Starbucks 2006 Annual Report Download - page 16

Starbucks fails to preserve the quality of its products, is perceived to act in an unethical or socially irresponsible manner or
fails to deliver a consistently positive consumer experience in each of its markets.
• Starbucks is highly dependent on the financial performance of its United States operating segment.
The Company’s financial performance is highly dependent on its United States operating segment, which comprised
79% of consolidated total net revenues in fiscal 2006. Any substantial or sustained decline in these operations, if not offset
by increased financial performance elsewhere, could materially adversely affect the Company’s business and financial
results.
• Starbucks is increasingly dependent on the success of its International operating segment in order to achieve its growth targets.
The Company’s future growth depends increasingly on the growth and operations of its International operating segment.
Some or all of the Company’s International market business units (“MBUs”), which Starbucks generally defines by the
countries or regions in which they operate, may not be successful in their operations or in achieving expected growth.
Starbucks may find business partners who do not share its cultural, marketing or operating philosophies or who are
unable to operate the MBU profitably. Some factors that will be critical to the success of International MBUs are different
than those affecting the Company’s U.S. stores and licensees. Tastes naturally vary by region, and consumers in new
international markets into which Starbucks and its licensees expand may not embrace Starbucks products to the same
extent as consumers in the Company’s existing markets. Occupancy costs and store operating expenses are also sometimes
higher internationally than in the United States due to higher rents for prime store locations or costs of compliance with
country-specific regulatory requirements. Because many of the Company’s International operations are in an early phase
of development, operating expenses as a percentage of related revenues are often higher, compared to U.S. operations.
The Company’s International operations are also subject to additional inherent risks of conducting business abroad, such
as:
• foreign currency exchange rate fluctuations;
• changes or uncertainties in economic, social and political conditions in the Company’s markets;
• interpretation and application of laws and regulations;
• restrictive actions of foreign or United States governmental authorities affecting trade and foreign investment,
including protective measures such as export and customs duties and tariffs and restrictions on the level of foreign
ownership;
• import or other business licensing requirements;
• the enforceability of intellectual property and contract rights;
• limitations on the repatriation of funds and foreign currency exchange restrictions;
• lower levels of consumer spending on a per capita basis than in the United States;
• difficulty in staffing, developing and managing foreign operations due to distance, language and cultural
differences; and
• local laws that make it more expensive and complex to negotiate with, retain or terminate employees.
• The China market is important to the Company’s long-term growth prospects — doing business there and in other
developing countries can be challenging.
Starbucks expects the People’s Republic of China to be its largest market outside of the United States. Any significant or
prolonged deterioration in U.S.-China relations might adversely affect the Company’s China business. The Company’s
growing investments in its China operations will increase the Company’s exposure in this market.
12 STARBUCKS CORPORATION, FORM 10-K