Example 1 Lucrative group Example 2 Potential group Low Recognition X : Population Y : No. of Starbucks Area : Music Industry Market Size Country Selection Lucrative GroupHigh Potential Group England Japan Taiwan Korea

11 11 Country Selection Lucrative group IT & Infra Criteria I Bargaining Power Criteria II Stay hour Criteria III Compulsiveness Criteria IV Japan +1 England +5 Country Selection Lucrative GroupHigh Potential Group

12 12 Country Selection Potential group IT & Infra Criteria I Bargaining Power Criteria II Stay hour Criteria III Compulsiveness Criteria IV Taiwan +1 Korea +4 Country Selection Lucrative GroupHigh Potential Group

13 13 Business Model of England

14 U.K Product Mix (Format) - U.K should pursue both CDs and Digital YESLATERNO -10% of global CD sales in U.K -Highest CD sales per capita (2.7) - 60 million albums sold H1 ‘07 (96.5% physical CDs) - Greatest penetration of music phones in Europe (43%) -90% of all singles sold through online and mobile - iPhone wifi issue - Strong Compilation CD sales (ex. Now 66) - U.K is a highly wired country (PCs, iphone…) - Costs $18,000 ~ $35, UK Product Mix (Format) UK Product Mix (Contents)UK Strategy Execution

15 U.K Product Mix (Contents) - U.K should market both intl. and local music U.K Starbucks 1. International Artist Local Music 2. Local i-tunes List3. Local Artist - Similar music taste as Americans - Leverage existing product line  Less risk - “Filtering” is relatively easy - U.K acts dominate U.K music market (59 of 100 top selling albums) - Finding talent is relatively easy - Can use own label to produce in U.S, market in U.K -Strong success of U.K artists in the U.S 15 UK Product Mix (Format) UK Product Mix (Contents)UK Strategy Execution

16 U.K Strategy Execution – First CD, then digital… deal with O 2 ASAP i-phone WiFi Problem X Switch to O 2 (similar to U.S Starbucks switching to AT&T)  Provide same service as in the U.S U.K Strategic Timeline Launch CD CD & Launch Digital Deal with O 2 Maintain strong CD Business & Increase proportion of revenue from Digital 16 UK Product Mix (Format) UK Product Mix (Contents)UK Strategy Execution

17 17 Business Model of Korea

18 18 Decline of the CD, and the boom of the digital music market Source: Korean Digital Music Development Association $370M Digital Music Market. First market where digital overtook physical sales. $435MTotal Music Market $65M CD Market. Impossible to sell CDs. Korean Product Mix (Format) Adjustments Execution Korean Product Mix (Contents)

19 19 The Gadget, the Vendor, and the Connection – Starbucks’ current plans Purchase restricted in Korea Korean Product Mix (Format) Adjustments Execution Korean Product Mix (Contents)

20 20 The Gadget, the Vendor, and the Connection – Plans that will work Cell phones are more adequate in the Korean market. Music vendor dealing with cell phones If in-store Melon access weren’t free, no one would use it. Thus, Starbucks needs to negotiate with the carrier. Korean Product Mix (Format) Adjustments Execution Korean Product Mix (Contents)

21 21 The Gadget, the Vendor, and the Connection - Send song info to cell phone through RFID - Cheap and Efficient for customer - Requires investment - Create direct download, reducing -time and money for customers - Increase contents expenditure for carrier. -Special price deals in Starbucks - Better music selection -Many possible plans negotiable. Utilize RFIDReduce Connection FeesBetter Deal in Starbucks Korean Product Mix (Format) Adjustments Execution Korean Product Mix (Contents)

22 Localize on the national level. Welcome Korean artists’ songs to meet local taste. Create a few unique flagship stores for various tastes. 22 Providing better music and a better experience Localize to meet customer taste better. Utilize Melon’s knowledge in customers. Localize By Store Management can’t control quality of music in each store. Protect brand image. Localize By Country Reasons for Localizing Reasons for Globalizing Entirely Global Korean Product Mix (Format) Adjustments Execution Korean Product Mix (Contents)

23 23 Execution – Negotiate with NESPOT, Melon.. And Install RFID ASAP Korea Strategic Timeline Deal with Carriers Partner with Melon Install RFID Build Flagship Starbucks Stores& Add Korean artists’ songs into the music list Lookout for Apple’s entry in the Korean market Establish Infrastructure Make business possible Establish Product Mix Make business lucrative Korean Product Mix (Format) Adjustments Execution Korean Product Mix (Contents)

24 24 Execution - Plan B What can go wrong? Melon might not work out, SKTelecom might not offer lower connection fees Music sales might be too bleak Coffee Bean & Tea Leaf, McDonalds may offer music or other cultural activities What then …? Use Alternatives Music vendors: Dosirak, Mnet Alternative Carriers: KTF, LGT ONCE STARTED, Must Continue because initial investment on RFID and equipment is the only significant cost Hurry Gain more know-how and bargaining power Partner Problems Competitors Chasing Profitability Question Current Degree of Threat : Profitability > Partner Problems >>> Competitors Korean Product Mix (Format) Adjustments Execution Korean Product Mix (Contents)

25 25 Valuation

26 Valuation Method Valuation outline Benefit & CostValue added Business Plan UK - CDs, Postponed iPhone service launch KOR - Mobile Music Margin Information iTunes Affiliates Margin Mobile music Margin estimates  Rev. / Cost estimates Assumptions Market Information Market Value Implied growth rate Trend Analysis Coffee Operation Margin Cost of Equity Beta Risk-free rate Market Premium Residual Income Model Starbucks Entertainment UK Coffee Country Division Value Market Value #of Stores = Country Division Value w/ 5 year sales Forecast Coffee Division Entertainment Division UK Coffee KOR Coffee Starbucks Entertainment KOR Coffee 26

27 Valuation Method Valuation outline Benefit & CostValue added Starbucks As Is Sales Growth Operation Margin Profit Margin ROE Trend Analysis Cost of Equity: 7.49% (CAPM model) Risk free rate: 3.49% (10-year T-bond Rate) Market Premium: 5% (Assumption) Beta: 0.89 (Google finance) Cost of Equity Implied Growth Rate = 3.6% Market CAP as of 11 APR = $12,520 Millions 2 stage growth Model g=ROE×Retention Ratio ROE = 30% (Assumption) Implied Growth Rate V= BV + ∑RI RI = Earnings - Required Return(BV×Cost of Equity) 2-stage growth Model Residual Income Model UK / Korea Core Coffee Revenue Breakdown in proportion to #of stores UK: 580 Company owned Korea: 215 Licensed Operation Margin: 11.6% Growth Rate: 3.6% Breakdown&Valuation $12,520 Millions $ Millions $ 32.3 Millions Core Coffee Parameters UK Korea Appendix “implied Cost of Equity” Appendix “Trend Analysis” 27

28 Value Added Valuation Method W/ Entertainment Value Added = Entertainment + Synergy Core Coffee UK / Korea Core Coffee UK / Korea Core Coffee Revenue Breakdown in proportion to #of stores UK: 580 Company owned Korea: 215 Licensed Operation Margin: 11.6% Growth Rate: 3.6% Starbucks Entertainment Operation Margin: Differ from CD/iTunes/E-music Synergy W/ Entertain. Additional Core Revenue Core Coffee Revenue Breakdown in proportion to #of stores UK: 580 Company owned Korea: 215 Licensed Operation Margin: 11.6% Growth Rate: 3.6% Valuation outline Benefit & CostValue added $ Millions $ 32.3 Millions UK Korea 28

29 Valuation Method UK Korea Synergy Increase in Sales = 0.18% Starbucks Entertainment CD Sales iTunes Sales Synergy? Starbucks Entertainment Mobile Music w/ RFID BenefitCost Additional Sales Enhanced Starbucks Experience through Music Brand Identity Coffee House or Music Store?  Focus Strategy CD Sales iTunes Incremental Gain Low Margin. Multi-Volume iTunes Akamai Server per Store Maintenance Cost Additional Sales Enhanced Starbucks Experience through Music Brand Identity Coffee House or Music Store?  Focus Strategy Digital Music Incremental Gain Low Margin. Multi-Volume Digital Music Through which Network? RFID Maintenance Cost Valuation outline Benefit & CostValue added 29

30 Valuation Method UK Korea Synergy Increase in Sales = 0.18% Starbucks Entertainment CD Sales iTunes Sales Synergy? Starbucks Entertainment Mobile Music w/ RFID BeforeW/ Entertainment Value: 685 $ Million Growth Rate: 3.6% Value: 700 $ Million Growth Rate: 4% Value: 32 $ Million Growth Rate: 3.6% Value: 33 $ Million Growth Rate: 3.6% Valuation outline Benefit & CostValue added 30

31 31 Conclusion

32 Our conclusion Starbucks Entertainment Synergy Unit Profitability Synergy Unit Profitability Great Value Huge Potential Less Potential Low Margin  Enter markets with great CD prospects - Profitability, great experience, less risk, less initial investment - Can accompany digital, but the model should not be dependent on digital  Exercise extremely caution when looking at markets with only digital prospects 32

33 Additional Materials 33

34 Appendix 1-1. Infrastructure Source: Sofrecom (27 th Oct 2006) 34

35 Appendix 1-2. UK Mobile Internet Usage There is increasing focus on encouraging internet access from consumer mobile handsets, e.g. many operators launched mobile TV services in There are now over 4.5 million 3G subscriptions (Q4 2005) Estimates vary considerably on how many people are actually using the mobile internet: 6% of UK adults access the internet via a portable device 11% of UK users have browsed the web using a mobile (May 2006) 15% of UK users browsed news and information at least monthly on their mobiles (based on quarter ended June 2006) 27% of UK users have surfed the web using a mobile (August 2006). The differences may be explained by lack of clarity about what respondents mean by ‘surfing the web’. Other UK monthly mobile usage figures based on the quarter ended June 2006 include: 6.6% of subscribers used personal 5.7% purchased a ring tone 4.3% downloaded a mobile game 4.1% used mobile Instant Messenger 2.2% purchased wallpaper or screensaver Many of these figures represent a decrease on previous usage – particularly those involving purchasing or downloading. 44% of people in the UK who tried mobile data services for the first time during the 2006 World Cup said they will not be doing so again. 75% of mobile phone users who request more information about a product and are sent a message with a call to action never follow it through. Mobile operator 3’s SeeMeTV service had 4 million downloads of thirty-second videos created by its subscribers in less than five months. Creators get a small slice of the download revenues which earned them £100,000 in total by March (Source: 35

36 Value Orientation Materialistic Values Online Buying Motives Emotional and mood-related Identity-related Dysfunctional Behavior Compulsive Buying Tendency Online Power Distance Individualism Uncertainty Avoidance Self-tr Self-en Open (+) (-) (0) * Appendix 2-1. Cross-Cultural Compulsive Buying Tendency (1/2) * The Cultural Relativity of Organizational Practices and Theories Geert Hofstede, Journal of International Business Studies, Vol. 14, No. 2, Special Issue on Cross-Cultural Management. (Autumn, 1983), pp ** A cross-cultural examination of the relationship between materialism and individual values, W. Kilbourne et al. / Journal of Economic Psychology 26 (2005) 624–641. *** When A Better Self Is Only A Button Click Away: Associations Between Materialistic Values, Emotional And Identity–Related Buying Motives, And Compul sive Buying Tendency Online, Helga Dittmar, Karen Long, And Rod Bond, University Of Sussex, UK, Journal Of Social And Clinical Psychology, Vol. 26, No. 3, 2007, Pp. 334–361. Cross-Cultural Difference ** Materialistic Values Hofstede(1983) shows cultural differences of 50 countries in following 4 dimensions. 1, Individualism versus Collectivism: 2. Large or Small Power Distance; 3. Strong or Weak Uncertainty Avoidance; and 4. Masculinity versus Femininity. Kilborune(2005) argues Power distance(equivalent to Self- transcendence) values is negatively related and Individualism (equivalent to Self-enhancement) positively related to Materialist Values Compulsive Buying Dittmar(2007) suggests 2-factor model for explaining compulsive buying behavior. The 2 factors are largely affected by the degree of materialism in personal value. ** *** Strong Materialistic Values High Tendency of Compulsive Buying Two Factor *

37 Appendix 2-2. Cross-Cultural Compulsive Buying Tendency (2/2) * The Cultural Relativity of Organizational Practices and Theories Geert Hofstede, Journal of International Business Studies, Vol. 14, No. 2, Special Issue on Cross-Cultural Management. (Autumn, 1983), p. 82. High Material Values High Individualism Low Power Distance KOR TAI GBR JPN Taiwan Korea Britain Japan TAI KOR GBR JPN AcronymCountry *

38 Source : Appendix 3. U.K Product Mix (Format) 38

39 39 Dominance in the US mp3 player market iTunes surpasses RealPlayer in unique users Source: Forbes Appendix 4-1. Strong dominance of iPod & iTunes in the US Market

40 40 Over 50% of the UK mp3 player market iTunes remains strong in the UK Market Source: Forbes Appendix 4-2. Relatively strong position of iPod & iTunes in the UK Market

41 41 iPod’s weak position in the Korean mp3 player market Apple only provides partial services in Korea iPod Touch does not provide Korean, thus limiting web browsing. Safari goes against Korean network provider NESPOT. Koreans cannot purchase contents at iTunes due to intellectual rights issues. Source: LG Electronics Appendix 4-3. Weak Position of iPod & iTunes in the Korean Market

42 Localize on the national level. Welcome Korean artists’ songs to meet local customers’ tastes. Maintaining national level control is easier than managing individual stores. Still meet Global standards 42 HIGH NEED to localize, due to different culture, taste, and music contents providers. Our local partner Melon would like to boost its overall sales. Nonetheless, Starbucks has to maintain it’s “exotic, foreign” image. Add Variety By Store Localizing by each store may hurt the Starbucks image. Management can’t control quality of music in each store. Build unique flagship stores in popular districts to add variety. Localize By Country Appendix 5. Localize on the country level and add flagship shops to add diversity

43 The growth rate that equates Intrinsic Value to Market Cap Given Market CAP of 12,520,000 indicates that the market estimate of Starbucks’ growth rate is approximately 3.6% 2008E2009E2010E2011E2012ETerminal BV$2,337,994$2,422,903$2,510,895$2,602,083$2,696,582 NI$700,328$701,220$726,686$753,077$780,426$808,769 NE$178,904$185,637$192,378$199,365$206,605$214,109 RE$521,425$515,583$534,307$553,712$573,821$594,660 Discount PV$483,069$442,521$424,858$407,900$391,620$8,116,839 RI model Pro-forma Current Market Cap (as of 11 Apr)$12,520, E Earnings$675,786 sum of PV(BV+Sum of RE)$12,520,000 Beta(google Finance) 0.89 CSE$2,253,193 ROE (ROE of 2008)30% Cost of Equity7.9% Market est.growth(Implied)3.6% Retention Ratio (g/ROE)12% Rf3.49% Key Parameters Implied Growth Rate Appendix 6-1. Valuation Method “Implied Growth Rate” 43

44 Simple regression analysis reveals that Starbucks is mature industry, and urgent need to open up new markets. Trend Analysis Operation Margin Growth Rate Operation Margin in increasing with diminishing return, converging to 12% implies Starbucks’ efficient operation Growth Rate of Recent 3yrs is continuously low, approaching 2% in contrast to market expectation of 3.6% Appendix 6-2. Valuation Method “Trend Analysis” 44

45 UK Starbucks Valuation UK Core Coffee= 685,622UK BV= 100,206 (in 000s)2007E2008E2009E2010E2011E2012ETerminal UK Retail 464, , , , , ,669 Foodservice and other 4,794 4,977 5,167 5,364 5,568 5,781 Global CPG 13,486 14,000 14,533 15,087 15,662 16,259 Operation Margin(3-y avg.)11.6% Coffe Operation Income 56,201 58,343 60,567 62,876 65,273 67,761 Coffee Growth Rate3.8% Starbucks Entertainment Variable OI CDGrowth Private Lable-2.0% CD from other labels-2.0% iTune Commision35% (Fixed Costs) cumulative(8)(11)(15)(20)(27) (Fixed Costs) Current(8)(3)(4)(5)(7) Entertainment Operating Income 56,201 59,412 61,631 63,921 66,301 68,774 NI 35,111 37,117 38,503 39,934 41,421 42,966 44,568 BV 100, , , , , , ,197 ROE37%36% Growth Rate5.7%3.7% Retention Ratio15%10% NE 7,956 8,411 8,725 9,049 9,386 9,736 RE 29,161 30,092 31,209 32,371 33,580 34,832 Discount Factor PV of added Value 27,016 25,828 24,816 23,847 22, ,440 UK W/ Entertainment= 700,070 Synergy 14,448 Appendix 6-3. Valuation Method of UK 45

46 Korea Valuation Korea Core Coffee= 32,283 Korea BV= 7,376 (in 000s)2007E2008E2009E2010E2011E2012ETerminal Korea Retail 17,005 17,623 18,263 18,926 19,614 20,326 Foodservice and other 1,777 1,842 1,909 1,978 2,050 2,124 Global CPG 4,999 5,181 5,369 5,564 5,766 5,975 Operation Margin(3-y avg.)11.6% Coffe Operation Income 2,770 2,871 2,975 3,083 3,195 3,311 Coffee Growth Rate3.6% Starbucks Entertainment Variable OI Mobile Music8% (Fixed Costs)(215)(5) Entertainment Operating Income 2,770 3,161 3,061 3,176 3,295 3,418 NI 1,731 1,975 1,912 1,984 2,058 2,135 2,216 BV 7,376 8, , , , , , ROE27%23%24% Growth Rate14.1%-3.2%3.7% 3.8% Retention Ratio52.7%-13.9%15.4% NE RE 1,389 1,244 1,337 1,387 1,439 1,493 Discount Factor PV of added Value 1,287 1,068 1,063 1, ,378 Korea W/ Entertainment= 33,175 Value Added 892 Appendix 6-4. Valuation Method of Korea 46

47 Number of albums sold in U.K Starbucks for a particular release Total Visitors to U.K Starbucks (based on #store) Total Visitors to U.K Starbucks (based on #store) Number of other label CDs sold in U.K Number of private label CDs sold in U.K Total Visitors to Starbucks Total Visitors to Starbucks Number of albums sold in the U.S for a particular release Apply respective margin to each album sold Number of visits required to result in a purchase for U.S Sales Forecast for CDs in the U.K Appendix 7-1. Sales Forecast – CDs 47

48 Number of visits required to result in a purchase for U.S Expected market share of iPhone in 2009 Scale to account for the magnitude of electronic single market in U.K Number of visits required to result in a purchase of 1 song Total Mobile Subscribers in U.K Total Mobile Subscribers in U.K Population of U.K “1 out of how many people own an iPhone?” Population of U.K “1 out of how many people own an iPhone?” Number of downloads per year at Starbucks Number of visits to U.K Starbucks by iPhone owners Sales Forecast for digital sales in the U.K Apply appropriate margin to each download Appendix 7-2. Sales Forecast - Digital 48

49 Source : Appendix 7-3. Sales Forecast backup information – iTunes Margin 49

50 Source : Appendix 7-3. Sales Forecast backup information – CD Margin 50

51 These margin figures do not consider specific fixed costs that will be incurred at each Starbucks Store UK: CD – insignificant Digital – Server LCD S. Korea: Digital – Server RFID Equip. RFID Reader LCD Appendix 7-4. Margin Calculation 51

52 McDonald’s Order by placing cell phone on bar code. Also pay for meal by cell phone Yahoo Korea Maps Place cell phone on a restaurant bar code sticker, and the cell phone connects to the restaurant website. Approximate Cost : $300 to install RIFD readers Appendix 5. Mobile - RFID Usage in Korea Per store Cost: $700 to install Laser Screen $300 to install RIFD readers $1000 per store 52

53 Q & A 53


Download ppt "Starbucks Entertainment March 29 th 2008 Sanghoon Lee Jinwoo Park Kyungwon Kim Hanup Park 1."

Similar presentations


Ads by Google