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Starbucks, Dunkin’ Donuts and McDonald’s: Comparative Analysis of Cafes

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Starbucks

Starbucks has become a market leader by understanding the core qualities of the coffee industry and the needs and wants of their customers. They have been able to deliver exceptional service to their customers and impeccable training to their employees for years. Acquiring a large percentage of the market, Starbucks is present in several different countries with thousands of stores throughout the world. In this report, I will give an overview of Starbucks Co. By going over its current mission statement, values, and performance, we will be able to better assess the internal and external environment of the company and the strength of its competitive forces.

What was once “Cargo House”, is now the infamous premium coffee company, Starbucks Co. Starbucks now operates in 78 different markets and has more than 30,000 stores as of 2019. Starbucks first started its operations in 1971 with one small store in Seattle’s Pike Place Market. While Starbucks started off its operations by selling only coffee, they soon branched out into teas, smoothies, pastries, water, and sandwiches. Originally acknowledged for their fine whole bean coffees, Starbucks soon became more than just a simple grab-and-go coffee location. Starbucks is a place for friends, couples, and families to conversate, work, and enjoy their coffee. That is why Starbucks’ mission is to “inspire and nurture the human spirit-one person, one cup and one neighborhood at a time”. While Starbucks has a mission statement, they do not have a clear vision statement, but instead they have made it clear what their values are. They want to create a culture of “warmth and belonging”, where everyone is welcome and included. They want to make sure that they are doing the best that they can day in and day out. They want to, “be present, transparent, and respectful” in all that they do. It is important to note that not only is Starbucks’ mission to make their customers happy but to inspire its employees as well.

In 2014, Starbucks opened its first roastery reserve location in Seattle. Starbucks reserve is more about the experience that you are getting when entering the store and ordering the unique coffee of your taste. Starbucks’ reserve carries limited coffees and their goal is always make sure that they are creating an exclusive experience for each customer. After Seattle, Starbucks’ reserve locations expanded to New York City, Shanghai, Milano, and Tokyo and has a store opening soon in Chicago.

As aforementioned, although Starbucks does not have a clear vision statement, the values that they continue to reinforce, is at the forefront of their priorities. Not only is it important to Starbucks that their customers are always satisfied, but their employees as well. They strive to build a nurturing, friendly, and exemplary relationship between top management and employees, by providing proper training to all prospective employees. Since trends are so important in our society nowadays, Starbucks makes sure that they are always up to date with what their customers’ needs and desires are. For example, Starbucks brings back and introduces new beverages every season. As of May 2019, they have brought back their S’mores Frappuccino, as well as introducing a new refresher drink for the warmer days, dragon fruit and mango tea. The introduction of new beverages every few months demonstrates that Starbucks takes into consideration the new trends of the season as well as the demand. In summation, Starbucks makes it their goal to always remain transparent, have the best quality, dignity, and respect for their customers and employees.

According to Starbucks’ latest annual report, as of September 30th, 2018, Starbucks Co.’s total net revenues increased $2.3 billion, or 10.4%, from fiscal 2017. Regarding the United States, it was calculated that total net revenue for fiscal 2018 increased by $1.1 billion, in comparison to fiscal 2017. When understanding where this increase in net revenue came from, it is important to note that 383 new stores were opened, contributing to $909 million, as well as 313 new licensed stores generating $197 million in net revenue. On a broader scale, we can see that China and Asia Pacific generated a total net revenue for fiscal 2018 of $4.4 billion, in comparison to a $3.2 billion total in fiscal 2017. From this total, $0.9 billion was due to the impact of ownership change in East China and $0.3 billion due to 443 company-operated stores opening. Starbucks’ 2018 annual revenue was $24.72 billion higher than 2013 annual revenue ($14.87 billion). There has also been a drastic change in the stock price over the past 5 years. In 2014, Starbucks was selling shares at $34.57, and as of May 3rd, 2019, its shares have increased to a selling point of $78.04. Starbucks is striving and performing exceptionally well in the Asian regions. However, Starbucks is not doing as well in balancing out its profit and liabilities ratio. Starbucks is distributing a large amount of money to its shareholders as opposed to investing more into the market. Additionally, Starbucks should reconsider its overall profitability and borrow less money as it would be more beneficial in the future.

Expected Rate of Return on Market Portfolio

  1. https://www.stock-analysis-on.net/NASDAQ/Company/Starbucks-Corp/DCF/Present-Value-of-FCFF
  2. The weighted-Average effective interest rate on Debt
  3. https://www.stock-analysis-on.net/NASDAQ/Company/Starbucks-Corp/DCF/Present-Value-of-FCFF
  4. Long-term Debt(10k-filing date: 2019-11-15)

As of November 8, 2019, there were 1,181.0 million shares of the registrant’s common stock outstanding and stock price was $83.02 during that time.

  1. Equity=No. shares of common stock outstanding * Current share price=$1,181,000,000*$83.02=$98,046,620,000.00
  2. Long-term debt=$12,033,000
  3. Rate of return on Long-term Treasury Composite=2.15%, Expected rate of return on market portfolio=11.49%, Systematic risk(B) of Starbucks Corp’s. common stock=0.52, then we can use the CAPM formula to calculate required rate of return on Equity=2.15%+0.52(11.49%-2.15%) =7.00%.
  4. Weighted-Average effective interest rate on debt=3.33%. 5)Estimated(average) effective income tax rate=(19.5%+19%+33.2%+32.9%+29.3%+34.6%)/6=$28.08% 6)(After tax)Required rate of return on Debt=3.33%*(1-28.08%)=2.39%.

Value Weight Required rate of return

  1. Equity (fair value) 9,8046,620 0.89 7.00%
  2. Long-term debt (fair value) 12,033,000 0.11 2.39%

WACC=0.89*7%+0.11*2.39%=6.5%

FCFF Growth Rate Forecast

Year Value g(t)

  • 1 g1 18.44%
  • 2 g2 14.64%
  • 3 g3 10.84%
  • 4 g4 7.04%
  • 5 g5 3.24%

Starbucks Corp., current enterprise value Calculation

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  • Current share price $ 83.02
  • No. Shares of common stock outstanding 1,181,000,000.00

US $ in thousands

  • Common equity (market value) 98,046,620.00
  • Add: Noncontrolling interests (Per book) 1,200.00
  • Total Equity 98,047,820.00
  • Add: Long-term debt 11,167,000.00
  • Total equity and debt 109,214,820.00
  • Less: Cash and cash equivalents (2,686,600.00)
  • Less: Short-term investments (70,500.00)
  • Market Price $ 106,457,720.00

Intrinsic Valuation Calculation of the Company

US $ in thousands

Year Value FCFF Calculation Present value at 6.5%

  • 0 FCFF0 3,481,498.00
  • 1 FCFF1 4,123,415.00 3,481,498*(1+18.44%) 3,871,743.00
  • 2 FCFF2 4,726,971.00 4,123,415*(1+14.64%) 4,167,559.00
  • 3 FCFF3 5,239,213.00 4,726,971*(1+10.84%) 4,337,249.00
  • 4 FCFF4 5,607,839.00 5,239,213*(1+7.04%) 4,359,064.00
  • 5 FCFF5 5,789,264.00 5,607,839*(1+3.24%) 4,225,426.00

5 Terminal Value 183,047,662.00 5,789,264*(1+3.24%)/ (6.5%-3.24%) 133,601,501.00

  • Intrinsic Value of Starbucks Corp.’s capital 154,562,542.00
  • Less: Long-term debt (12,033,000.00)
  • Intrinsic Value of Starbucks Corp.’s common stock(per share) 142,529,542.00

It is no doubt that Starbucks has competitors that are always trying to one-up them in the coffee industry. With customers’ opinions constantly changing, companies must make sure that they are aware of current trends to satisfy demand. It is evident that all companies in the industry strive for success, growth, good word-of-mouth, and finally, profit. Starbucks’ two largest known competitors are Dunkin Donuts and McDonald’s Cafe. Dunkin Donuts has a market share of 16.09%, McDonald’s Cafe has 11.94% of the shares, and Starbucks remains the leading brand with 21.83%. While McDonald’s Cafe is a rising force in the industry, Dunkin Donuts poses more of a threat to Starbucks because it is currently using very similar strategies and marketing techniques as Starbucks.

Dunkin Donuts first opened its doors in 1950 and after just five years, was already franchising throughout the United States. In 2004, Dunkin Donuts became one of Starbucks’ biggest competitors. While Starbucks was offering premium quality coffee drinks at a high price point, Dunkin Donuts was offering almost the same quality coffee, but at a much lower price, causing a potential threat. The low price point attracted many Starbucks customers that were looking for a more affordable option. To attract new customers, Starbucks relied heavily on word-of-mouth from their present loyal customers. On the other hand, Dunkin Donuts used the more “classic” form of advertisements, such as TV commercials and fliers. This may be an advantage to Dunkin Donuts as they are targeting many different people through several platforms, while Starbucks is promoting more exclusively, only through word-of-mouth. As the second biggest competitor, McDonald’s Cafe has also marked its presence in the premium coffee market. Competitors pose a concern for the future of Starbucks because as they are offering similar quality products at lower prices. Because of this, Starbucks is at risk of losing loyal customers to Dunkin Donuts and McDonald’s Cafe. External elements contribute to their low switching costs, which also causes strong competition. With Starbucks’ high-quality Arabica and Robusta coffee beans grown worldwide, it creates a low switching cost between other suppliers trying to follow in their footsteps. A low switching cost also causes a low bargaining power because of its enormous size and services.

When we think of quick fast food, McDonald’s is the first company that comes to mind, but no one stops to think about their performance in the coffee industry. They opened doors in 1955, and their first McCafé location opened in 1993 in Australia. Once it was known that customers had high demands for customizing their coffee, McDonald’s took the opportunity to introduce several different coffees for customers to choose from. They sold cappuccinos, smoothies, hot chocolate, lattes, and other breakfast items. McDonald’s goal was to create an at home, cozy, comfortable, warm atmosphere for customers. Because obesity is such a hot topic in the United States, McCafé introduced many healthy options, appealing to those looking for a healthier alternative. Studies have also shown two important facts, customers have a personal connection with a company that speaks to you face to face, and they also prefer separate sections within one store. By combining their new ideas in 2017, McDonald Cafe’s sales increased by 6.6%. Both Dunkin Donuts and McDonald’s Cafe are big players with similar structures and many diversified store locations. It is important to note that Starbucks’ has had a lot of imitation from smaller chains that are trying to achieve a similar marketing strategy. While Starbucks has many loyal customers that order the same drink every day, McDonald’s Cafe and Dunkin Donuts have customers that vary a little in their purchasing habits. Starbucks remains the leader of the industry and is continuously growing their market share. With more than 200 items on their menu, they have many options for their loyal and new customers to choose from, while Dunkin Donuts only provides 32 items and McDonald’s Cafe 145 items.

Starbucks main industry which it competes in, is coffee beverages. Offering different varieties of coffee, customers can request their drinks anyway they like. One may ask, just how attractive is the coffee industry? The coffee industry is a constantly growing with millions of customers viewing coffee as a stable purchase. Coffee is one of the most commonly consumed beverages in United States, even more so than tap water. According to the study that National Coffee Association conducted in collaboration with Specialty Coffee Association of America, the total economic impact of the coffee industry in the United States in 2015 was $225.2 billion. In addition, it was also established that the coffee industry is responsible for 1,694,710 jobs in the United States economy. It generates nearly $28 billion in taxes and it is estimated that over the next five years, industry revenue is forecasted to grow at an annualized rate of 2.1% to $50.6 billion due to strong consumer demand for gourmet coffee in numerous blends, flavors and varieties. With the demand for coffee increasing, Starbucks is surely able to grow alongside it, supplying the coffee to fulfill consumers demands.

The popularity that has developed with Starbucks’ brand is unmistakable. Since its first store opening in 1971, there is an estimated 28,218 other locations around the world. Originated in the United States, popularity began here and spread throughout other countries. By targeting its main consumers, 20-40-year old, the U.S. market is the most profitable market. Over 70% of Americans spend money on coffee daily, with an average of $16.00 spent per week. Starbucks’ highest source of revenue is in the U.S., with $16.73 billion accounted for in 2018 compared to its second main market, China, with only $4.47 billion. Moreover, the main source of revenue is beverages, with 73% of the market. The remaining 27% is divided by 23% going to food sales and the last 3% in single packaged served coffees. Although the U.S. accounts for the highest quantity of stores, the American customer satisfaction index score was 78%, compared to previous years in which the satisfaction score reached 80%. However, visits to the stores is significantly high within the country where approximately 40 million customers visited Starbucks in only 30 days ranging from 18 to 39 years.

At the end, I would suggest that Starbucks partner with Netflix. The reason why we believe that this partnership would be beneficial is because we are providing an incentive for those who have the mobile app and use it to purchase our products. The way that this partnership would work is that for those customers who purchase through the mobile app, can be eligible for free Netflix membership. However, customers would not be eligible for free Netflix with just one purchase through the mobile app, they would have to purchase a minimum of $10 per month through app. For our loyal customers, this would be beneficial because they are most likely already spending more than $10 per month, so receiving free Netflix membership would be another incentive to continue purchasing from us. For new customers, this partnership would be beneficial because through our mobile app, every purchase you receive points and after a certain amount of points are accumulated, you are eligible for a free drink. Not only will this be an incentive to purchase from Starbucks, but it will also be a great opportunity for them to explore our menu and find which drinks they like the best, while having a free Netflix membership.

Reference

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