STARBUCKS

Jodie Moore

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

Revenues

2,169

2,649

20% Growth Rate

465

698

975

1,309

1,680

1995 1996 1997 1998 1999 2000 2001

Revenue Breakdown

Specialty

16%

Retail

84%

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

Store Growth

3501

4709

1015

1412

1886

2498

1996 1997 1998 1999 2000 2001

Stock

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