TABLE OF CONTENTS
Annual Report
Industry. . 1
Primary Products . 1
Raw Materials . 1
Company Statistics . 2
Location . 2
Associations . 2
Annual Report Image and Contents . 3
10-K Report 3
Starbucks Vs. Industry
Key Economic Factors 4
Life Cycle 4
Factors of Success 4
Stance of Success Factors 4
Key Business Risks 5
Notable Accounting Considerations 6
Legal/Regulatory Matters 7
Social Matters 7
Corporate Governance 9
Sarbanes-Oxley Compliance 9
Financial Strength Analysis
Financial Strength 10
Changes in Near Future 10
Sources of Capital and Valuation 11
Capital Market Response 12
Industry Comparison 12
Audit Planning
Major Transactions and Cycles 13
High-Risk Areas 14
Low-Risk Areas 14
Fraudulent Opportunities 15
Assessed Control Risk Reduction 15
Auditor’s Reporting 15
Works Cited 16
ANNUAL REPORT
a) What is Starbucks’ industry?
Starbucks’ industry is specialty coffee. According to Starbucks Corporation, 66 billion cups of coffee are drunk every year in the U.S., and a full three quarters of those cups of coffee are enjoyed at home (n.p.). Starbucks has no clear competition; however the closest competitors include other specialty coffee shops, doughnut shops, and restaurants. Starbucks holds a dominant position in the specialty coffeehouse market and has no single clear rival in the sector. In the specialty coffee market, the closest is Caribou Coffee, which has 415 stores in the United States, which is less than 5% of Starbucks' 11,000 and counting. Its most intense specialty coffeehouse competition is dispersed among the thousands of independent or small-chain coffee shops around the nation and the world (Company Profile 1).
b) What are Starbucks’ primary products?
Starbucks offers a range of exceptional products that customers enjoy in our stores, at home, and on the go.
· Coffee: More than 30 blends and single-origin premium coffees.
· Handcrafted Beverages: Fresh-brewed coffee, hot and iced espresso beverages, Frappuccino® coffee and non-coffee blended beverages, Starbucks Refreshers, smoothies and teas.
· Merchandise: Coffee and tea brewing equipment, Verismo System™ by Starbucks®, mugs and accessories, packaged goods, music, books and gifts.
· Fresh Food: Baked pastries, sandwiches, salads, salad and grain bowls, oatmeal, yogurt parfaits and fruit cups.
· Consumer Products
o Coffee and Tea: Whole bean and ground coffee (Starbucks and Seattle’s Best Coffee brands), Starbucks VIA®Ready Brew, Starbucks® K-Cup® portion packs, Starbucks® and Teavanna® Verismo™ pods, Tazo® tea filterbags, and tea latte concentrates.
o Ready-to-Drink (RTD):Starbucks® bottled Frappuccino® coffee drinks, Starbucks Discoveries® chilled cup coffees, Starbucks Discoveries® Iced Café Favorites™, Starbucks Iced Coffee, Starbucks Doubleshot® espresso drinks, Starbucks Doubleshot® Energy+Coffee drinks; Starbucks Refreshers™ beverages, Evolution Fresh bottled juices, Tazo® bottled iced and juiced teas (Company Profile 2).
c) What raw materials does Starbucks use?
Coffee beans, paper cups/lids, plastic cups/lids, syrups, dairy, fruit purees, juice concentrates, ingredients for food items, and teas are the raw materials used by Starbucks. The coffee beans are harvested, roasted, shipped, and then they undergo a wide variety of business techniques to land in consumer's hands. Most are ground up and processed into drinks right there. Other types of beans are sold in bulk in bags for home brewing. Starbucks thrives on this raw material more than any other. Their product line constitutes their finished goods, and everything that goes into brewing a good cup of coffee requires regular maintenance and upkeep. The machines have to be kept in good condition to grind, blend, and warm up the drinks. Starbucks is a major business, and it has all the components. Based on its massive success as a chain, it's not much of a secret to say that they've mastered many of these elements, from procuring raw materials on down. (Responsibility n.p.)
d) How large is the company? (Statistics retrieved from Annual Report)
a. Sales: Total net revenues increased 12% to $14.9 billion in fiscal 2013 compared to $13.3 billion in fiscal 2012. Of the total net revenues, $11,793.2 billion was generated from company operated stores, $1,360.5 B was from licensed stores, and $1,738.5B was from other segments of operations.
b. Assets: Total assets for fiscal 2013 were $11,516.7 million, which was an increase of 40.2% from fiscal 2012 ($8219.2M). This is due in part to an increase in deferred income taxes from the loss of litigation with Kraft Foods.
c. Employees: 182,000 worldwide: 137,000 in the United States and 45,000 outside of the U.S.
e) Where is Starbucks located?
Starbucks Corporation is an American global coffee company and coffeehouse chain based in Seattle, Washington. Starbucks is the largest coffeehouse company in the world with 20,891 stores in 64 countries, including: 13,279 in the United States, 1,324 in Canada, 989 in Japan, 851 in China, and 806 in the United Kingdom (Company Profile n.p.). Of those stores, they have stand-alone stores and kiosks within retailers, i.e. Target, Bass Pro Shops, and Kroger grocery stores.
f) What other people/companies are closely associated with Starbucks?
Seattle's Best Coffee, a wholly owned subsidiary of Starbucks, is a specialty coffee retailer and wholesaler based in Seattle, Washington. Seattle's Best Coffee has retail stores and grocery sub-stores in 20 states and provinces and the District of Columbia. Sub-stores can also be found within many other businesses and college campuses, including Subway restaurants. Seattle's Best Coffee is generally cheaper than that of its parent, and is marketed as more of a working class coffee compared to the more upmarket Starbucks. Seattle's Best Coffee began as a combination ice cream and coffee shop called the Wet Whisker on Whidbey Island, northwest of Seattle, Washington.
In addition to its subsidiary, Starbucks is, “focused on galvanizing a passionate network of our diverse partners, customers, nonprofit organizations, businesses and civic leaders for innovative, positive change (Responsibility n.p.).” Starbucks’ network includes: Abyssinian Development Corporation (ADC), American Red Cross, AAMA (The Association for the Advancement of Mexican Americans), Association of Postconsumer Plastic Recyclers, Business for Social Responsibility (BSR), Calvert Foundation, Catalyst, Business for Innovative Climate and Energy Policy (BICEP), Conservation International, DonorsChose.org, Foodservice Packaging Institute, Inc. (FPI), Global Green USA, Global Social Compliance Programme, Incofin Investment Management, Fairtrade International and Grameen Foundation, International Youth Foundation (IYF), Los Angeles Urban League, Mercy Corps, Multicultural Foodservice & Hospitality Alliance, NAACP, National Urban League (NUL), National Urban League (NUL), Points of Light, Product(RED)™, Root Capital, Save The Children, Sustainable Food Lab, Sustainable Packaging Coalition, U.K. Youth, US Business Leadership Network (USBLN®), United States Green Building Council (USGBC), Washington State Recycling Association (WSRA), Women in Foodservice Forum, and the World Cocoa Foundation (Responsibility n.p.).
g) Look at the annual report:
a. What image does it intend to convey?
The annual report conveys an image of sustainable growth by a company that has core values to maintain its image and control of its products and distribution. It has a focus of supplying the highest quality of goods and services to its customers and maintaining a positive relationship with its shareholders. When you read the annual report, the tone is positive even though they had a downfall in their financial statements/condition due to litigation loss with Kraft Foods.
b. What are the segments and functional contents of the report?
The annual report opens with a executive summary from Howard Schultz, President and CEO of Starbucks, that is directed to shareholders. In part one, the basic company information, risk factors, unresolved issues, and legal issues are displayed to give an overview of the company as a whole. In part two, consolidated financial statements, segments of the company’s performance, equity, accounting issues, and controls and procedures are displayed to supply the numerical data and internal processes to its shareholders. In part three, top company management and governance, executive compensation, shareholder matters, company relationships and related transactions, and accountant information is displayed to show the hierarchy and relationships therein. Part four contain exhibits and financial statement schedules for reference.
10-K Report
a) How does the 10-K differ from the annual report?
The annual report includes an introduction overview of the major highlights of the company, but otherwise is identical to the 10-k report.
The Coffee Industry
a) What are the key economic factors about the industry?
The key economic factors for the coffee industry would be growth rates, interest rates, levels of employment, and price stability (inflation and deflation). The growth rate is measured by the change in the amount of goods and services produced by a nation’s economy. The Industry as a whole showed to have a soft growth for 2013. The top 3 competitors of the industry: Starbucks showed a 7% growth in sales, Nestle had a 2.7% increase in sales, and Dunkin Brands had a 3.4% growth in sales.
b) Where is Starbucks in terms of its life cycle?
Starbucks is in the growth stage of its life cycle. Starbucks states their standard as: “The Starbucks Experience is built upon superior customer service, as well as clean and well-maintained company-operated stores that reflect the personalities of the communities in which they operate, thereby building a high degree of customer loyalty.” Starbucks wants to continue to grow by increasing their global business by increasing their market share in a disciplined manner by selecting opening additional stores in new and existing markets, as well as growing sales in existing stores, to support their long-standing strategic objective to maintain Starbucks standing as one of the most recognized and respected brands in the world. Store growth in precise obtainable markets will vary due to countless factors, including the maturity of the market.
c) What are the five or six most important factors for success for Starbucks?
1. Quality of products-Increasing level of competition in the market is fuelling the level of customer expectations regarding the quality in general, and freshness in particular.
2. Customer services-Excellent customer services are being adopted as an important source of competitive edge by increasing numbers of coffee shops that Starbucks have.
3. Shop Design-Coffee shops are being positioned as a ‘third place’, where people can spend most of their time apart from workplace and home. Accordingly, relevant atmosphere needs to be developed with the interior, music, and design.
4. Social Responsibility-The impact of corporate social responsibility on profitability has increased significantly in the past several years. Accordingly, the level of engagement in fair trade, recycling policies, carbon emission policies, and employee treatment can be specified as important success factors for branded coffee shops like Starbucks.
5. Customer loyalty rewards- consumer behavior is greatly impacted by the level of attractiveness of loyalty programs that offer discounts and other advantages to loyal customers.
d) How does Starbucks stand with respect to these factors?
Starbucks is in good standing as far as their success factors. As a company, they have exceeded all their expectations in all aspects. In 2013, they reached record revenues of $14.9 billion, which was a 12 percent increase from the previous year. Also, they had a 7 percent rise in global comparable shares with an opening of 1,701net new stores around the globe. Starbucks had a non-GAAP operating income of 2.5 billion, a 23 percent increase, for the 2013 fiscal year. They also had non- GAAP operating margin of 16.5 percent. With this record growth, they were able to have non-GAAP $2.26 earnings per share which was a 26 percent increase from 2012. With those record numbers, Starbucks was able to return $1.2 billion to their shareholders.*Non-GAAP referring to litigation results on financial statements per GAAP rules and regulations on reporting.
e) Describe four or five key business risks related to the Starbucks’ business and industry.
Starbucks believes that if any of these risks were to actually occur, their business, financial condition, results of operation, and the trading price of their common stock could be materially affected.
Economic condition in the U.S. and certain international markets could be a risk factor. Starbucks is a retailer that is dependent on consumer spending. Their results of operations are sensitive to changes in macroeconomic conditions. Starbucks believes if their customers have less money for purchases, they may stop or reduce their purchases of products. They also believe that it may be a possibility that their customers may trade down to competitor’s lower priced products due to job losses, foreclosures, bankruptcies, increased fuel and energy costs, higher interest rates, higher taxes, reduced access to credit and lower home prices. Starbucks believes that if negative economic condition persist for a long time or even worsen, that consumers may long-lasting changes to their purchasing behavior, including less frequent purchases on a more permanent basis.
Starbucks recognizes the risk of not successfully implementing important strategic initiatives or effectively managing growth. Starbucks makes no assurance that they will be able to implement strategic initiatives in accordance to their expectations. Their strategic initiatives are designed to create growth, improve their results of operation and drive long-term shareholder value. Their strategic initiatives would include:
· Successfully leveraging Starbucks brand portfolio outside the company-operated store base, including our increased focus on international licensed stores.
· Focusing on relevant product innovation and profitable new growth platforms, including retail tea, and achieving customer acceptance of these new products and platforms while maintaining demand for our current offerings.
· Continuing to accelerate the growth of our Channel Development business;
· Balancing disciplined global store growth and existing store renovation while meeting target store-level unit economics in a given market.
· Timely completion of certain supply chain capacity expansion initiatives, including increased roasting capacity and construction of a new soluble products plant.
· Executing a multi-channel advertising and marketing campaign to effectively communicate our message directly to Starbucks consumers and employees.
· Strategic acquisitions, divestitures or joint ventures.
Starbucks believes increases in the cost of high-quality Arabica coffee beans or other commodities or decreases in the availability of high-quality Arabica coffee beans is a business risk as well. Arabica coffee trade on a negotiated basis. The price depends on the supply and demand at the time of purchase and the price can vary significantly. Increases in the coffee price do increase the price of high-quality Arabica coffee and also impact Starbuck’s ability to enter into fixed-price purchase commitments.