Starbucks 2003 Annual Report Download - page 1

Fiscal฀2003฀Annual฀Report฀ 13
CAUTIONARY฀STATEMENT฀PURSUANT฀TO฀THE฀PRIVATE฀
SECURITIES฀LITIGATION฀REFORM฀ACT฀OF฀1995
Certain฀ statements฀ herein,฀ including฀ anticipated฀ store฀ openings,฀
comparable฀store฀sales฀expectations,฀trends฀in฀or฀expectations฀regarding฀
Starbucks฀Corporation’s฀revenue฀growth,฀operating฀expenses,฀capital฀
expenditures,฀ effective฀ tax฀ rate฀ and฀ net฀ earnings฀ and฀ earnings฀ per฀
share฀results,฀all฀constitute฀“forward-looking฀statements”฀within฀the฀
meaning฀ of฀ the฀ Private฀ Securities฀ Litigation฀ Reform฀ Act฀ of฀ 1995.฀
Such฀statements฀are฀based฀on฀currently฀available฀operating,฀financial฀
and฀ competitive฀ information฀ and฀ are฀ subject฀ to฀ various฀ risks฀ and฀
uncertainties.฀Actual฀future฀results฀and฀trends฀may฀differ฀materially฀
depending฀on฀a฀variety฀of฀factors,฀including,฀but฀not฀limited฀to,฀coffee,฀
dairy฀ and฀ other฀ raw฀ materials฀ prices฀ and฀ availability,฀ successful฀
execution฀of฀internal฀performance฀and฀expansion฀plans,฀fluctuations฀
in฀United฀States฀and฀international฀economies,฀ramifications฀from฀the฀
war฀on฀terrorism,฀or฀other฀international฀events฀or฀developments,฀the฀
impact฀of฀competitors’฀initiatives,฀the฀effect฀of฀legal฀proceedings,฀and฀
other฀risks฀detailed฀herein฀and฀in฀Starbucks฀Corporation’s฀other฀filings฀
with฀the฀Securities฀and฀Exchange฀Commission.
A฀forward-looking฀statement฀is฀neither฀a฀prediction฀nor฀a฀guarantee฀of฀
future฀events฀or฀circumstances,฀and฀those฀future฀events฀or฀circumstances฀
may฀not฀occur.฀Users฀should฀not฀place฀undue฀reliance฀on฀the฀forward-
looking฀ statements,฀ which฀ speak฀ only฀ as฀ of฀ the฀ date฀ of฀ this฀ report.฀
The฀Company฀is฀under฀no฀obligation฀to฀update฀or฀alter฀any฀forward-
looking฀ statements,฀ whether฀ as฀ a฀ result฀ of฀ new฀ information,฀ future฀
events฀or฀otherwise.
BUSINESS
Starbucks฀ Corporation,฀ which฀ was฀ formed฀ in฀ 1985฀ as฀ a฀
Washington฀ corporation,฀ (together฀ with฀ its฀ subsidiaries,฀
“Starbucks”฀or฀the฀“Company”)฀ purchases฀ and฀roasts฀high-
quality฀whole฀bean฀coffees฀and฀sells฀them,฀along฀with฀fresh,฀
rich-brewed฀ coffees,฀ Italian-style฀ espresso฀ beverages,฀ cold฀
blended฀ beverages,฀ a฀ variety฀ of฀ complementary฀ food฀ items,฀
coffee-related฀ accessories฀ and฀ equipment,฀ a฀ selection฀ of฀
premium฀teas฀and฀a฀line฀of฀compact฀discs,฀primarily฀through฀
Company-operated฀ retail฀ stores.฀ Starbucks฀ sells฀ coffee฀ and฀
tea฀ products฀ through฀ other฀ channels,฀ and,฀ through฀ certain฀
of฀ its฀ equity฀ investees,฀ Starbucks฀ also฀ produces฀ and฀ sells฀
bottled฀ Frappuccino®฀ and฀ Starbucks฀ DoubleShot™฀ coffee฀
drinks฀ and฀ a฀ line฀ of฀ premium฀ ice฀ creams.฀ These฀ non-retail฀
channels฀ are฀ collectively฀ known฀ as฀ “Specialty฀ Operations.”฀
The฀Company’s฀objective฀is฀to฀establish฀Starbucks฀as฀the฀most฀
recognized฀and฀respected฀brand฀in฀the฀world.฀To฀achieve฀this฀
goal,฀ the฀ Company฀ plans฀ to฀ continue฀ rapid฀ expansion฀ of฀
its฀ retail฀ operations,฀ to฀ grow฀ its฀ Specialty฀ Operations฀ and฀
to฀ selectively฀ pursue฀ other฀ opportunities฀ to฀ leverage฀ the฀
Starbucks฀ brand฀ through฀ the฀ introduction฀ of฀ new฀ products฀
and฀the฀development฀of฀new฀channels฀of฀distribution.฀
The฀Company฀has฀ two฀operating฀segments,฀ United฀ States฀ and฀
International,฀ each฀ of฀ which฀ include฀ Company-operated฀ retail฀
stores฀and฀Specialty฀Operations.
Company-operated฀Retail฀Stores
The฀Company’s฀ retail฀ goal฀ is฀to฀ become฀the฀leading฀ retailer฀
and฀brand฀of฀coffee฀in฀each฀of฀its฀target฀markets฀by฀selling฀the฀
finest฀ quality฀ coffee฀ and฀ related฀ products฀ and฀ by฀ providing฀
superior฀customer฀service,฀thereby฀building฀a฀high฀degree฀of฀
customer฀ loyalty.฀ Starbucks฀ strategy฀ for฀ expanding฀ its฀ retail฀
business฀ is฀ to฀ increase฀ its฀ market฀ share฀ in฀ existing฀ markets฀
primarily฀ by฀ opening฀ additional฀ stores฀ and฀ to฀ open฀ stores฀
in฀new฀markets฀where฀the฀opportunity฀exists฀to฀become฀the฀
leading฀ specialty฀ coffee฀ retailer.฀ In฀ support฀ of฀ this฀ strategy,฀
Starbucks฀opened฀602฀new฀Company-operated฀stores฀during฀
the฀fiscal฀year฀ended฀September฀28,฀2003฀(“fiscal฀2003”).฀In฀
July฀2003,฀through฀its฀acquisition฀of฀Seattle฀Coffee฀Company฀
(“SCC”)฀ from฀ AFC฀ Enterprises,฀ Inc.,฀ Starbucks฀ acquired฀
70฀ Company-operated฀ Seattle’s฀ Best฀ Coffee฀ (“SBC”)฀ and฀
Torrefazione฀Italia฀(“TI”)฀stores.฀At฀fiscal฀year฀end,฀Starbucks฀
had฀3,779฀Company-operated฀stores฀in฀the฀United฀States,฀373฀
in฀the฀United฀Kingdom,฀316฀in฀Canada,฀40฀in฀Australia฀and฀
38฀in฀Thailand.฀Company-operated฀retail฀stores฀accounted฀for฀
approximately฀85%฀of฀total฀net฀revenues฀during฀fiscal฀2003.
Starbucks฀ retail฀ stores฀ are฀ typically฀ located฀ in฀ high-traffic,฀
high-visibility฀locations.฀Because฀the฀Company฀can฀vary฀the฀
size฀and฀format,฀its฀stores฀are฀located฀in฀a฀variety฀of฀settings,฀
including฀ downtown฀ and฀ suburban฀ retail฀ centers,฀ office฀
buildings฀ and฀ university฀ campuses.฀ While฀ the฀ Company฀
selectively฀locates฀stores฀in฀suburban฀malls,฀it฀focuses฀on฀stores฀
that฀have฀convenient฀access฀for฀pedestrians฀and฀drivers.
All฀Starbucks฀stores฀offer฀a฀choice฀of฀regular฀and฀decaffeinated฀
coffee฀ beverages,฀ a฀ broad฀ selection฀ of฀ Italian-style฀ espresso฀
beverages,฀ cold฀ blended฀ beverages,฀ iced฀ shaken฀ refreshment฀
beverages฀ and฀ a฀ selection฀ of฀ teas฀ and฀ distinctively฀ packaged฀
roasted฀ whole฀ bean฀ coffees.฀ Starbucks฀ stores฀ also฀ offer฀ a฀
selection฀of฀fresh฀pastries฀and฀other฀food฀items,฀sodas,฀juices,฀
coffee-making฀ equipment฀ and฀ accessories,฀ a฀ selection฀ of฀
compact฀ discs,฀ games฀ and฀ seasonal฀ novelty฀ items.฀ Each฀
Starbucks฀ store฀ varies฀ its฀ product฀ mix฀ depending฀ upon฀ the฀
size฀of฀the฀store฀and฀its฀location.฀Larger฀stores฀carry฀a฀broad฀
selection฀of฀the฀Company’s฀whole฀bean฀coffees฀in฀various฀sizes฀
and฀types฀of฀packaging,฀as฀well฀as฀an฀assortment฀of฀coffee฀and฀
espresso-making฀ equipment฀ and฀ accessories฀ such฀ as฀ coffee฀
grinders,฀ coffeemakers,฀ coffee฀ filters,฀ storage฀ containers,฀
travel฀tumblers฀and฀mugs.฀Smaller฀Starbucks฀stores฀and฀kiosks฀
typically฀sell฀a฀full฀line฀of฀coffee฀beverages,฀a฀limited฀selection฀
of฀ whole฀ bean฀ coffees฀ and฀ a฀ few฀ accessories฀ such฀ as฀ travel฀
tumblers฀ and฀ logo฀ mugs.฀ Approximately฀ 1,200฀ stores฀ carry฀
a฀selection฀of฀“grab฀ and฀go”฀sandwiches฀and฀salads.฀ During฀
fiscal฀2003,฀the฀Company’s฀retail฀sales฀mix฀by฀product฀type฀
was฀ comprised฀ of฀ approximately฀ 78%฀ beverages,฀ 12%฀ food฀
items,฀ 5%฀ whole฀ bean฀ coffees฀ and฀ 5%฀ coffee-making฀
equipment฀and฀accessories.
Specialty฀Operations
Starbucks฀ Specialty฀ Operations฀ strive฀ to฀ develop฀ the฀
Starbucks฀ brand฀ outside฀ the฀ Company-operated฀ retail฀ store฀
environment฀ through฀ a฀ number฀ of฀ channels.฀ Starbucks฀
strategy฀is฀to฀reach฀customers฀where฀they฀work,฀travel,฀shop฀
and฀dine฀by฀establishing฀relationships฀with฀prominent฀third฀
parties฀ that฀ share฀ the฀ Company’s฀ values฀ and฀ commitment฀
to฀ quality.฀ These฀ relationships฀ take฀ various฀ forms฀ including฀
licensing฀ arrangements,฀ foodservice฀ accounts฀ and฀ other฀
initiatives฀ related฀ to฀ the฀ Company’s฀ core฀ businesses.฀ In฀
certain฀situations,฀Starbucks฀has฀an฀equity฀ownership฀interest฀
in฀licensee฀operations.฀During฀fiscal฀2003,฀specialty฀revenues฀
(which฀ include฀ royalties฀ and฀ fees฀ from฀ licensees฀ as฀ well฀ as฀
product฀sales฀derived฀from฀ Specialty฀ Operations)฀accounted฀
for฀approximately฀15%฀of฀total฀net฀revenues.
Licensing฀
Although฀ the฀ Company฀ does฀ not฀ generally฀ relinquish฀
operational฀ control฀ of฀ its฀ retail฀ stores฀ in฀ the฀ United฀ States,฀
in฀ situations฀ in฀ which฀ a฀ master฀ concessionaire฀ or฀ another฀
company฀controls฀or฀can฀provide฀improved฀access฀to฀desirable฀
retail฀ space,฀ the฀ Company฀ licenses฀ its฀ operations.฀ As฀ part฀
of฀ these฀ arrangements,฀ Starbucks฀ receives฀ license฀ fees฀ and฀
royalties฀ and฀ sells฀ coffee฀ and฀ related฀ products฀ for฀ resale฀ in฀
licensed฀ locations.฀ Employees฀ working฀ in฀ licensed฀ locations฀
must฀ follow฀ Starbucks฀ detailed฀ store฀ operating฀ procedures฀
and฀attend฀training฀classes฀similar฀to฀those฀given฀to฀Starbucks฀
Company-operated฀store฀managers฀and฀employees.
During฀ fiscal฀ 2003,฀ Starbucks฀ opened฀ 315฀ licensed฀ retail฀
stores฀in฀the฀United฀States.฀In฀addition,฀Starbucks฀obtained฀76฀
franchised฀SBC฀retail฀stores฀through฀the฀acquisition฀of฀SCC฀in฀
July฀2003.฀As฀of฀September฀28,฀2003,฀the฀Company฀had฀1,422฀
licensed฀or฀franchised฀stores฀in฀the฀United฀States.฀Product฀sales฀
to฀and฀royalty฀and฀license฀fees฀from฀these฀stores฀accounted฀for฀
approximately฀22%฀of฀specialty฀revenues฀in฀fiscal฀2003.฀
The฀ Company’s฀ international฀ licensed฀ retail฀ stores฀ are฀
operated฀ through฀ a฀ number฀ of฀ licensing฀ arrangements฀ with฀
prominent฀ retailers.฀ During฀ fiscal฀ 2003,฀ Starbucks฀ expanded฀
its฀ international฀ presence฀ by฀ opening฀ 284฀ new฀ international฀
licensed฀ stores,฀ including฀ the฀ first฀ stores฀ in฀ Chile,฀ Peru฀ and฀
Turkey.฀ At฀ fiscal฀ year฀ end฀ 2003,฀ the฀ Company฀ had฀ a฀ total฀
of฀ 1,257฀ licensed฀ retail฀ stores฀ managed฀ by฀ the฀ Company’s฀
international฀divisions฀and฀located฀as฀follows: