This renewed focus on managing their supply chains to tighter levels of profitability and performance metrics including increasing quality standards has led to a significant reduction in operating expenses and control of variable costs (Starbucks Investor Relations, 2011). Starbucks was also able to manage costs of closing locations effectively, and when this strategy was combined with supply chain cost savings, greater focus on in-store profitability and faster new product introductions, Starbucks was able to reverse a negative trend on gross margins and profitability. Beginning in FY 2010 and continuing through the current fiscal period, Starbucks continues to see their gross margins and operating profits including Net Margin, Gross Margin and EBITDA Margin. Figure 1, 5-Year Trend Margin Analysis Shows Impact of Strategic Marketing shows the aggregate impact of these decisions on overall company profitability. Starbucks has a business model that is highly reactive to changes made in product and service mix yet ironically, as history shows, is less receptive to price changes. With the increase in prices on new beverages rushed through research & development (R&D) Starbucks has created a reason for their most loyal customers to come back and visit them at least 16 times a month (Starbucks Investor Relations, 2011). This 16-visits-per-month figure is the breaking point in customer loyalty for the company; their marketing strategies revolve around this figure and set it as a goal for continually gaining new visitors to their stores. It is the watermark or objective of long-term marketing efforts to earn the right to serve customers 16 times a month (Starbucks Investor Relations, 2011).
Figure 1: 5-Year Trend Margin Analysis Shows Impact of Strategic Marketing
Source: (Starbucks Investor Relations, 2011)
In aggregate, the focus on strategic marketing and the streamlining of supply chains to fuel global growth in China has led to significant gains in gross margins to 58.4%, increasing operating margins to an all-time high of 13.3%, attaining a net contribution margin of 13.4%.
What these financial metrics indicate is that even in the middle of a global recession, Starbucks continues to excel at managing the research and development (R&D) strategies, quickly translating innovation into revenue. In conjunction with this core competency of making R&D spending translate into revenue, the company also has the ability to launch new products globally extremely well, synchronizing efforts and ensuring a high degree of profitability in the process (Harrison, Chang, Gauthier, Joerchel, 2005). Third, the integrated nature of their supply chains to fuel growth in China, which is what the senior management team has openly called their "next U.S." also contributes to reducing variable operating costs while increasing gross margins. Combining all of these factors together account for 60% of gross margin contributions in their latest fiscal year (Starbucks Investor Relations, 2011). The blistering, rapid pace of Starbucks global growth can be attributed to these core strengths in R&D, new product development and introduction, and excellent management of their supply chains globally (Kanter, 2010). In retrospect, investing even more in R&D and increasing the pace of new product introductions would have had an even more profitable effect on their corporate financials vs. completing a price reduction temporarily in 2009 which tended to alienate loyal customers who took it as a message that the brand was cheapening itself.
Despite these strategies however, Starbucks still faced significant inventory levels throughout the FY 2009 and 2010 timeframes and is just now fully recovering from these conditions today. At their worst, Starbucks was challenged with a series of liquidity shortages primarily in their North American markets (Starbucks Investor Relations, 2011). The cash cycle metrics for this time period are shown in Figure 2, 5-Year Trend Operations Cycle Shows Impact of Strategic Marketing. Cash cycles continue to improve in addition to Inventory Turnover, which steadily is decreasing from the highest in the company's history during FY2009.
Figure 2: 5-Year Trend Operations Cycle Shows Impact of Strategic Marketing
Source: (Starbucks Investor Relations, 2011)
Company's Competitive Strength and Cost Structure
The strategy of investing heavily in R&D to quickly develop and launch new products is a proven strength of Starbucks and was instrumental in turning the company around in FY2009. The focus today from a competitive standpoint is to transform this rapid pace of innovation and new product introductions into earing 16 or more visits per store. As early as 2002 Starbucks realized that this connection of R&D to increased foot traffic existed, yet found the connection elusive to promote and continually gain traction with globally (Plog, 2005). What transformed the company was a study completed showing...
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