starbucks-business-model

Starbucks Business Model In A Nutshell

Starbucks is a coffee retail company that sells beverages (primarily consisting of coffee related drinks) and food. Even though Starbucks has 49% of company-operated stores vs. 51% of licensed stores, revenues for company-operated stores accounted for 79% of total revenues compared to just 11% of licensed stores in 2017. Thus even though licensed stores generally have a higher operating margin than company-operated stores, the company can be defined as a company owned business model.

Starbucks origin story

It was the year 1983, Howard was a young man, walking through the streets of Milan and Verona. As Howard Schultz would put it, he became "enamored" by the coffee experience people had in the Italians bars. 

Places where the Barista knew the name of each person entering it and the coffee experience was about more than just a cup of coffee, it was about creating this sense of community. That's how Howard Schultz set to bring that same experience back in the US.

At that time, in 1983, Starbucks had three stores in Seattle. However, it wasn't serving any beverage, but only coffee to bring home. When Howard looked at the way Italian experienced coffee, he understood the real segment of the business that could have made Starbucks truly successful was serving coffee directly to consumers.

The objective was to replicate the Italian experience back in the US. Thus, making Starbucks - in the words of its founder - the third place between work and home.

What's Starbucks mission?

As specified in its annual report its mission is to provide the so-called Starbucks Experience, consisting in "superior customer service and a seamless digital experience as well as clean and well-maintained stores that reflect the personalities of the communities in which they operate, thereby building a high degree of customer loyalty."

What are the primary segments of the business?

The main Starbucks segments can be broken down in:

  • Company-operated Store Revenues
  • Licensed Store Revenues
  • CPG, Foodservice and Other Revenues

At geographical level instead Starbucks operates in four main regions:

  • Americas, comprising US, Canada, and Latin America
  • CAP, comprising China/ Asia Pacific
  • EMEA, comprising Europe, Middle East, and Africa
  • All others, which is related instead to the development of new products, thus called "channel development"and "includes roasted whole bean and ground coffees, premium Tazo® teas, Starbucks- and Tazo-branded single-serve products, a variety of ready-to-drink beverages, such as Frappuccino®, Starbucks Doubleshot® and Starbucks Refreshers® beverages and other branded products sold worldwide through channels such as grocery stores, warehouse clubs, specialty retailers, convenience stores and U.S. foodservice accounts"

Is Starbucks a chain or franchising?

If we look at the mix of operated vs. licensed stores, the answer is both. However, if we look at the revenue generation, company-operated stores make up 79% of the company's revenues in 2017.

As specified on Starbucks annual report for 2017, "The mix of company-operated versus licensed stores in a given market will vary based on several factors, including our ability to access desirable local retail space, the complexity and expected ultimate size of the market for Starbucks and our ability to leverage the support infrastructure within a geographic region."

starbucks-owned-stores-vs-franchised

While Starbucks has over fourteen thousand licensed stores, compared to over thirteen thousand company-operated stores, most revenues come from the former.

Where do most of Starbucks revenues come from?

As of 2017 company-operated stores accounted for 79% of total net revenues. Instead, 11% is produced by the licensed stores, which have a lower gross margin and a higher operating margin than company-operated stores.

As specified in the Starbucks annual report for 2017, "In our licensed store operations, we leverage the expertise of our local partners and share our operating and store development experience. Licensees provide improved and at times the only, access to desirable retail space."

It is important to remark that even though company-operated stores have higher gross margins. They also have a lower operating margin compared to licensed stores.

What are the most sold Starbucks products?

starbucks-sales-mix

As specified in its 2017 annual report "Starbucks is committed to selling the finest whole bean coffees and coffee beverages. To ensure compliance with our rigorous coffee standards, we control coffee purchasing, roasting and packaging and the global distribution of coffee used in our operations. We purchase green coffee beans from multiple coffee-producing regions around the world, and custom roasts them to our exacting standards for our many blends and single origin coffees."

In terms of revenue generation beverages represented 73% of the net sales in 2017.

How does Starbucks protect itself from the sudden change in the price of raw coffee?

As specified in the 2017 annual report Starbucks" buys coffee using fixed-price and price-to-be-fixed purchase commitments, depending on market conditions, to secure an adequate supply of quality green coffee. Price-to-be-fixed contracts are purchase commitments whereby the quality, quantity, delivery period, and other negotiated terms are agreed upon, but the date, and therefore the price, at which the base “C” coffee commodity price component will be fixed has not yet been established. For most contracts, either Starbucks or the seller has the option to “fix” the base “C” coffee commodity price prior to the delivery date. For other contracts, Starbucks and the seller may agree upon pricing parameters determined by the base “C” coffee commodity price. Until prices are fixed, we estimate the total cost of these purchase commitments. Total green coffee purchase commitments as of October 1, 2017, were $1.2 billion, comprised of $860 million under fixed-price contracts and an estimated $336 million under price-to-be-fixed contracts."

How much revenue does Starbucks make?

starbucks-net-sales

The total revenues in 2017 surpassed the $22 billion compared to $14 billion in 2013. 79% of net sales came from company-operated stores.

net-sales-comparison-2017-2016

If we look t the change in revenues of 2017 over 2016, company-operated stores grew by 4.8% while licensed stores grew by 2.7%.

Summary and conclusions

Starbucks is a coffee retail company that was inspired by a trip by Howard Schultz in Italy. When in the Bars in Milan and Verona he saw the whole experience of having coffee, he realized it was way more about building communities around local coffee shops, rather than just coffee itself.

That's how he thought to rebuild and bring the same kind of experience back to the US. Ever since Starbucks has been a global success. It also announced its first store in Milan, after decades. That represented a milestone for the company.

At the financial level Starbucks has 49% of company-operated stores (in 2017) compared to 51% of licensed stores. It is important to remark that also the licensed stores are more of partnerships between Starbucks and local entrepreneurs with years of experience.

Even though the model might be that of franchising, those partnerships are selected to guarantee the growth of the Starbucks brand around the world. In fact, Starbucks is among the most recognized brand names in the world.

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Published by

Gennaro Cuofano

Creator of FourWeekMBA.com | Head of Business Development at WordLift.io | International MBA

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