Introduction
The success of every business depends on its ability to generate profits and, equally importantly, continuously grow and expand its operations. Coffee Connection, a small enterprise located in the Midwest, is rather well-positioned to create value both for its customers and its stakeholders. Nevertheless, there are always opportunities for improvement, and the purpose of the present report is to identify the best practices in the coffee shop industry based on a financial analysis of a major competitor – Starbucks.
Clearly, Starbucks and Coffee Connection are on different ends of the company size spectrum. Starbucks was founded almost half a century ago and has since become a major actor in the coffee market. Currently, the corporation has over 22,000 stores in almost 70 countries (Starbucks, 2015). Evidently, Coffee Connection does not have the same resources as Starbucks does. However, researchers and practitioners in the field of business believe that competitor analysis can be a valuable business process improvement tool (Siha & Saad, 2008). In the present case, given Coffee Connection’s objectives to improve its profitability and expand its operations, the competitor analysis will be aimed at developing financial benchmarks necessary for Coffee Connection to achieve its goals.
The report consists of three parts. The first section is dedicated to an analysis of Starbucks’ financial statements with the purpose of identifying any considerable and noteworthy trends over the past two-year period. Special attention is given to the Starbucks’ management of accounts receivable, asset acquisition, and debt financing practices. The second part includes an analysis of the company’s financial performance through liquidity, solvency, and profitability ratios. The third section provides an overview of the Generally Accepted Accounting Principles which Starbucks has to follow. Finally, the conclusion of the report reiterates its main findings and provides general suggestions for financial improvements.
Conclusion
The findings of the analysis have revealed Starbucks’ solid financial performance, regardless of the somewhat unfavorable economic conditions. While the analysis of asset acquisition demonstrated that the company continues to expand its operations, the examination of its debt financing practices showed that the company relies primarily on its own resources instead of turning to borrowing. Starbucks is experiencing a considerable rise in the value of its goodwill and other intangible assets: one may assume that this increase is due to the company’s marketing and CSR efforts.
The company experienced a slight drop in its liquidity ratios, but the figures still indicate that the company is able to repay its short-term obligations successfully. Starbucks also has low solvency ratios, meaning that it does not need to rely on its cash flow to honor its debts (Tracy, 2004). Given that Starbucks does not rely on external financing extensively, it is worth exploring how the company performs on profitability ratios. For the last three years, the company experienced a steady and significant increase in its returns on assets and equity. It means that the company uses shareholders’ funds for strategic and well-calculated investments (Needles, Powers & Crosson, 2014).
Coffee Connection should learn the following lessons from Starbucks. First of all, it is worth investing in marketing and PR since the value of the company’s intangible assets can play an important role in its business operations. Secondly, external financing should be the last resort option, and Coffee Connection should rely on its retained earnings for its future expansion. The key to growth is investing strategically, meaning carefully selecting and designing new store sites. It is, however, also important to consider the company’s own financial performance: what may work for one business, may not necessarily be a universal solution for all of its competitors.
References
Needles, B.E., Powers, M., & Crosson, S.V. (2014). Principles of accounting (12th ed.). Stamford, CT: Cengage Learning.
Siha, S.M., & Saad, G.H. (2008). Business process improvement: Empirical assessment and extensions. Business Process Management Journal, 14(6), 778-802.
Starbucks. (2015). Starbucks company profile. Web.
Tracy, J.A. (2004). How to read a financial report: Wringing vital signs out of the numbers. Hoboken, NJ: John Wiley and Sons.