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Starbucks Case Analysis

2363 words - 10 pages

Starbucks Case Analysis

September 13, 2012 Mike Behrns, Jessica Niese, Jennifer Dadlow, Scott Ryan, Ketan Patel

Part 1. Annual Value and Customer Lifetime Value

The annual value of each type of customer (exhibit 1) has been calculated by multiplying the number of visits to Starbucks per month times twelve (months/year) times the average customer life in years – thus yielding the annual values of unsatisfied customers, satisfied customers, and highly satisfied customers of $181.58, $209.50 and $381.89, respectively. In determining cost of capital (exhibit 2), we first considered the cost of debt, which was 7.47% in 2001 and 5.97% in 2002. The historical rate of inflation may be used, ...view middle of the document...

78, $46.43 and $136.16, respectively.

Starbucks Case Analysis

September 13, 2012 Mike Behrns, Jessica Niese, Jennifer Dadlow, Scott Ryan, Ketan Patel
Exhibit 1 # of Starbucks visit/month Average expenditure/visit Average customer life in years # of Starbucks visit/year Annual Value of Customer Unsatisfied Customer 3.9 $3.88 1.1 46.8 $181.584 Satisfied Customer 4.3 $4.06 4.4 51.6 $209.496 Highly Satisfied Customer 7.2 $4.42 8.3 86.4 $381.888

Exhibit 2

Debt (in thousands) Interest Expense (in thousands) Cost of Debt

Cost of Debt 2001 $5,786 $432 7.47%

2002 $5,076 $303 5.97%

Exhibit 3

2002 Net Profit Margin Net Revenue (in millions) $3,288.90 Net Income (in millions) $215.1 Net Profit Margin 6.54%

Starbucks Case Analysis

September 13, 2012 Mike Behrns, Jessica Niese, Jennifer Dadlow, Scott Ryan, Ketan Patel
Exhibit 4 Unsatisfied Customer Period 1 annual Value of the Customer 181.58 Discounted 165.0727 NPV of Revenue: $180.14 Customer Lifetime Value (NPV of Net Income): $11.78 1 period 18.158 15.0646

Period 1 annual 2 annual 3 annual Value of the 209.496 209.496 209.496 Customer Discounted 190.4509 173.1372 157.3974 NPV of Revenue: $709.85 Customer Lifetime Value (NPV of Net Income): $46.43

Satisfied Customer 4 annual 1 period 209.496 143.0886 20.9496 19.11868

2 period 20.9496 17.44778

3 period 20.9496 15.92291

4 period 20.9496 14.53131 46.42548

Period 1 annual 2 annual 3 annual 4 annual Value of 381.888 381.888 381.888 381.888 Customer Discounted 347.1709 315.6099 286.9181 260.8346 NPV of Revenue: $2081.98 Customer Lifetime Value (NPV of Net Income): $136.16

Highly Satisfied Customer 5 annual 6 annual 7 annual 381.888 237.1224 381.888 215.5658 381.888 195.9689

8 annual 381.888 178.1536

1 period 38.1888 34.85124

2 period 38.1888 31.80538

3 period 38.1888 29.02571 44.63651

NPV of Revenue Customer Lifetime Value (NPV of Net Income)

NPV Summary Unsatisfied Customer $180.14 $11.78

Satisfied Customer $709.85 $46.43

Highly Satisfied Customer $2081.98 $136.16

Starbucks Case Analysis

September 13, 2012 Mike Behrns, Jessica Niese, Jennifer Dadlow, Scott Ryan, Ketan Patel

Part 2. Decision to Invest
In order to evaluate whether incremental contributions to operating profit due to increased customer satisfaction would offset the $40MM cost of the investment, we first need to understand what percentage of the current customers are Unsatisfied, Satisfied and Highly Satisfied. This can be accomplished by evaluating the average visits per month. On average, if ten of each type of customer visited during a month, there would a total 154 visits. Of those visits, 72 (46.75%) would be Highly Satisfied, 43 (27.92%) would be Satisfied, and 39 (25.32%) would be Unsatisfied customers. This, at a “percentage of transactions” level, gives a basis to understand how the types of customers contribute to stores’ revenues (Exhibit 1). To understand how the customers contribute to the stores’...

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