Starbucks Digital Music Case Analysis

STARBUCKSENTERTAINMENTVenkat Rao, Melanie Stambaugh, Jessica Hendrawidjaja, Kyle Bartlow

OBJECTIVE

Position the Starbucks Entertainment in the global market

NPV = $3.663 Million

GOAL

OUTLINE

Situation

Analysis

Action

Financials

Conclusion

• Slowed US Sales• Cheaper competitors• Coffee focus

SITUATION – Starbucks Company

• Leader of Coffee• Leader of Culture• Strong Brand

Situation Analysis Action Financials ConclusionSTARBUCKS

COFFEE

Strength

Weakness

Opportunities

Threat

Over saturation Interest from global market

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Strength

Weakness

Opportunities

Threat

SITUATION – Starbucks Entertainment

• Successful in US• Have relationship with artists• Large and established distribution

network through retail stores

• Localization of music preferences abroad

• Infrastructure for downloads• Buying song via iTunes doesn’t ensure

entire album purchase

• 3 types of products-global appeal, locally relevant, local artists

• Digital Music – less inventory cost, more retail space

• More time in the stores-customer experience, higher coffee sales

• Technology “cheapens” music• Negotiations of royalties• Competitors

Situation Analysis Action Financials Conclusion

Discounted of prices of mainstream artists

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POTENTIAL STRATEGIES


COMPREHENSIVEMusic Strategy

MODERATEMusic Strategy

MINIMALMusic Strategy

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COMPREHENSIVEMusic Strategy

Music Immersion

Live Music Performances• Local artists from HearMusic

Promotion and Connection

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MINIMALMusic Strategy

Maintain focus on CDs• Focus on Coffee

Reduce visual impact of music

iTunes download only

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MODERATEMusic StrategyEnhance Starbucks

Locations• Interactive Music Display• Interactive “like/dislike”

option to personalize music preferences

Starbucks Music on the MoveMusic addition to MyStarbucks Phone Application

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Comprehensive Moderate Minimal

Sustained Focus on Coffee

Revenue Potential

Feasibility

Increase Customer FrequencyAlignment with Core Values

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MODERATE STRATEGY


Interactive Display• Shows “Now Playing”• Shows “Recently Played”• “Like” & “Dislike” Buttons• QR picture to facilitate

mobile purchasing• Purchase option via Phone

App

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MODERATE STRATEGY


Starbucks Wi-Fi• Music link on Starbucks

Homepage• Shows “Now Playing”• “Like” & “Dislike” option• Artist Recommendations• Social Media Connection

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MODERATE STRATEGY


Phone Application• Addition to

MyStarbucks App• Ability to Purchase

Music• Listen to previously

downloaded Starbucks artists

Technology30%

Music35%

Starbucks Culture 25%

Coffee Consumption 10%

COUNTRY ANALYSIS

Situation Analysis Action Financials ConclusionSTARBUCKS

COFFEE

SalesPiracy

Download

WiFi Capability3G Subscribers

Download Access

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POTENTIAL COUNTRIES


CountriesTechnology /

Download Access (.30)

Music Sales, Downloads and

Piracy (.35)

Coffee Consumption

(.10)

Starbucks Culture

(.25)Total

Canada 4 3 4 4 3.65

Mexico 3 3 1 2 2.55United

Kingdom 5 5 3 3 4.3

Germany 5 4 5 3 4.15

China 3 2 3 3 2.65

Japan 5 5 4 4 4.65

South Korea 5 3 4 5 4.2

Phillipines 3 1 2 2 1.95

Taiwan 4 1 2 2 2.25

Thailand 2 1 2 2 1.65

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COUNTRY SELECTION


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JAPAN - Overview


Population 126 millionGDP per Capita USD 34,200Starbucks stores 722Overall music sales/year USD 4.05 billionDigital music sales/year USD 972 millionMarket Geographic ± 100 million lives in

urban areaMarket Demographics Middle-upper classMarket Behavior Utilization of high

technology

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JAPAN – Customer Profile


Age 35Profession Works at TSEInterest TechnologyMusical Interests Jpop, Classical, WesternWireless device of choice

iPhone

Hiro Tanaka

Local60%Micro

10%

Global30%

Music MixFocus on local taste

• Hiro yearns for a relaxing environment between work and home

• He values premium/high quality products including the food he eats and beverages he drinks

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MARKETING PLAN - Japan


Mobile advertising

• 44% of Japanese consumers click on mobile ad links

In store advertising

• Place cards with logon instructions

• Music promotion info

Pick of the week promotion

• Free download of one song every week

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HR STAFFING PLAN - Japan


National Director of Entertainment

Regional Music manager

Local Music Specialist







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UNITED KINGDOM - Overview


Population 63 millionGDP per capita USD 35,100Starbucks stores 727Overall music sales/year USD 1.574 billionDigital music sales/year USD 295 millionMarket Geographic Large cities:

London, Birmingham, Leeds & Glasgow

Market Demographics • 43% is upper-middle class

• 27% disposable income spent on food

Market Behavior Going to coffee shop as a new kind of socializing

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U.K. – Customer Profile


Age 25Profession Graduate Student at London

School of EconomicsInterest Discovering new thingsMusical Interests Amy WinehouseWireless device of choice

Netbook

Jane HughesLocal20%

Micro50%

Global30%

Music MixHigh focus on individualism

• Jane yearns for a relaxing environment between school and home

• She values a good cup of coffee and is very particular on how it should be prepared

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MARKETING PLAN – U.K.


Instructions on coffee sleeve

• Download access from laptop & mobile device

Starbucks gift card promo

• Users of Like or Dislike function will have a chance to win a Starbucks gift card

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HR STAFFING PLAN – U.K.


National Director of

Entertainment









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FINANCIAL ASSUMPTIONS


Beta 1.28Risk-free rate 3.46%Return on market 6.84%

K(e): 12.22%

Interest Rate (10 yr AA Corporate Bond) 6.15%

K(d): 6.15%

Total Debt Weight 11.90%Total Equity Weight 88.10%Cost of Debt 6.15%Cost of Equity 12.22%Tax Rate 40%

K: 11.06%

Cost of Equity Capital

Cost of Debt Capital

Weighted Average Cost of CapitalLaunch Progression• Year 1: 200 stores total in each country • Year 2: 300 stores total in each country• Year 3: 500 stores total in each country• Year 4: All stores in each country• Year 5: All stores in each country

SBUX Total Revenue Growth

8% per year

Specialty Sales 15% of total sales, growing by 2% points each year

Starbucks Entertainment Share of Specialty Sales

1.5% with a 30% growth rate

Japan & UK % of Total Stores

8.59%

Music Consumption 85% of purchases through download 15% of purchases of physical CDCOGS 53% for physical CDs

61% for digital downloads 59.8%Sound Station Cost $3000 per unit

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FINANCIAL PROJECTIONS


2012 2013 2014 2015 2016Total Revenue 11815200.0 12760416.0 13781249.3 14883749.2 16074449.2Specialty Sales 1772280.0 2169270.7 2618437.4 3125587.3 3697123.3Japan & UK Portion of Specialty Sales 152238.9 186340.4 224923.8 268488.0 317582.9Starbucks Ent. % Share of Specialty Sales 1.50% 1.95% 2.54% 3.30% 4.28%Total Starbucks Ent. Sales 2283.6 3633.6 5701.8 8848.0 13605.7COGS 1365.6 2172.9 3409.7 5291.1 8136.2Marketing / SG&A Costs 1000.0 1000.0 1000.0 800.0 800.0In-Store Equipment Costs 60.0 90.0 150.0 0.0 0.0Tax 0.0 148.3 456.9 1102.8 1867.8Total Cash Flow -142.0 222.4 685.3 1654.1 2801.7NPV 3663.0

NPV = $3.663 Million IRR = 290%

0500

100015002000250030003500400045005000

2% 4% 8% 12%

Project NPV

SBUX Total Revenue Growth Rate

NPV

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SENSITIVITY ANALYSIS


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SENSITIVITY ANALYSIS


0

1000

2000

3000

4000

5000

6000

7000

0% 15% 30% 50%

Project NPV

SBUX Ent. Growth Rate

NPV

YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5

Starbucks Sound Stations

Wi-Fi Music Page

Phone App

Stores Implementation per country

200 300 500 All stores All stores

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TIMELINE


Evaluate Strategy

Physical CD Consideration




THANK YOU

Starbucks Digital Music Case Analysis

Technology

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relaxing environment

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