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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.

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