Skip to main content

2 - Competitive Advantage - Starbucks

Competitive Advantage is the gap of economical value between two or more competitors. In simple terms how much one seller can charge more for similar service then its competitor. I am going to pick Starbucks as my focus company and we will see its competitive advantage over its competitors. 

If we look at the financial indicators, all of them look good except leverage. That is not in normal range because Starbucks took big loans to shareholder obligations. I created this report as part of Financial Management Class.

But this is not all what helps finding if Starbucks has competitive advantage. We have to look at other factors which are hard to quantify. Lets look at some of them, as suggested in the book are

1. Information-ally Complex - Roasting Coffee beans is not that simple as it looks and roasting at Starbucks scale with consistent quality and taste it quite complex. Through the years Starbucks has gathered all this information and now has four specialist coffee roastery’s in Washington, Pennsylvania, Nevada and the Netherlands.

2. Know your Customer - If Starbucks would just be selling Coffee then they might not be as successful as they are, rather they started selling experience. Analyzing customer behavior and taste preferences is daily task for Starbucks. Thinking about personal experience, I look for Starbucks whenever I am travelling because I know what I will get in terms of product and services. I know the taste. I love to explore new local cafe's but sometime Starbucks is the best option around. I think this is one of the biggest competitive advantage for any company that their customers look for them where ever they are.

3. R&D - Starbucks did extensive research on all parts of Coffee brewing process from procurement to roasting, sales, brewing, and flavor. Frappuccino came out of R&D to attract non-coffee drinkers. Later they introduced bottled coffee and Mocha flavors.

4. Economies of Scale - Two biggest part of Starbucks stores are, store location and coffee beans. Starbucks choose to find busy locations within city to attract customer throughout the day. This also helped Starbucks make raw material deliveries convenient. On the coffee beans side, they partnered with farmers and made them part of the process. Coffee farmers are normally not very rich and not have enough resources to keep up with the demand, but they have extensive experience for producing high quality beans. Starbucks helped them financially and put some measure the quality to make sure to get highest quality beans at large scale.

I calculated these ratios in Financial Management class (7155). You can see the full report by using this link From 2019 Annual Financial Statements.

CategoryRatioFormulaValue
Short-term solvency, or liquidity ratiosCurrent RatioCurrent Assets / Current Liabilities2.20
Quick Ratio(Current Assets - Inventory) / Current Liabilities1.95
Cash RatioCash / Current Liabilities1.54
Long-term solvency, or financial leverage, ratiosTotal Debt Ratio(Total Assets - Total Equity) / Total Assets0.95
Debt/Equity RatioTotal Debt / Total Equity19.65
Equity multiplierTotal Assets / Total Equity20.66
Time interest earned ratioEBIT / Interest-22.37
Cash coverage ratio(EBIT + Depreciation)/ Interest-30.04
Asset utilization, or turnover ratiosInventory TurnoverCost of Goods Sold / Inventory12.40
Days Sales in Inventory365/Inventory Turnover29.43
Receivable TurnoverTotal Revenue / Account Receivable15.00
Days Sales in Receivable365 / Receivable Turnover24.34
Total Assets TurnoverTotal Revenue / Total Assets1.02
Capital IntensityTotal Assets / Total Revenue0.98
Profitability ratiosProfit MarginNet Income / Total Revenue18.28%
ROANet Income / Total Assets 18.70%
ROENet Income / Total Equity386.34%
Market Value ratiosBook valueShareholders Equity / Shares Outstanding$0.97 
EPSNet Income / Shares Outstanding$3.77 
P/E RatioPrice Per Share / Earning Per Share23.92
Market-to-Book RatioMarket Value Per Share / Book Value Per Share92.42
ROE ComponentsTax BurdenNet Income / Income Before Tax0.78
Interest BurdenIncome Before Tax / EBIT1.52
EBIT Margin (ROS)EBIT / Total Revenue0.15
Asset TurnoverTotal Revenue / Total Assets1.02
LeverageTotal Assets / Total Equity20.66

https://medium.com/@shahmm/how-did-starbucks-build-its-sustainable-competitive-advantage-79ff5eedb5ff

From 2019 Annual Financial Statements.

Labels:

Comments

Post a Comment

Popular posts from this blog

15 - Starbucks International Strategy

Starbucks mostly wants to own its own stores for best experience and it has done that successfully in US. Although drinking coffee in bar was not famous when Starbucks was started in 1970's. Howard Schultz inspired from this idea in Italy, started serving brewed coffee in US. He was an American Businessman and understood the economics, work, and local cultures of US, so was likely aware of the risks and opportunities of the time. He made Starbucks a success story in US and now we can find Starbucks stores in almost all the major and even small US cities.  But replicating same success would not that be easy. It would need lot of capital, cultural experiences, macro and micro economic indicators, and specifically language and accent. Some of these things can be replicated using the local hires, but creating a success at the level Starbucks would want to would not be easy without local partnerships and alliances. Starbucks heavily relied on license model for half of its stores and als...
Post a Comment
Read more

14 - Starbucks Acuiqsitions

Starbucks acquired many companies over the years. Let’s look at these acquisitions strategies employed by Starbucks.  Teavana • Type of business: Tea and Accessories • Acquisition price: $620 million • Date purchased: December 31, 2012 Starbucks acquired Teavana as Product Extension Merger and started offering loose leaf tea and tea related products in its stores and online. Although this acquisition gave Starbucks 379 new locations, but Starbucks closed them all instead.  La Boulange • Type of business: Bakery Chain • Acquisition price: Reported $100 million • Date purchased: June 4, 2012 This is mix of Vertical Integration and Product Extension acquisition. Since Starbucks started selling bakery products in its stores as Product Diversification strategy, it was sourcing these bakery products from La Boulange. Later Starbucks decided to acquire La Boulange to vertically integrate its operations and kept 400 locations came with this acquisition. Later Starbucks dec...
Post a Comment
Read more

3 - Mr. Porter Coffee Please

1. Threat of Entry             a. Economies of Scale: Starbucks currently have 5 roasting facilities and opening a new one in China, which will be biggest so far and will serve approx. 6000 Starbucks in China itself. At this scale, it is very hard for any new entrant to compete with Starbucks on cost. https://u.osu.edu/commoditychaincoffee/manufacturing-page/ https://stories.starbucks.com/stories/2020/starbucks-announces-new-roasting-facility-in-china-extending-its-global-roasting-network/             b. Product Differentiation: Starbucks not only buys best coffee beans out there but also help them grow. They always use Arabic Coffee beans, which are considered best in quality for dark roasting and never mixed them any other type to cut down the cost and increase profit. “Starbucks Arabica beans are different from regular Arabica beans. At every step, we go to grea...
Post a Comment
Read more