Coffee
• 2nd largest US import next to oil
• US consumes one fifth of the world’s coffee
– Largest consumer in the world
Background
• Began in 1971 in Seattle, WA
– 4 stores
• 1982
– 5 stores
• IPO in 1992
– 275 stores
• Serves more than 15 million customers per week
– 4,709 stores
Why to buy Starbucks
• Strong management
• Brand awareness• Brand awareness
• Industry leader
• Employees
Competition
Diedrich Coffee AFC Enterprises
• 370 Coffeehouses
• Scaled back expansion
plans
• Seattle’s Best Coffee
– 160 coffeehouses
• 2nd largest operator of
fast-food chicken
Howard Schultz
• CEO and Chairman
• Grew up in Brooklyn projects
• Northern Michigan • Northern Michigan University
• “If I was in a position where I could make a difference, I wouldn’t leave people behind”
Orin Smith
• President
• Harvard Business
School
• Cut in pay to come to
Starbucks
• 1-2 days behind
counter each quarter
Howard Behar and H20
• 1989 joined Starbucks
• Previous 25 years in furniture industry
• Howard, Howard and Orin = H20• Howard, Howard and Orin = H20
• Top management has been there since the
beginning
Partnerships
• Horizon Air
• Nordstrom
• Sheraton Hotels
• Kraft Foods
• Albertsons
• Host Marriot• Sheraton Hotels
• Hear Music
• United Airlines
• Chapters Inc.
• Dreyers
• Canadian Airlines
• Host Marriot
• Hyatt Hotels Inc.
• Barnes and Noble
• Tazo Tea
• Pepsi
Pepsi
• Began in 1994
• New DoubleShot
– Canned espresso drink with cream– Canned espresso drink with cream
– Throughout US by April
• Joint venture income $28.6 million in 2001,
up from $20.3 million in 2000
– Increase in Frappaccino sales
Financials
�et Profit Margin6.8%
Return on Assets10.2
Earnings per share.51
Current Ratio1.48
Price to Earnings Ratio46.55
Return on Equity13.4
Revenue By Region
2000
2500
3000
Foreign Countries
United States
Total
0
500
1000
1500
2000
1999 2000 2001
Revenue (millions)
Employees
• Stock options and health benefits for part-
time employees
• Fortunes 100 best companies to work for• Fortunes 100 best companies to work for
• Consulting firm polls employees annually
– Rates Starbucks “best of class”
Risks
• Growth
– Open one new store a day
– Moving into Europe/Asia
– Anticipate 21% growth next year
• Free Trade Coffee
– Importer pays at least $1.25 per lb
– Starbucks largest purchaser of FTC
• Green coffee costs
Valuation
• Discounted Cash
Flows
– 20% growth for next 5
years
• EV/EBITDA
– $21 per share
years
• $30.60 per share
– 20% next 2 years, 10%
after that
• $22.21 per share
Porter’s Five Forces
• Threat of new entrants
– Economy of scale
– Brand Identity
• Substitutes
– Not as convenient
– Value good coffee
• Supplier Power
– Controls price
– Free Trade Coffee
• Buyer Power
– Lots of suppliers to
choose from
• Jockeying for Position
– Perishable product
– High exit barriers
• Loyal management
• Specialized assets