BUSSPP 0020 Final Exam Study Guide Chapters 1 7 Starbucks Case Success Attributed to I general revenue income regardless of rate revenue and income have grown substantially a Revenue per dollar income revenue has increased from about 4 cents to about 7 cents II expansion has been massive a defined the market both domestically and internationally b market share domestically and internationally has only expanded III only 1 5 spent on marketing also expanded at their level before much social media IV CSR pioneers in their early reporting of sustainability diversity responsible supplying a paying more than market price for premium coffee to improve conditions of coffee farmers b reasons business reasons reputation some form of appropriate charity V HR wages benefits a Strategically set out to make coffee drinking an experience make a caf a destination b Created an entire industry I So why is Starbuck s stock price going down Brainstorming A If Starbucks has had financial success a strong handle on market share a successful CSR and excellent HR why is stock price falling 1 Ideas a Maybe CSR policy is too aggressive etc b competition increasing c company splits increase in stock decrease in price d already expanded so possible that growth of stores has stunted i e market is maturing everyone that wanted the product already got it e new concepts f high dairy cost 2 What do all of these things have in common a They all pertain to the FUTURE II Analysis of stock A What prompts people to hold onto stocks 1 Potential to increase in value 2 Likely to increase in value MORE THAN something else equivalent 3 Growth is relatively constant B What prompts people to sell stocks 1 Price is more likely to drop C Stock price is a function of 1 supply and demand a supply and demand for stocks 2 When a firm goes public it makes its stock available for purchase to the public a amount of stocks stays relatively constant b at times companies will buy back shares to increase price but in general the number of stocks is constant D So what s driving the price if it s not supply 1 DEMAND a if price is falling it indicates demand is falling b people value that particular stock less than other investments E Pure speculation why is demand going down 1 If CSR was the issue stock price probably wouldn t have been growing up to whatever point a competition MAY be the culprit b data in the case has been adjusted for stock splits probably not the issue c market MAY be maturing and consumers are becoming increasingly satiated don t reject this possibility d although this case is based in 2007 the stock chart included in the case indicates that the stock prices of this market will not be drastically affected until well into 2008 II Profit A Accounting profit vs economic profit 1 Accounting profit historical rearview mirror 2 Economic profit both historical and prediction a Difference in revenue vs expenses b will not grow as rapidly in the future if revenue growth slows down even if expenses stays the same c Will not grow as rapidly in the future if expenses decrease even if revenue stays the same B Issues facing revenue growth 1 New competition 2 Strong players i e McDonalds a New competition is selling same products for less Starbucks is the premium seller while McDonalds is a discount seller b McDonalds coffee reported better in at least one study C Issues with expenses 1 Beginning to spend more in advertising marketing not necessarily shown in the case but this is a reasonable assumption in the face of growing competition a hit is not going to be overwhelming but it will be significant 2 More competition need new products for product development and research 3 Coffee supply with increased competition Starbucks may be required to pay their suppliers more in order to remain the favorite preferred buyer III Conclusion about Starbucks stock A Let s back it up for a second 1 What two things in our lifetimes have been getting RIDICULOUSLY EXPENSIVE a Tuition b Healthcare i Starbucks spent 200 million in healthcare expenses in 2007 that s about half of revenue this looks like a time bomb B Coffee comes from a semi tropical band of the world 1 What processes does coffee go through a Picking washing etc b Roasting i Starbucks roasts its own coffee ii McDonald s and other competitors do not iii Retailing and roasting are two separate industries 2 Starbucks has 5 roasting plants 4 in the US and 1 in Holland a Starbucks RETAILS all over the world b so one batch of coffee may come from Sumatra be shipped to Seattle to be roasted and then shipped back to Australia to retail i Now we re including massive shipping and tax costs ii Coffee is an agricultural product it s going to spoil at some point iii Dealing with currency exchange massive risk iv Selling in AUD convert that back to USD you re making 81 cents on the 1 3 Starbucks is investing in WEIRD STUFF Music a It s 2007 illegal downloading has peaked b Now producing 3 groups artists Paul McCartney Joni Mitchell Dave Matthews i This music isn t selling to Starbucks target market ii Starbucks what the heck are you doing 4 So why is stock price going down a Demand is going down b It s a reasonable guess that Starbucks economic profit going forward is not going to increase and will most likely decrease IV Take aways A The performance of a firm is multi dimensional 1 Data qualitative and quantitative Both are important a no guarantee that data will tell a consistent story b we can anticipate performance c performance is a good indicator of what stock will do B Expectations of the future ARE IMPORTANT 1 History is no predictor of performance in and of itself a Just because it s been successful doesn t mean it will continue to be successful and vice versa C Sometimes data are in our face sometimes they re in our face and we must manipulate them and sometimes we have to push really hard to make good conclusions V Organizations and Firms A Organizations have 4 Characteristics 1 Boundaries separate the organization in two ways a External from other things in the world b Internal 2 Goals a Econ one goal model b MCE more than one goal model 3 Deliberately structured sets of activities a lots of stuff they need to get done i this has to be strategically planned or chaos ensues b called a position i putting a person into a position results in a job 4 Social inventions a there is nothing about our species that somehow requires that we have organizations B WE ARE INTERESTED IN FIRMS 1 firms