Individual assignment 2
Part 1
1.1, what major risk is the company exposed to?
The Starbuck identified the risk factors in their STARBUCKS CORPORATION FORM 10-Q for the Quarterly Period Ended March 30, 2008. The New Risk Factor is the Starbucks may not be successful in implementing important new strategic initiatives, or even if successfully implemented such initiatives may not achieve the Starbucks’ intended results, either of which may have a material adverse impact on its business and financial results.
On January 7, 2008, the Starbucks announced that its chairman Howard Schultz would take on the additional role of president and chief executive officer, replacing Jim Donald who left the Company. The Company subsequently undertook the development and implementation of several important strategic initiatives as part of a transformation agenda designed to drive long-term shareholder value and improve Starbucks results of operations, including:
- Improving the current state of the U.S. business by refocusing on the customer experience in the stores, new products and store design elements, and new training and tools for the Starbucks’ store partners to help them give customers a superior experience;
- Slowing the Starbucks’ pace of U.S. store openings and closing a number of underperforming U.S. store locations, enabling Starbucks to renew its focus on its store-level unit economics;
- Re-igniting the emotional attachment with customers and restoring the connections customers have with Starbucks ® coffee, brand, people and stores;
- Re-aligning Starbucks organization and streamlining the management to better support customer-focused initiatives and reallocating resources to key value drivers; and
- Accelerating expansion and increasing the profitability of Starbucks outside the U.S., including redeployment of a portion of the capital originally earmarked for U.S. store growth to the International business.
There can be no assurance that the Starbucks will be able to successfully implement its new strategic initiatives or that its transformation agenda will result in improved results of operations. If it does not successfully implement its new strategic initiatives, or if its transformation agenda does not achieve its intended results, the Starbucks may experience a material adverse impact on its business and financial results.
Additionally, the following four risk factors, which were previously disclosed under Item 1A. “Risk Factors” in the 10-K report, have been updated and revised and are replaced in their entirety by the risk factors set forth below.
- Failing to meet market expectations for Starbucks financial performance could cause the market price of Starbucks stock to drop rapidly and sharply;
- Starbucks is highly dependent on the financial performance of its United States operating segment;
- The China market is important to the Company’s long-term growth prospects — doing business there and in other developing countries can be challenging;
- Effectively managing the Company’s rapid growth is challenging.
1.2, why is the company exposed to these risk?
First of all, under the requirement of the U.S Securities and Exchange Commission, Starbucks have responsibility to expose above risk factors in their report. To expose their risks to public means Starbucks has good risk control and report system. Because nobody will believe there is no any risk for one company. To show their transparency, Starbucks also need to prove they have evaluated their risks quarterly.
Secondly, from the contents of the risks, all above risk factors are obviously to report information user. Such as the New Risk Factor: Starbucks may not be successful in implementing important new strategic initiatives, or even if successfully implemented such initiatives may not achieve the Starbucks’ intended results, either of which may have a material adverse impact on its business and financial results. This kind of risk can apply to every company. Above identified risks just provide a reasonable reminder to tell report users what will the company face with current strategy with common sense. The company still can hide some important crucial risks which will be analyzed in part 2.
1.3, what makes the company vulnerable?
In above identified risks, effectively managing the Company’s rapid growth is challenging strategy to Expansion and Cannibalization risk. Above chart illustrate Starbucks has seen declining same-store growth. Weaker growth in same store sales reported in the first half of 2007 raised investor concerns that Starbucks’ recent expansion has been too aggressive and was beginning to result in cannibalization.
Starbucks recent Q4 earnings report showed continued deterioration, with the company reporting a 1% decrease in store traffic, its first decrease since the company began reporting the figure three years ago. Investors fear that these weak growth figures could indicate saturation in the U.S. market. Regardless, Starbucks aims to double its US locations to 20,000 and eventually open 40,000 locations worldwide. Starbucks cut its 2008 new stores plan from 1,600 to 1,175 (US), plus mentioned closing 100 or so underperforming locations. So can Starbucks really effectively manage the rapid expansion is a doubtful question to every outsider investors.
Part 2
2.1 What other risks but not identified or elaborated on by the company itself? Why is the company exposed to these risks? What makes the company vulnerable?
1) One of the unidentified risks is the China market plan. Starbucks already has sizable presence in China, but the company is planning an even bigger expansion. A massive potential market with 8.3 billion in estimated retail value and 20% of the global population, China marks Starbuck’s most significant international opportunity. According to Euromonitor, 2005 retail coffee sales in China doubled in 2005, a volume increase of 11%–compare this to an increase of only 7.5% in retail sales for tea and other drinks. Still, a China focus is not without its risks for Starbucks. The risk of an anti-American/anti-globalization attitude may make it harder for some Chinese to accept and embrace coffee consumption, long viewed as an inherently Western or American practice. Also, China’s middle class is growing, but rural incomes are still only 30% of urban incomes, and Chinese consumers continue to spend less than American consumers–a problem for Starbucks, which depends on high margins from an "affordable luxury" theme.
2) The second potential risk is related with the chairman replacement of Starbucks. On January 7, 2008, the Starbucks announced that its chairman Howard Schultz would take on the additional role of president and chief executive officer, replacing Jim Donald who left the Company. Even though Schultz – the Starbucks’ father had made huge contributions to Starbucks Empire, he also made some deficient strategy recently. When Starbucks enter Japan in 2001, Schultz predicts the Japan market will be the second biggest international market in the world. After two years consecutive profitable, Starbucks not even make money in Japan. In May, 2005 Starbucks Japan’s joint-venture company announced the last fiscal annual sales of only 467 million U.S. dollars, the annual deficit amounted to 3.9 million U.S. dollars. In addition, while many investors fear that weak growth performances could indicate saturation in the U.S. market, Schultz never admit or accept it. Although he announced plans to slow the number of new stores built in the U.S, he still announced to accelerate the chain’s expansion overseas. As mentioned above, the leadership shifting might also be a great potential risk.
3) The third risk is about the international expansion plan. According to the annual report of Starbucks, much of Starbucks’ growth is driven by the international market, which like the domestic market has a targeted unit volume of 20,000 units. The international segment is still in relatively early development, however, and Starbucks can expect rapid growth from its 3000-plus stores in 37 foreign countries. In 2006, international sales increased by 27% to US$ 1.3 billion (17% of Starbucks’ operated retail; 18% of specialty operations). Canada and the U.K. are Starbucks’ current strongest markets abroad, while India, Russia, and China represent key areas of focused future expansion. Even Starbucks had big success in that developing country in Canada and the U.K., their future plan to focus on India, Russia, and China is a great challenging (China market has discussed in first paragraph).
India is another tea-drinking nation. India’s national income has also been raising, with steady increases since 2000–a blessing for the relatively expensive Starbucks. But a venture into India also has hurdles: Starbucks can only enter by joint venture or franchise, foreign ownership of real estate is restricted, real estate prices in urban areas are extremely high, and established local competitors often already have a big advantage (for instance, Barista Coffee Company’s 5000 acres of coffee plantations in South India yield cheaper coffee than imported Starbucks’ beans).
The Russian coffee market is also young, with only 140 coffee shops in the country at the close of 2005. However, tea sales have dropped more than 7% by volume in the past decade; meanwhile coffee has grown to capture 15% market share. But Starbucks will face challenges in Russia, too; imported green coffee faces a 5% tax, and imported ready-to-use coffee a 10% tax.
- The threat of more new entrants and gradually saturated domestic and global market will lead Starbucks to unprecedented predicament. According to latest research, consumer awareness of the rise of obesity has caused some would-be Starbucks customers to turn to healthier option. Until now, many of Starbucks’ beverages contain dairy, sugar, and a good amount of caffeine. However, those caffeine beverages account for 77% of total revenue. Significant shifts in demand patterns could have a huge negative impact on Starbucks sales. If customers begin to prefer lower-caffeine coffee, competitors could gain a significant advantage before Starbucks manages to change its offerings accordingly. Meanwhile, lots of new competitors may provide substitute of coffee to challenge the leader position of Starbucks in beverage chain.
In conclusion, above exposed and unexposed risks already weaken the reputation of Starbuck. Besides above risks, the unprofitable music business is also a clearly risk to Starbucks business model. Moreover, in 2006, the lost of Starbuck’s ex-employees personal data also point out the security risk of Starbucks’ information system. Recently, some investment analyzer also claim that Starbucks’ annual report was only showing the information that made them look good instead of giving people the true picture. Confused financial report and consecutive losses in parts of global market will lead to credit and investment risk.
References:
STARBUCKS CORPORATION FORM 10-Q for the Quarterly Period Ended March 30, 2008
http://www.wikinvest.com/stock/Starbucks_(SBUX)
http://finance.yahoo.com/q/sec?s=sbux
http://finapps.forbes.com/finapps/AccountingRisk.do?tkr=sbux
Starbucks: Growth, Trust, and Risk
http://blog.roodo.com/nextstep/archives/2516029.html
http://www.8bio.com/Article/Class30/Class34/200503/8512.html
http://www.cnr.cn/2004news/myjj/jjrw/200408/t20040819_257864.htm
http://www.globrand.com/2005/10174.shtml