Starbucks is the premier roaster, marketer, and retailer of specialty coffee in the world, operating in 83 markets. Starbucks purchases and roasts high-quality coffees, handcrafted coffee, tea, and other beverages, and a variety of high-quality food items through company-operated stores.
Starbucks also sells a variety of coffee and tea products and licenses its trademarks through other channels, such as licensed stores, as well as grocery and food service through its Global Coffee Alliance with Nestlé S.A. (“Nestlé”). In addition to its flagship Starbucks Coffee brand, Starbucks sells goods and services under the following brands: Teavana, Seattle’s Best Coffee, Ethos, Starbucks Reserve, and Princi.
Starbucks’ primary objective is to maintain Starbucks standing as one of the world’s most recognized and respected brands. Starbucks invests in its brand and operations to achieve long-term targeted revenue and income growth. This includes expanding its global store base, adding stores in both existing, developed markets such as the U.S. and in higher growth markets such as China, and optimizing the mix of company-operated and licensed stores around the world.
By leveraging experiences gained, Starbucks continues to drive beverage, equipment, process, and technology innovation, including in its digital platform. Starbucks regularly offers consumers new, innovative coffee and other products in a variety of forms across new categories, diverse channels, and alternative store formats.
In this strategy story, we decided to decipher the business model and supply chain of Starbucks.
Business Model of Starbucks
Starbucks generated $32.25 billion in revenues in FY22. The business model of Starbucks consists of company-operated stores and licensed stores. As of FY22, Starbucks had 35,711 stores, comprising 18,253 company-operated stores (51%) and 17,458 licensed stores (49%).
The mix of company-operated versus licensed stores in a given market generally varies based on several factors, including its ability to access desirable local retail space, the complexity, profitability, and expected ultimate size of the market for Starbucks, and its ability to leverage the support infrastructure within a geographic region.
Total net revenues increased $3.2 billion, or 11%, over fiscal 2021, primarily due to higher revenues from company-operated stores ($2.0 billion).
- The growth in company-operated store revenue was driven by an 8% increase in comparable store sales ($1.8 billion), attributed to a 5% increase in average tickets and a 2% increase in similar transactions.
- Licensed stores’ revenue increased by $972 million, primarily driven by higher product and equipment sales and royalty revenues from its licensees.
- Other revenues increased by $249 million, primarily due to higher product sales and royalty revenue in the Global Coffee Alliance and growth in its ready-to-drink business.
Revenue from company-operated stores accounted for 82% of total net revenues during FY22. Starbucks’ retail objective is to be the leading retailer and brand of coffee and tea in each of Starbucks’ target markets by selling the finest quality coffee, tea, and related products, as well as complementary food offerings, and by providing each customer with a unique Starbucks Experience.
The Starbucks Experience is built upon superior customer service, convenience, and a seamless digital experience, as well as safe, clean and well-maintained stores that reflect the personalities of the communities in which they operate, thereby building a high degree of customer loyalty.
Starbucks company-operated stores are typically located in high-traffic, high-visibility locations. Starbucks’ ability to vary the size and format of its stores allows it to locate them in or near various settings, including downtown and suburban retail centers, office buildings, university campuses, and rural and off-highway locations.
Starbucks has plans to increase the efficiency of its business model while elevating the partner and customer experience (the “Reinvention Plan”). Starbucks believes investing in partner wages and training will increase retention and productivity. At the same time, the acceleration of purpose-built store concepts and technological innovations will provide additional convenience and connection with customers.
Starbucks strongly focuses on increasing digital adoption to provide convenience and elevate the customer experience. These strategies align closely with rapidly evolving customer preferences, including higher levels of mobile ordering, more contactless pick-up experiences, and reduced in-store congestion, all of which naturally allow for greater physical distancing.
Stored Value Cards and Loyalty Program: The Starbucks Card, Starbucks’ branded stored value card program, is designed to provide customers with a convenient payment method, support gifting, and increase the frequency of store visits by cardholders, in part through the related Starbucks Rewards loyalty program where available.
Revenues from licensed stores accounted for 11% of Starbucks’ net revenues in fiscal 2022. Licensed stores generally have a lower gross margin and a higher operating margin than company-operated stores. Under the licensed business model, Starbucks receives a margin on branded products and supplies sold to the licensed store operator and a royalty on retail sales.
Licensees are responsible for operating costs and capital investments, which more than offset the lower revenues Starbucks receives under the licensed store model. In its licensed store operations, Starbucks seeks to leverage the expertise of its local partners and share its operating and store development experience. Licensees provide improved and, at times, only access to desirable retail space. Most licensees are prominent retailers with the in-depth market knowledge and access.
As part of these arrangements, Starbucks sells coffee, tea, food, and related products to licensees for resale to customers and receives royalties and license fees from the licensees. Starbucks also sells certain equipment, such as coffee brewers and espresso machines, to its licensees for use in their operations.
|Revenue Mix by business model type (in $ Mn)||FY22||FY21||FY20|
|Revenue Mix by product type (in $ Mn)||FY22||FY21||FY20|
Other revenues primarily include sales of packaged coffee, tea, and ready-to-drink beverages to customers outside of its company-operated and licensed stores, as well as royalties received from Nestlé under the Global Coffee Alliance and other collaborative partnerships. Others accounted for 7% of Starbucks’ revenue in FY22.
Supply Chain of Starbucks
Starbucks is committed to selling the finest whole bean coffees and coffee beverages. To help ensure compliance with its rigorous coffee standards, Starbucks substantially controls all coffee purchasing, roasting, and packaging and the global distribution of coffee used in its operations, as part of its supply chain strategy.
Nestlé controls the distribution of certain finished goods through the Global Coffee Alliance. Starbucks purchases green coffee beans from multiple coffee-producing regions around the world and custom roasts them to its exacting standards for many blends and single-origin coffees.
The price of coffee is subject to significant volatility. Both the premium and the commodity price depend upon the supply and demand at the time of purchase. Supply and price can be affected by multiple factors in the producing countries, including
- water supply quality and availability throughout the coffee production chain,
- natural disasters,
- crop disease, and pests,
- a general increase in farm inputs and costs of production,
- inventory levels, and political and economic conditions.
Depending on market conditions, Starbucks buys coffee using fixed-price and price-to-be-fixed purchase commitments to secure an adequate supply of quality green coffee.
Starbucks depends upon its relationships with coffee producers, outside trading companies, and exporters for the supply of green coffee. To secure the supply chain of high-quality green coffee, Starbucks operates ten farmer support centers.
Farmer support centers are staffed with agronomists and sustainability experts working with coffee farming communities to promote best practices in coffee production designed to improve coffee quality and yields and agronomy support to address climate change and other impacts.
In addition to coffee, Starbucks also purchases significant amounts of dairy and plant-based dairy-free alternative products, particularly fluid milk, oat milk, and almond milk, to support the needs of its company-operated stores.
Products other than whole bean coffees and coffee beverages sold in Starbucks stores include tea and many ready-to-drink beverages purchased from several specialty suppliers, usually under long-term supply contracts. Food products, such as pastries, breakfast sandwiches, and lunch items, are purchased from national, regional, and local sources.
Starbucks also purchases a broad range of paper and plastic products, such as cups and cutlery, from several companies to support the needs of its retail stores and manufacturing and distribution operations. Starbucks is also expanding its use of reusable packaging to reduce landfill waste.