Financial Management

&

Submitted to

By

SIAMAK MOULAEIFAR 20207133

Jan 2011

List of Contents

1
Introduction 3
Objectives 3
Starbucks background
4

Whitbread Plc (Costa Coffee) background

4

Industry overview 5

Financial Performance (Starbucks Vs Costa Coffee)

• Revenue Vs Net Income

6
• Profitability Ratio
6
• Liquidity ratio 7
• Return on Equity-ROE
8
• Long Term Gearing 9

Conclusions and Recommendations

9

References 11

List of figures

Figure 1: Summary scope of Starbucks operation today

Figure 2: Summary scope of Whitbread operation today

Figure 3: Top 5 Leading Chained Specialist Coffee Shop Brands

Figure 4: Revenue against net income in both Starbucks and Costa Coffee from 2005

– 10 6

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Figure 5: Compares Profitability Margin, Starbucks Vs Costa Coffee 2005 – 10

Figure 6: Compares Liquidity Ratio, Starbucks Vs Costa Coffee 2005 – 10

Figure 7: Compares return on equity, Starbucks Vs Costa Coffee 2005 – 10

Figure 8: Compares long term gearing, Starbucks Vs Costa Coffee 2005 – 10

Introduction

There are many ways an investor or a business owner can identify how well or how
poorly a company is performing. Each quarter publicly traded companies are required
to publish quarterly financial data to the public. Looking at this information,
comparing data, and using simple formulas to determine different ratios can save an
investor and/or business owner money before things go bad. Therefore, Financial Data
provides insight into company performance and market trends within industries
therefore, analyzing financial statement information (also known as quantitative
analysis), is one the most important element to understand financial health of
businesses. According to Jim McMenamin (1999, p.298) Financial analysis is the
evaluation a firm’s past, present, and anticipated future financial performance and
financial condition.

Objectives
This report sets out to give an overview of the current financial health of Starbucks
and Whitbread Plc (Costa Coffee). The financial health is analysed by looking at
accounting ratios over the last few years (2005 – 10) and by an examination of
sources of long term finance gearing, finally this report will set out to recommend
future direction and development plan for both companies.

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Industry overview
The internationalisations of the Chained Specialist Coffee market drive most leading
players to expand their international operations. With 74,810 specialist coffee shops,
chained players account for 45,560, with Starbucks by far the market leader. Figure 3
illustrates top 5 Leading Chained Specialist Coffee Shop Brands. (Euromonitor
International Dec 2010, Starbucks Corporation in Consumer Foodservice –World.)

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Figure 3, Top 5 Leading Chained Specialist Coffee Shop Brands 04/09 Absolute Value
Growth US$ fixed exchange rates.

Source; Adapted from Euromonitor International Dec 2010, Starbucks Corporation in

Consumer Foodservice –World.

Starbucks is the world's fifth largest consumer foodservice brand and the leader in the
only category it operates in, specialist coffee shops With 16,706 Starbucks branded
outlets in 2009, the coffee specialist is present in 50 countries, with a combination of
company-owned and licensed outlets. While chained competitors are far behind at the
global level, competition remains strong especially from the independents and local
chains in each country the company operates in. Costa Coffee, the third-ranked coffee
specialist, has a strong international presence with outlets in 25 countries, consistent
outlet growth (reaching 1,700 outlets in 2009) and future plans for expansion in
Europe.

Financial Performance (Starbucks Vs Costa Coffee)

Revenue Vs Net Income

The Foodservice industry is a very competitive area for companies to survive. Both
Starbucks and Costa coffee are excellent companies to earn a lot of profit in this
industry.

Figure 4 compares revenue against net income in both Starbucks and Costa Coffee
from 2005 - 10.

The charts in above clearly illustrate that, Starbucks is accruing higher revenue and
net income than Costa coffee. This could be due to the share size of the company
which has more than 16,706 stores and operations over 50 countries compare to
Costa with only 1,700 stores and operation in 25 countries. However, it is interesting
to see Starbucks making more than four times revenue than Costa coffee but, the net
income in Starbucks is not as much as revenue due to high cost of operation.

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Profitability Ratio

Gross margin: It indicates the profit a company earns after direct costs of production
(Harrington, 2004). Companies not be earning a gross profit then there is no point in
staying in business. Jim McMenamin (1999, p. 303) states that ‘The Gross profit (GP)
ratio is a very important profitability measure for any business, it essentially measure
the trading effectiveness and basic profit potential of a firm’.

Simply, the gross profit margin is an efficiency measure. The higher the margin is, the
more efficient the business is.

Figure 5 compares Profitability Margin, Starbucks Vs Costa Coffee 2005 – 10.

Profitability of Starbucks and Costa coffee demonstrate that they were going smoothly
with increase from 2005 till 2007. Major difference in net profit and gross profit
margin came in 2008 where recession hit world economy but from 2009 as economy
recovering the profit margins increase. Figure 5 show that Starbucks has a lower
gross profit and net profit margin than Costa coffee; it means Costa coffee is far more
efficient as a company however, Starbucks expand rapidly from 2005.

Liquidity ratio

Common liquidity ratios include the current ratio, the quick ratio but quick ratio is
more conservative than current ratio because its exclude inventory.

Current ratio: It measures the company’s ability to pay its current liabilities using
current assets and reflects the size of short-term obligations (Harrington, 2004). A
current ratio greater than one is preferable.

Figure 6 compares Liquidity Ratio, Starbucks Vs Costa Coffee 2005 – 10.

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Companies with high current ratio are considered more liquid than those with low
liquidity ratios. Their short-term assets are greater than their short-term liabilities.
They have the good ability to pay off its short-term obligations. Obviously, Starbucks
has higher liquidity ratios since 2007 than Costa coffee. Costa coffee has a decline
trend of liquidity ratio from 2006.

Return on Equity-ROE

Harrington 2004 state that, ‘Return on equity: It focuses on expenses control, assets
utilization and debt utilization. It indicates that how these factors combine to
determine the return for shareholders’. In another word, Return on equity measures a
corporation's profitability by revealing how much profit a company generates with the
money shareholders have invested.

Figure 7 compares return on equity, Starbucks Vs Costa Coffee 2005 – 10.

Figure 7 shows that Starbucks ROE were far higher than Costa coffee every year.
According to Harrington, the higher assets a company uses to generate sales, and the
less debt it uses to finance those assets, the lower the return shareholders can earn.
Starbucks has a very high percentage of ROE, this indicates that they are very
profitable, especially in the period from 2005-2007 before recession hit world’s
economy.

Long Term Gearing

According to Harrington (2004), long term gearing provide information about the
sources the company has used to financial its investment in assets. Financial analysts
are more concentrated with the firm’s long-term debt than its short-term debt

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because the short-term debt is constantly changing (Ross, Westerfield, Jordan, and
Roberts, 2001).

Figure 8 compares long term gearing, Starbucks Vs Costa Coffee 2005 – 10.

As the figure 8 demonstrates, Starbucks not only has a little proportion of long-term
debt, but this ratio also declined from 2007, year by year. Costa coffee long-term debt
to equity is much higher than Starbucks in every year. However, lenders such as
bankers typically prefer both these two companies for low debt ratios because they
provide greater security for their loans.

Conclusions and Recommendations

With a Strong and growing international presence, Starbucks is the top specialist
coffee shop operating over 50 countries across six continents. Also, Costa Coffee, the
third-ranked coffee specialist, has a strong international presence with outlets in 25
countries. Both Starbucks and Costa coffee financial performance improved from 2005
but, in 2008, both revenue and operating profit suffered as a result of recession took
place beginning of 2008. Decreasing in gross profitability margin means Starbucks
has been becoming less efficient over the years but, in 2009 improvement of cost
structure, which resulted in removing $544 million in costs from the. The liquidity
position of Starbucks looks stronger than Costa coffee, which means Starbucks, has
made effective efforts in paying its short term debt with.

For over decades, globalization has been a key factor in decisions by many
organizations seeking expansion and high profits (Allen and Raynor, 2003). The
internationalisations of the foodservice market drive most leading players to expand
their international operations. Future success of Starbucks and Costa coffee is sort of
based on globalizations ideas therefore, largest market for Starbucks is outside the US
and for Costa coffee outside the UK.

Why China?

China is the emerging force in today’s business world and its domestic market bears
huge growth potential for multinational companies. China has already experienced a
substantial growth in the field of international business because aside from its local
companies going international, many international companies from different countries

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have already started to dominate the Chinese market. China has been the fastest
growing major nation for the past quarter of a century with an average annual GDP
growth rate above 10%. Chinese economy has grown faster than predicted. It jumped
by 8.7% for the whole of 2009, and was up by 10.9% in the last quarter - despite the
global recession (BBC China economy 2009). As a result, it was perceived that the
Chinese economy will continue to grow. The coffee industry in china has a high
intensity of competition, however sales through cafés/bars grew by 8% to RMB36
billion (over £3,487million). In addition chained specialist coffee shops saw the
highest current value growth in 2009, of 22% (Euromonitor International August 2009,
Cafés/bars – China)

References

Books:

Jim McMenamin (1999) Financial Managment. London, Routledge

Harrington, D. (2004) Corporate Financial Analysis. 7th ed. Ohio, South-Western.

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Ross, S.A., Westerfield, R.W., Jaffe, J.F., & Roberts, G.S (2001) Corporate Finance. 3 th
ed.Toronto, McGraw-Hill Ryerson.

Internet sources:

Allen, D. & Raynor, M. E. (2003) Globalization at Risk, (online) Available at:

http://www.manyworlds.com/default.aspx?from=/exploreCO.aspx&coid=CO1270317195517
(Access 20th Dec, 2010)

Euromonitor International Dec 2010, Starbucks Corporation in Consumer Foodservice –World,

(online) Available at:

http://ezproxy.tvu.ac.uk:2181/Portal/ResultsList.aspx(Access 20th Dec, 2010)

Euromonitor International August 2009, Cafés/bars – China, (online) Available at:

http://ezproxy.tvu.ac.uk:2181/Portal/Magazines/Welcome.aspx(Access 20th Dec, 2010)

www. BBC China economy 2009, (online) Available at:

http://news.bbc.co.uk/1/hi/business/davos/7856636.stm (Access 17th Dec, 2010)

www.Starbucks.com
Annual report 2005
Annual report 2006
Annual report 2007
Annual report 2008
Annual report 2009
Available at: http://www.starbucks.com/ [Accessed 17th Dec 2010]
www.Whitbread Plc.com
Annual report 2005
Annual report 2006
Annual report 2007
Annual report 2008
Annual report 2009
Available at: http://www.whitbread.co.uk/whitbread.html [Accessed 17th Dec 2010]

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