BUSSPP 0020Final Exam Study Guide: Chapters 1 – 7Starbucks 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 centsII. expansion has been massive a. defined the market both domestically and internationally b. market share domestically and internationally has only expandedIII. only 1.5% spent on marketing, also expanded at their level before much social mediaIV. 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 café 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 constantB. What prompts people to sell stocks? 1. Price is more likely to dropC. 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 investmentsE. 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 2008II. 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 studyC. 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 $13. 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-awaysA. 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 doB. Expectations of the future ARE IMPORTANT 1. History is no