Starbucks Corporation is a US company that is considered one of the largest global coffee retailers. This brief report analyses the company’s DuPont identity, which is calculated for the last three years, and compares it with that of a competitor company i.e. Dunkin’ Brands Group, Inc.
DuPont Identity is a measure of a company’s Return on Equity (ROE) that is dependent upon its operating efficiency, asset utilization efficiency, and financial leverage. These factors are measured by three different financial ratios including profit margin, total asset turnover, and equity multiplier (Ross, Westerfield, & Jordan, 2012). DuPont ratio is given below.
Return on Equity = Profit margin x Total asset turnover x Equity Multiplier (Eisen, 2007). I have collected values of all three ratios from the website MorningStar®. The following table provides values of each of the required financial ratios for the last three years and generates values of ROE for Starbucks Corporation and Dunkin’ Brands Group, Inc.
Source: (Dunkin Brands Group Inc DNKN, 2014; Starbucks Corp SBUX, 2014).
The results indicate that the ROE of Starbucks Corporation declined from 28.42% to 0.18% over a three-year period. On the other hand, the ROE of Dunkin’ Brands Group, Inc. increased from 4.56% in 2011 to 36.12% in 2013. Therefore, it can be suggested that both companies had different outcomes from their business strategies. In the last three years, Starbucks Corporation’s operating efficiency and assets utilization efficiency deteriorated. In 2013, the company only generated a profit margin of 0.05% which was very low as compared to Dunkin’ Brands Group, Inc., which had a profit margin of 20.59%. A major decline in the company’s profit margin indicates its operations remained inefficient after a recent change in its business strategy. The company struggled as a result of the recent financial crisis and it has closed down a large number of its stores in order to reduce its operational costs and consolidate its operations in its major markets. However, it appears that the company strategy did not prove to be successful.
The company increased its total assets by opening up new stores and refurbishing its existing stores. The outcome of this strategic move by the company was declining total asset turnover recorded in the last three years. On the other hand, Dunkin’ Brands Group, Inc. operated with a low value of assets, and it was able to generate increased sales. Starbucks Corporation, therefore, reported inefficiencies in terms of the utilization of its assets.
Finally, the equity multiplier also reflected the inefficiencies of Starbucks Corporation in the last three years. The company had a very low level of equity multiplier as compared to Dunkin’ Brands Group, Inc. Overall, inefficiencies of Starbucks Corporation caused a reduction in its ROE, which could be a major concern for its shareholders.
In order to conclude the discussion, I am of the opinion that Starbucks Corporation must undertake major business reforms and strategy reformulation to overcome its inefficiencies. Failure to do so could harm the business and its position in the global coffee retail industry.
References
Dunkin Brands Group Inc DNKN. (2014). Web.
Eisen, P.J. (2007). Accounting. New York: Barron’s Educational Series.
Ross, A., Westerfield, R., & Jordan, D. (2012). Corporate Finance (10th edition ed.). New York: Mc-Graw Hill.
Starbucks Corp SBUX. (2014). Web.