Financial analysis project for Starbucks

Chapter 1

Introduction:

Starbucks Corporation is one of the largest snacking and drinking enterprises globally. Born
from a humble start in 1971 as a single-store operation in the bustling Pike Place Market of
Seattle, Starbucks has transcended its origins to become a worldwide coffee juggernaut,
synonymous with the enticing aroma of freshly brewed coffee and the lively ambiance of its
signature coffeehouses. Starbucks' genesis can be traced back to the shared passion for fine
coffee and the unwavering vision of fostering a community of coffee aficionados by Jerry
Baldwin, Zev Siegl, and Gordon Bowker. These three pioneers embarked on a journey to
bring the world the finest coffee experience, meticulously sourcing high-quality beans from
around the globe and ensuring that each cup was brewed to perfection. Their unwavering
commitment to quality and their dedication to creating a welcoming environment quickly
captured the hearts of coffee lovers, and Starbucks soon became a beloved neighborhood
hangout. They envisioned a place where people could immerse themselves in the rich
aromas and flavors of freshly brewed coffee, transcending it from a mere beverage to a
social experience. Their first Starbucks store, nestled at 2000 Western Avenue in Seattle,
embodied this vision, transforming into a haven for coffee lovers to gather, connect, and
savor the nuances of their beloved brew. The tantalizing fragrance of roasted beans mingled
with the lively conversations of fellow patrons, creating an ambiance that resonated deeply
with Seattle's coffee-centric culture.

Starbucks's trajectory took a pivotal turn in 1982 when Howard Schultz, a former
employee, returned to the company as Director of Retail Operations and Marketing. Driven
by an ambitious vision to transcend Seattle's boundaries and unveil Starbucks' extraordinary
coffeehouse experience to a wider audience, Schultz embarked on a transformative journey
that would forever alter the landscape of the global coffee industry. Under Schultz's
leadership, Starbucks embarked on a period of astonishing expansion, fueled by his
innovative concept of the "third place," a welcoming sanctuary that lay between the
professional realm of work and the comfort of home. This concept resonated deeply with
customers, transforming Starbucks into a haven for relaxation, connection, and the pursuit
of coffee's exquisite flavors. Schultz's vision also extended to Starbucks's menu,
introducing an array of delectable beverages that redefined the coffee experience. The
introduction of the Frappuccino, a blended coffee drink that quickly became a customer
favorite, marked a turning point in the company's trajectory. Under Schultz's guidance,
Starbucks also established its own roasting facilities, ensuring the consistent delivery of
high-quality coffee across all its stores, preserving the essence of its unique coffeehouse
experience for every customer. As Starbucks's global footprint expanded, the company's
menu underwent a remarkable transformation, adapting to local preferences and culinary
traditions. In Japan, for instance, Starbucks introduced matcha lattes, catering to the
country's deep-rooted tea culture. Similarly, in India, Starbucks integrated the flavors of
chai into its menu, offering chai tea lattes that resonated with local palates. This
commitment to local tastes allowed Starbucks to seamlessly integrate into diverse markets,
becoming a beloved and familiar presence across cultures. In recent years, Starbucks has
continued to innovate, introducing new menu items that cater to evolving consumer
preferences. The company has expanded into new product categories, offering a wider
range of food and beverages, from savory snacks to refreshing beverages. Additionally,
Starbucks has embraced digital technologies, developing a mobile app that enhances the
customer experience. Through the app, customers can order and pay ahead, skip lines, and
collect rewards, streamlining their interactions with the brand and fostering a sense of
convenience and personalization. Starbucks's commitment to quality, sustainability, and
social responsibility has been a cornerstone of its success, ensuring its enduring presence in
the global coffee industry. The company's commitment to sourcing coffee beans from
ethically managed farms is evident in its sourcing practices. Starbucks partners directly
with coffee growers, ensuring fair wages, sustainable agricultural practices, and economic
opportunities for coffee communities. To reduce its environmental impact, Starbucks has
implemented a range of initiatives, including minimizing waste, conserving energy, and
promoting sustainable packaging. The company has adopted a comprehensive approach to
waste management, diverting over 90% of its food waste from landfills. Starbucks has also
made significant strides in energy conservation, reducing its greenhouse gas emissions by
over 40% since 2009. Starbucks's philanthropic endeavors extend beyond environmental
sustainability, with a focus on education, community development, and environmental
conservation.

The company's Starbucks Foundation supports various initiatives, including providing

educational resources for underserved communities, promoting community revitalization
projects, and supporting environmental conservation efforts. In addition to these initiatives,
Starbucks has implemented a series of programs to promote social responsibility within its
own operations. The company's "Partners First" program focuses on creating a supportive
and engaging work environment for its employees, ensuring fair compensation, providing
comprehensive healthcare benefits, and fostering opportunities for professional
development. Starbucks's commitment to quality, sustainability, and social responsibility
has not only made it a global coffee leader but has also solidified its position as a
responsible corporate citizen. The company's dedication to ethical sourcing, environmental
stewardship, and community engagement has earned it widespread recognition and
admiration, making Starbucks a beacon of corporate responsibility in the global
marketplace.

From humble beginnings in Seattle's Pike Place Market, Starbucks has ascended to become
a global coffee phenomenon, leaving an indelible mark on the world of coffee and culture.
Its journey, marked by passion, innovation, and a commitment to quality, has transformed
the way people experience and enjoy this beloved beverage. The brainchild of three coffee
enthusiasts, Jerry Baldwin, Zev Siegl, and Gordon Bowker, Starbucks' first store opened in
1971, offering more than just a cup of coffee; it provided a welcoming space for coffee
aficionados to gather, connect, and savor the rich flavors of freshly brewed coffee. The
aroma of freshly roasted beans, the lively chatter of customers, and the soothing ambiance
of the shop quickly captivated Seattle's coffee scene. A pivotal turning point arrived in
1982 when Howard Schultz, a former employee, rejoined the company as Director of Retail
Operations and Marketing. Driven by a vision to extend Starbucks' reach beyond Seattle
and share its unique coffeehouse experience with a broader audience, Schultz embarked on
a transformative journey. Under Schultz's leadership, Starbucks' expansion accelerated,
fueled by his innovative concept of the "third place," a welcoming sanctuary that lay
between the professional realm of work and the comfort of home. This concept resonated
deeply with customers, transforming Starbucks into a haven for relaxation, connection, and
the pursuit of coffee's exquisite flavors. Schultz's vision also extended to Starbucks' menu,
introducing an array of delectable beverages that redefined the coffee experience. The
introduction of the Frappuccino, a blended coffee drink that quickly became a customer
favorite, marked a turning point in the company's trajectory. Under Schultz's guidance,
Starbucks also established its own roasting facilities, ensuring the consistent delivery of
high-quality coffee across all its stores, preserving the essence of its unique coffeehouse
experience for every customer. As Starbucks' global presence expanded, the company
embraced the richness and diversity of local cultures, tailoring its menu to resonate with the
unique preferences of each region. From introducing matcha lattes in Japan, a beverage
deeply rooted in Japanese tea culture, to offering chai tea lattes in India, a beverage that
embodies the essence of Indian hospitality, Starbucks showcased its dedication to
connecting with customers on a global stage. In recent years, Starbucks has continued to
innovate, introducing new menu items, expanding into new product categories, and
embracing digital technologies. The company's mobile app, for instance, allows customers
to order and pay ahead, skip lines, and collect rewards, enhancing the overall customer
experience.

Throughout its remarkable growth, Starbucks has consistently upheld a steadfast

commitment to quality, sustainability, and social responsibility. The company meticulously
sources its coffee beans from ethically managed farms, ensuring fair compensation and
sustainable farming practices. Starbucks has also made remarkable advancements in
minimizing its environmental footprint, implementing initiatives to reduce waste, conserve
energy, and promote sustainable packaging. The company's philanthropic endeavors have
focused on education, community development, and environmental conservation.
Starbucks' legacy lies not just in its delicious coffee and ubiquitous presence, but in its
ability to embody a culture of connection, innovation, and social responsibility. The
company has transformed the way people experience and enjoy coffee, creating a global
community of coffee enthusiasts who share a passion for the beverage and the values that
Starbucks stands for.

Chapter 2

In 1971, three passionate coffee enthusiasts, Jerry Baldwin, Gordon Bowker, and Zev Siegl,
embarked on a journey to transform Seattle's coffee scene. They opened their first store in
the heart of Pike Place Market, a hub of culinary and cultural vibrancy. Inspired by the
name of a character from Herman Melville's classic novel, "Moby-Dick," they christened
their humble establishment "Starbucks." Baldwin, Bowker, and Siegl, all academics with a
shared love for coffee, were determined to provide Seattle with a haven for coffee
connoisseurs. They meticulously sourced premium beans from around the globe, ensuring
each cup was brewed to perfection. Their passion for quality and their commitment to
creating a welcoming atmosphere quickly captured the hearts of Seattle's coffee enthusiasts,
and Starbucks quickly became a beloved neighborhood hangout.

In 1982, Howard Schultz, a former Starbucks employee with a vision for transforming the
company, rejoined the team as Director of Retail Operations and Marketing. Schultz
recognized the immense potential for Starbucks to transcend its Seattle roots and
revolutionize the global coffee industry. He envisioned Starbucks as more than just a coffee
shop; he envisioned it as a vibrant third place, a community hub where people could
connect, work, and simply enjoy the company of others.

Schultz introduced the concept of espresso-based beverages and transformed Starbucks into
a coffeehouse experience unlike any other. He opened additional stores in Seattle and
expanded the company's reach beyond the city limits. In 1987, Schultz's vision materialized
when he acquired Starbucks from its original owners and renamed his Il Giornale coffee
shops as the Starbucks Company.

Under Schultz's leadership, Starbucks embarked on a period of unparalleled growth. The

company opened stores in Chicago and Vancouver, Canada, and continued to expand its
global presence. Starbucks introduced innovative products like the Frappuccino, which
quickly gained worldwide recognition. The company's commitment to quality, innovation,
and social responsibility resonated with coffee lovers worldwide, and Starbucks became a
cultural phenomenon.

Starbucks had 667 branches operational by 1995 and was going on the expansion of its
store by selecting Tokyo, Japan as its debut place away from North America in 1996, then
expanding to Singapore and the Philippines. Starbucks operates two distinct kinds of
outlets: business-owned and franchised. Starbucks ventured into additional essential
significant markets in the early 2000s, encompassing most Asian countries along with
Europe, Australia, and Latin America. Starbucks has grown to be the top brewer and
distributor of particular kinds of coffee in North America, having approximately 24,000
shops selling its products in 72 different nations.

Mission:

Starbucks' mission statement, "With every cup, with every conversation, with every
community – we nurture the limitless possibilities of human connection," encapsulates the
company's core values and its commitment to fostering a welcoming environment where
people can connect, gather, and share experiences.

The statement emphasizes an interconnected approach, signifying that every cup served,
every conversation exchanged, and every community served plays a vital role in shaping
Starbucks' overall experience. This holistic perspective reflects the company's ambition to
expand its reach gradually and progressively, one location or community at a time, while
ensuring that each interaction contributes to the overall customer experience.

When Starbucks speaks of "nurturing limitless possibilities of human connection," it

extends this concept beyond customer interactions and embraces its employees as well. To
achieve this, Starbucks cultivates a warm and welcoming atmosphere that encourages open
communication and genuine connections among its baristas. This social setting fosters a
sense of belonging and camaraderie, creating a workplace where employees feel valued and
appreciated.

Similarly, Starbucks extends the small-company mentality to its customers, aiming to

provide a personalized and attentive experience that goes beyond simply serving coffee.
The company's mission statement reflects its dedication to fostering genuine connections
and building a sense of community, making Starbucks more than just a coffee shop – it's a
gathering place where people can connect, unwind, and feel a sense of belonging.

Vision statement:

Starbucks' vision statement, "To establish Starbucks as the premier purveyor of the finest
coffee in the world while maintaining our uncompromising principles while we grow,"
highlights the company's unwavering commitment to excellence and its dedication to
upholding its core values as it expands its global reach.

The pursuit of becoming the "premier purveyor" entails a relentless drive to source and
serve the highest quality coffee and related products. Starbucks' unwavering focus on
quality has propelled the company to become one of the world's largest coffeehouse chains
and coffee brands.

Starbucks' commitment to its "uncompromising principles" extends beyond coffee quality

to encompass its dedication to fostering a welcoming atmosphere and conducting business
in an ethical manner. This commitment has been a hallmark of the company under the
leadership of its former CEO Howard Schultz, who championed Starbucks' values and
ensured their consistent application.

The growth portion of the vision statement is reflected in Starbucks' continuous expansion
into new markets worldwide, with over 30,000 stores spanning across 80 countries. This
remarkable growth is testament to Starbucks' ability to scale its operations while
maintaining its commitment to quality and its defining principles

SWOT Analysis

Strengths:

1. Strong brand recognition: Starbucks's strong brand recognition is a key factor in

its success. The company's reputation for exceptional service and high-quality
products has made it one of the most recognizable coffee brands in the world.
Starbucks's strong brand has helped it to build a loyal customer base and
differentiate itself from competitors.
 2. Innovative business model: Starbucks's innovative business model has been a
driving force behind its success. The company has a long history of introducing
groundbreaking products, such as the Frappuccino, and pioneering the concept
of coffee bars. This commitment to innovation has allowed Starbucks to stay
ahead of its competitors and maintain its position as a leading coffee brand. In
today's ever-changing market, innovation is crucial to meet evolving customer
needs and preferences. Starbucks can better cater to the growing expectations of
its customer base and remain competitive by continuously introducing
innovative products and improving its operations. These efforts can help drive
profitability and fuel the company's growth.

Weaknesses:

1. Significant reliance on a single product line: Starbucks's over-reliance on a

single product line, coffee, is a significant weakness. While the company offers
other products like tea, fruit smoothies, and meals, coffee remains the core focus
of the business and its primary source of revenue. This reliance on coffee can be
considered a liability as it exposes the company to fluctuations in coffee demand
and changes in consumer preferences.
2. Fierce competition in the coffee industry: Starbucks faces intense competition in
the coffee industry, which is highly fragmented with numerous small and large
companies vying for market share. Starbucks competes with a wide range of
competitors, including specialty coffee shops, independent cafes, fast-food
restaurants, and grocery stores that sell coffee. This intense competition can put
pressure on Starbucks to maintain its prices, expand its product offerings, and
differentiate itself from its rivals.

Opportunities:

1. Expanding into new markets: Starbucks must continue to expand and diversify
its operations, and one potential growth strategy is to enter new markets. While
 the company has a dominant presence in the United States, there are numerous
global markets where it has yet to establish a significant foothold or gain a
competitive edge.
2. Collaborations with other companies: Strategic alliances and partnerships with
other businesses or brands can open up a wealth of opportunities for Starbucks.
These collaborations can enable the company to expand into new markets, reach
new customer segments, and gain access to new distribution channels.
Additionally, by partnering with other brands, Starbucks can leverage their
expertise, resources, and reputation to enhance its own brand and business
operations.

Threats:

1. Consumer preferences and evolving trends: If consumer attitudes shift towards

cleaner or more environmentally friendly products, it could lead to a decrease in
demand for specific Starbucks items or put pressure on the company to adapt its
offerings to reflect these changing preferences. Additionally, changes in
consumer trends, such as a move towards online-based ordering or mobile app
ordering, could have an impact on how Starbucks operates and require the
company to adjust its procedures to remain competitive.
2. Market volatility and economic downturns: Economic downturns or market
fluctuations can pose significant risks to Starbucks by influencing consumer
spending patterns and demand for its products and services. During periods of
economic uncertainty, consumers may become more price-conscious and shift
their preferences towards more affordable alternatives, potentially reducing
demand for Starbucks' premium coffee and food offerings. Additionally, market
volatility can impact the costs of raw materials and other inputs needed for
Starbucks' operations, potentially squeezing profit margins and affecting overall
business performance.

Products:
Starbucks sells a wide range of goods, including coffee, tea, and snacks.

1. Coffee beverages:
 Espresso-based (for example, lattes, cappuccinos, and macchiato)
 Coffee brewed (different blends and roasts)
 Frappuccino (mixed coffee drinks)

2. Tea:
 Teas, both hot and cold
 Tea lattes
3. Other Beverage
 Hot Chocolate
 Refreshers (fruit-flavored energy drinks)
 Several iced brew beverages
4. Food items include:
 Breakfast sandwiches
 Bakery goods and pastries
 Salads, sandwiches, and wraps for lunch

Chapter 3
 For analyzing Starbucks, the ratios used are from the financial statements for the
years 2020, 2021 and 2022. From the financial reports of Starbucks, ratio analysis,
vertical analysis and horizontal analysis will be calculated.

Financial Ratios for Starbucks:

Current Ratio: Starbucks's ability to meet its short-term obligations has been
steadily diminishing, as indicated by the company's declining current ratio. This
decline suggests that the company's liquidity has been diminishing, potentially due
to factors such as elevated expenses, particularly in employee wages and marketing,
leading to reduced cash flow and making it more challenging to settle debts.

Even with this current ratio decline, Starbucks's liquidity position remains relatively
healthy, as a ratio of 0.77 is considered acceptable for most companies. However, the
company needs to prioritize effective cash flow management to prevent liquidity issues
from arising in the future.

2020 2021 2022

Current Assets 7,806 9,756 7,019
Quic
Current 7,346 8,151 9,152
k
Liabilities

Current Ratio 1.06 1.20 0.77

Ratio: Starbucks' quick ratio, a financial metric that assesses the company's capacity to
fulfill its short-term obligations using its most immediate liquid assets, has demonstrated
significant fluctuations over the past three years. In 2020, a quick ratio of 0.85 revealed that
Starbucks could only cover about 85% of its short-term liabilities using its most liquid
assets, indicating a precarious liquidity position.

A significant improvement in liquidity was observed in 2021, with a quick ratio of 1.0
indicating that Starbucks could fully meet its short-term obligations with its most liquid
assets. However, this positive trend reversed in 2022, with a quick ratio of 0.53 signaling a
notable weakening in liquidity. This could be attributed to various factors, including
elevated inventory levels, slower cash collection from customers, or increased short-term
debt obligations.
A quick ratio below 1 is generally considered a warning sign, as it suggests that the
company may struggle to meet its short-term obligations without additional financing or
asset sales. The company's recent liquidity fluctuations warrant close monitoring to assess
the underlying causes and ensure the sustainability of its financial position.

2020 2021 2022

Current Assets 7,806 9,756 7,019
Inventory 1,151 1,604 2,177

Current 7,347 8,151 9,152

Liabilities

Quick Ratio 0.91 1.0 0.53

Debt to Equity Ratio: Starbucks's total debt to equity ratio, which measures its
financial leverage, has been consistently negative, indicating a stronger equity
position than debt. This is generally considered a positive sign, suggesting the
company's resilience against financial distress.

In 2020, the ratio was -1.88, indicating the company's equity was nearly twice the
size of its debt. The ratio increased to -2.56 in 2021, suggesting equity growth
 outpacing debt expansion. However, it declined to -1.51 in 2022, indicating a
relative increase in debt compared to equity.

The fluctuations in the debt-to-equity ratio may stem from various factors, including
changes in financing structure, investment activities, and the overall economic
climate.

Overall, Starbucks's negative debt-to-equity ratio demonstrates its financial stability

and ability to navigate economic downturns. However, continuous monitoring and
careful management of debt are crucial to maintain this strong position.

2020 2021 2022

Total Debt 14,660 13,617 13,120
Shareholders’ (7,799) (5,315) (8,693)
Equity
Debt to Equity -1.88 -2.56 -1.51
Ratio

Debt to Total Asset Ratio: Starbucks's total debt to total assets ratio, a measure of
its financial leverage, has been steadily declining over the past three years,
indicating a reduced reliance on debt financing. A ratio below 0.50 is considered
low, suggesting a relatively conservative approach to debt management.

In 2020, the ratio was 0.50, meaning Starbucks was using about half of its assets to
finance its operations through debt. By 2021, the ratio decreased to 0.43, suggesting
the company was utilizing more equity and less debt to support its operations. This
trend continued in 2022 with a stable ratio of 0.47, demonstrating a persistent shift
towards an equity-focused capital structure.

The decline in the ratio is likely attributed to a combination of factors, including

strong cash flow generation, strategic asset sales, and a commitment to effective
debt management.
 Overall, Starbucks's decreasing debt-to-assets ratio is a positive sign of financial
stability and reduced debt dependence. This position could enhance the company's
flexibility to pursue growth opportunities and weather economic challenges.

2020 2021 2022

Total Debt 14,660 13,617 13,120
Total Assets 29,374 31,392 27,978

Debt to Total Assets 0.50 0.43 0.47

Ratio

Total Capitalization Ratio: The total capitalization ratio, a broader measure of a

company's financial leverage, has exhibited significant fluctuations for Starbucks
over the past three years. In 2020, a ratio of 2.14 indicated a balanced approach to
debt and equity financing. However, the ratio shifted in favor of equity in 2021,
with a value of 1.64, suggesting a focus on equity-based financing. A reversal
occurred in 2022, with the ratio jumping to 2.96, indicating a renewed emphasis on
debt financing.

The ups and downs could be attributed to various factors, such as shifts in corporate
funding practices, investment strategies, and the broader economic environment.
The company's flexible approach to capital structure could offer advantages in
situations like capitalizing on favorable interest rates or pursuing growth initiatives.
However, it also exposes the company to interest rate risk and the potential for
financial distress if economic conditions worsen.

Overall, Starbucks's dynamic total capitalization ratio reflects a willingness to adapt

its capital structure to evolving circumstances, balancing the benefits of debt and
equity financing. However, the company needs to carefully manage this flexibility
to minimize associated risks and maintain its financial stability.

2020 2021 2022

Total Debt 14,660 13,617 13,120
Total Equity (7,799) (5,315) (8,693)

Total Capitalization 2.14 1.64 2.96

Ratio

Inventory Turnover Ratio: The inventory turnover ratio, a measure of a

company's inventory management efficiency, has been steadily decreasing for
Starbucks over the past three years. This decline suggests that the company is less
efficient in managing its inventory, increasing the risk of holding obsolete or excess
stock.

In 2020, the ratio was 6.68, indicating that Starbucks was selling and replacing its
inventory nearly seven times per year. However, this efficiency declined to 5.45 in
2021, suggesting a slower pace of inventory turnover. The trend worsened in 2022,
with a further decrease to 4.74, indicating a worsening of inventory management
efficiency.

2020 2021 2022

Cost of Goods Sold 7,694 8,738 10,317
Inventory 1,151 1,603 2,177
Inventory Turnover 6.68 5.45 4.74
Ratio

Asset Turnover Ratio: Starbucks's ability to generate sales from its assets has been
steadily improving over the past three years, as evidenced by the rising asset
turnover ratio. This upward trend signifies that the company is utilizing its assets
more effectively, extracting more revenue from each dollar of invested capital. In
2020, Starbucks generated $1 of sales for every $1 of assets. This figure increased
to $0.93 in 2021 and further to $1.16 in 2022, indicating a continuous enhancement
in asset utilization efficiency. This improved efficiency is a positive indicator of
Starbucks's ability to generate more revenue with the same pool of assets,
contributing to enhanced financial stability and profitability.

2020 2021 2022

Net Sales 23,518 29,060 32,250
Total Assets 29,374 31,392 27,978

Asset Turnover 0.80 0.93 1.16

Ratio

Receivable Turnover Ratio: The receivable turnover ratio measures the

number of times a company collects its receivables in a year has exhibited
fluctuations for Starbucks over the past three years. In 2020, a ratio of 26.63
suggested that Starbucks collected its receivables nearly 27 times per year. This
indicates a relatively efficient collection process. However, the ratio improved to
30.91 in 2021, suggesting a further strengthening of receivable collection
efficiency. The upward trajectory of Starbucks's receivable turnover ratio, which
measures the company's efficiency in collecting outstanding debts from
customers, came to a halt in 2022. The ratio dipped to 27.45, indicating a slight
 decrease in the company's ability to collect receivables as quickly as it did in
previous years.

2020 2021 2022

Net Sales 23,518 29,060 32,250
Account Receivables 883 940 1,175

Receivable Turnover 26.63 30.91 27.45

Ratio

Average Collection Period: The average collection period, which measures the average
time it takes to collect receivables, has shown variability for Starbucks in the last three
years. In 2020, the average collection period was 13.71 days, implying it took Starbucks
roughly 13.71 days to collect receivables from its customers. This suggests moderate
efficiency in collecting payments. However, the period shortened to 11.81 days in 2021,
indicating an improvement in receivable collection efficiency. This positive trend reversed
in 2022, with the period extending to 13.30 days, implying a slowdown in receivable
collection efficiency.

2020 2021 2022

Days in the year 365 365 365
Receivable Turnover 26.63 30.91 27.45
Ratio
Average 13.71 11.81 13.30
Collection
Period
 Gross Margin Ratio: The gross margin ratio, an indicator of a company's
profitability, has exhibited fluctuations for Starbucks over the past three years.
In 2020, the ratio stood at 67.3%, implying that Starbucks kept about 67.3% of
its revenue after deducting direct costs. This suggests a moderate level of
profitability. However, the ratio improved to 70.0% in 2021, indicating
enhanced profitability. Unfortunately, this positive trend reversed in 2022, with
the ratio dipping to 68.0%, implying a slight decline in profitability.

2020 2021 2022

Revenue 23,518 29,060 32,250

Gross Profit 15,824 20,322 21,933

Gross Margin 67.3%, 70.0% 68.0%
Ratio as %

Net Profit Margin: Starbucks's profitability has fluctuated significantly over the past three
years, with its net profit margin ranging from a low of 3.9% in 2020 to a high of 5.2% in
2021. However, a remarkable surge in net profit margin to 14.5% in 2021 marked a
significant improvement in profitability, possibly driven by cost reduction initiatives,
operational efficiency gains, and revenue growth. This positive trend moderated in 2022,
with net profit margin declining to 10.2%, suggesting a slower pace of profitability
enhancement. This decline could be attributed to economic downturns and inflationary
pressures.

Starbucks's fluctuating net profit margin highlights the need for consistent efforts to manage
expenses, optimize operations, and drive revenue growth to achieve sustainable
profitability. The company should maintain a focus on cost control, operational efficiency,
innovation, and market expansion to enhance its profit margins and overall financial
performance

2020 2021 2022

Net Income 928 4,199 3,282
Total Revenue 23,518 29,060 32,250
Net Profit 3.9% 14.5% 10.2%
Margin

Return on Equity (ROE): Starbucks has been unable to generate adequate returns for its
investors over the past three years, as demonstrated by its consistently negative return on
equity (ROE). In 2020, ROE stood at -11.9%, implying that the company was incurring
losses on every dollar of shareholder equity. This indicates severe financial struggles.
However, the ratio experienced an even more dramatic decline in 2021, plummeting to -
79.0%, highlighting a substantial worsening of profitability. Thankfully, in 2022, ROE
witnessed a slight improvement to -37.8%, suggesting a glimmer of recovery in the
company's financial performance.

These persistent negative ROEs raise concerns about Starbucks's ability to generate
adequate returns for its shareholders and maintain financial stability. The company should
carefully examine the underlying factors contributing to these losses and implement
strategies to turn its profitability around.
 2020 2021 2022
Net Income 928 4,199 3,282
Shareholders’ (7,799) (5,315) (8,693)
Equity
ROE -11.9% -79.0% -37.8

Return on Investment (ROI): Starbucks's return on investment (ROI) has been

fluctuating over the past three years. In 2020, the company's ROI was quite low at 3.2%,
hinting at insufficient efficiency in utilizing its assets to generate profits. However, a
remarkable upturn in ROI to 13.4% in 2021 highlighted a significant advancement in
profitability, possibly attributable to cost-saving measures and operational efficiency
enhancements. This positive trend moderated in 2022, with ROI declining to 11.7%,
signifying a slower pace of profitability improvement. This decline could be attributed to
economic downturns and inflationary pressures.

Starbucks's inconsistent ROI underscores the necessity for unwavering endeavors to

maximize asset utilization and stimulate profitability. The corporation should persevere in
its attention to cost management, operational efficiency, and innovation to elevate its asset-
based returns and overarching financial results.

2020 2021 2022

Net Income 928 4,199 3,282
Total Assets 29,374 31,392 27,978

ROI 3.2% 13.4% 11.7%

Vertical Analysis:

The vertical analysis allows better understanding of the relative significance of each
expense or income item in relation to the company's total revenue. Vertical analysis is
useful for comparing the composition of income statements across different periods or
companies of varying sizes. Furthermore, vertical analysis helps to highlight the relative
significance of different elements of the income statement and identify trends or changes
over time.

Regular (in $) Indexed (%)

2020 2021 2022 2020 2021 2022
Revenue 23,518 29,060 32,250 100 124.00 137.00
COGS 7,694 8,738 10,317 100 114.00 134.00
Gross Profit 15,824 20,322 21,933 100 128.00 139.00
SG&A 1,679 1,932 2,032 100 115.00 121.00
Depreciation 1,431 1,441 1,447 100 101.00 101.00
Total Operating Expenses 22,278 24,573 27,866 100 110.00 125.00
EBIT 1,561 4,872 4,617 100 312.00 296.00
Interest Expense 437 469 483 100 107.00 111.00
EBT 1,164 5,356 4,232 100 460.00 364.00
Taxes 239 1,156 948 100 484.00 397.00
Net Income 928 4,199 3,282 100 452.00 354.00
As observed from the table and graph, the company's revenue and EBIT were increasing
steadily between 2021 and 2022. However, the COGS, SG&A expenses, and total operating
expenses were also increasing at a faster rate, which indicates that the company's
profitability may be negatively affected in the future. The company's tax rate was also
increasing, which also put a strain on the company's profitability. To improve its
profitability, the company needs to find ways to control its costs and boost its revenue.

Horizonal Analysis:

Horizontal analysis, a financial analysis tool also known as trend analysis, involves
comparing financial statements from different periods to identify patterns and gauge a
company's performance over time. It entails calculating the percentage change in key
financial ratios or individual line items across the income statement, balance sheet, and cash
flow statement. This approach assists investors, analysts, and management in
comprehending how a company's financial position and profitability have changed over the
years. analyzing trends in total current assets is crucial for investors and management to
gain insights into a company's financial health and make informed decisions to enhance its
performance and stability. Current assets represent a company's liquid resources, indicating
its ability to meet short-term obligations and fund its ongoing operations. By tracking
changes in total current assets over time, stakeholders can identify potential risks or
opportunities that may impact the company's financial health.

Horizontal Analysis of Balance Sheet:

Table 1.1
2020 2021 2022
Regular (in $) Common-size % Regular (in $) Common-size % Regular (in $) Common-size %
Cash 4,350 0.148 14.81 6,455 0.206 20.56 2,818 0.101 10.07
Short-Term Investment 281 0.010 0.96 162 0.005 0.52 364 0.013 1.30
Account Receivable 833 0.028 2.84 940 0.030 2.99 1,175 0.042 4.20
Inventory 1,151 0.039 3.92 1,603 0.051 5.11 2,177 0.078 7.78
Current Assets 7,806 0.266 26.57 9,756 0.311 31.08 7,019 0.251 25.09
Net PPE 6,241 0.212 21.25 6,369 0.203 20.29 6,560 0.234 23.45
Goodwill 3,597 0.122 12.25 3,677 0.117 11.71 3,283 0.117 11.73
Total Assets 29,374 1 100 31,392 1 100 27,978 1 100
Accrued Expense 1,856 0.063 6.32 2,745 0.087 8.74 761 0.027 2.72
Accrued Taxes 98 0.003 0.33 348 0.011 1.11 2,137 0.076 7.64
Notes Payable 438 0.015 1.49 - 175 0.006 0.63
LT Debt - Current 1,249 0.043 4.25 998 0.032 3.18 1,749 0.063 6.25
Total Current Liabilities 7,346 0.250 25.01 8,151 0.260 25.97 9,152 0.327 32.71
LT Debt 14,659 0.499 49.90 13,616 0.434 43.37 13,120 0.469 46.89
Total Liabilities 37,173 1.266 126.55 36,707 1.169 116.93 36,671 1.311 131.07
Common Stock 374 0.013 1.27 847 0.027 2.70 205 0.007 0.73
Retained Earnings -7,815 -0.266 -26.61 -6,315 -0.201 -20.12 -8,450 -0.302 -30.20
Total Equity -7,805 -0.266 -26.57 -5,314 -0.169 -16.93 8,699 0.311 31.09
Total Equity and Liabilities 29,374 1 100 31,392 1 100 27,978 1 100

From the table we can see that current assets increased from 26.67% in 2020 to 31.08% in
2021 but current assets decreased to 25.09% in 2022. The reason for the decrease could
indicate that the company's holdings of cash and/or short-term investments have declined
because as shown the amount of cash decreased in 2022. This could be due to various
factors, including the company's investments in fixed assets, such as new stores or
equipment. The percentage of total liabilities relative to total equity and liabilities has
declined from 126.6% in 2020 to 131.1% in 2022. This positive shift is attributed to a
reduction in long-term debt, indicating that Starbucks has been managing its debts more
effectively.
Horizontal Analysis of Income Statement

Table 1.2

2020 2021 2022

Regular (in $) Common Size % Regular (in $) Common Size % Regular (in $) Common Size %
Revenue 23,518 1 100 29,060 1 100 32,250 1 100
COGS 7,694 0.327 32.72 8,738 0.301 30.07 10,317 0.320 31.99
Gross Profit 15,824 0.673 67.28 20,322 0.699 69.93 21,933 0.680 68.01
SG&A 1,679 0.071 7.14 1,932 0.066 6.65 2,032 0.063 6.30
Depreciation 1,431 0.061 6.08 1,441 0.050 4.96 1,447 0.045 4.49
Total Operating Expenses 22,278 0.947 94.73 24,573 0.846 84.56 27,866 0.864 86.41
EBIT 1,561 0.066 6.64 4,872 0.168 16.77 4,617 0.143 14.32
Interest Expense 437 0.019 1.86 469 0.016 1.61 483 0.015 1.50
EBT 1,164 0.049 4.95 5,356 0.184 18.43 4,232 0.131 13.12
Taxes 239 0.010 1.02 1,156 0.040 3.98 948 0.029 2.94
Net Income 928 0.039 3.95 4,199 0.144 14.45 3,282 0.102 10.18

Starbucks' revenue has demonstrated a consistent upward trend over the past three years,
with a notable increase of 16.8% from 2020 to 2022. This commendable growth stems from
a confluence of factors, including the expansion of Starbucks' global store presence, the
introduction of innovative products and services, and a surge in customer demand for coffee
and related beverages. Starbucks' cost of goods sold has also risen over the past three years,
albeit at a more moderate pace compared to revenue growth. This favorable trend has
positively impacted Starbucks' gross profit margin, which has expanded from 67.28% in
2020 to 68.01% in 2022. Starbucks' operational efficiency has improved over the past three
years, as evidenced by a gradual increase in gross profit margin and operating margin. This
enhanced efficiency has contributed to a steady rise in net income, which has grown by
21.7% from 2020 to 2022. In simpler terms, Starbucks has become better at turning revenue
into profit, resulting in stronger financial performance.
 Chapter 4

The company's financial performance in 2022 indicates a pattern of consistent growth, with
revenue expanding by 10.98% and net income soaring by 354%. This upward trajectory
signifies the company's strong foundation for continued expansion and success in the
future.
Despite its impressive growth trajectory, the company faces a few challenges that demand
attention to ensure its continued success. One key concern is the substantial increase in
COGS by 18.07% in 2022. This surge in expenses could potentially erode the company's
profitability in the long run. To address this issue, Starbucks must implement effective cost
containment strategies, such as negotiating more favorable deals with suppliers or
optimizing production processes to enhance efficiency.

Furthermore, the company's total operating expenses, which rose by 13.40% in 2022, pose
another potential obstacle to sustained growth. To address this, Starbucks must implement
strategies to effectively manage its operating expenses, including consolidating its
operations to streamline processes and outsourcing non-core activities to external partners
to reduce overhead costs.

Additionally, the company's interest expense increased by 11% in 2022, indicating a

growing reliance on debt financing. To maintain financial stability and avoid overburdening
its balance sheet, Starbucks must exercise caution in debt management strategies and
prioritize a more balanced approach to funding its operations.

Moreover, the company's taxes surged by a staggering 397% in 2022, reflecting the direct
impact of its rising profits. To safeguard its financial well-being, Starbucks must astutely
manage its tax obligations and explore strategic approaches to minimize its tax liability.

In summary, Starbucks' financial performance in 2022 presented a mixed picture,

showcasing promising growth while also highlighting areas of concern. The company's
steady revenue expansion is a positive indicator; however, rising costs, particularly in
COGS and total operating expenses, pose potential threats to profitability and long-term
sustainability. To maintain its growth trajectory, Starbucks must prioritize cost containment
measures, enhance operational efficiency, and exercise prudence in debt management. By
addressing these challenges, Starbucks can solidify its position as a thriving and resilient
organization.
Here are some concrete suggestions that the company can consider to address the concerns
raised and enhance its financial performance.

 Negotiating better deals with suppliers: Leverage stronger supplier relationships to

secure more favorable pricing on raw materials and supplies.
 Streamlining production processes: Identify and eliminate inefficiencies within
production processes to reduce waste and optimize resource utilization.
 Consolidating operations: Combine similar functions or operations across different
locations to reduce duplicative efforts and lower overhead expenses.
 Outsourcing non-core activities: Consider outsourcing non-essential functions or
activities to external partners to reduce internal operational costs.
 Prudently managing debt: Exercise caution in debt financing, ensuring that debt
levels align with the company's financial capacity and growth plans.
 Strategic tax planning: Implement effective tax planning strategies to minimize tax
liability while remaining compliant with tax regulations.

By adopting these actionable strategies, the company can effectively address the challenges
identified and set itself on a trajectory for sustainable growth and enhanced financial
performance.