Starbucks Entertainment Global Music Strategy

1. Starbucks Entertainment Global Music Strategy

2. Problem We lost our coffee shop aura Symptom Falling sales

3. Transformation Agenda ► Renew focus on coffee ► Reinvigorate coffee experience ► International expansion

4. Prevent repeating the mistakes of the past

5. What is the strategy? How do we applythe strategy? How will we benefit?

6. Objectives Enhance coffee experience Create emotional connection Support core business

7. What is the strategy? How do we applythe strategy? How will we benefit?

8. Global Strategy Position Differentiation Price Premium Placement In-store Promotion In-store

9. Undisruptive = Maintaining Focus

11. Market entry conditions >3 years Piracy level < 58%

12. Product Strategy Local Product Type Global Digital Product Medium CD

14. Product Level of globalisation (1-10) Proportion of English speakers (1-10) 1-10 Focus on local11-20 Focus on global

15. Medium Age skew (1-10) Internet usage (1-10) 1-10 Focus on CDs11-20 Focus on digital

18. What is the strategy? How do we applythe strategy? How will we benefit?

19. Benefit to Starbucks • Additional revenue stream • Flow-on profit effects (core business)

20. Flow-On • Profit • Enhanced Customer Engagement

21. 38% will increase their purchasing

22. 20x

23. Expected NPV

24. Experience Enhancement • Instant gratification • Emotional attachment to the Starbucks’ Brand

25. More time More sales Music makes it happen

26. Country Facts Pricing Competitive Advantage Criteria for Framework Condition Entries Product Criteria Medium Criteria Financials Change in Profit Potential Profit Simulation Simulation Assumptions International Store Information CD vs. Digital Profit CD vs. Digital Profit Simulation WACC Calculations WACC Assumptions Study Information Index • Presentation:- Transformation Agenda- Strategy: - Global - Country(Framework)- Japan- Germany- Financials • Appendix- Company Criticism- Company Response- Background Music- Music Selection

27. Company Criticism • Lost focus on our core business (coffee “experience”) • Too rapid domestic expansion (over-saturation) • Lost business to cheaper competitors • Starbucks Entrainment has become too mainstream in the US.

28. Response to Criticism • Transformation Agenda • Refocus on coffee • Ensure that music supports coffee by enhancing experience and does not steal business • Find a balance between global and local music

29. Entry Conditions Established >3years:Starbucks believe that it takes the company a minimum of 3 years to establish brand presence in a newly entered market (country). To avoid detracting from the core coffee business, Starbucks Entertainment will not enter countries until Starbucks Coffee Houses have been established for at least this amount of time. Level of piracy <58%:The level of piracy that occurs in a country is of significant concern to Starbucks Entertainment. Whilst the flow on effects of playing music in store may still be recognised, high levels of piracy will mean that selling music, and establishing the channels to do this, will not add significant value. A piracy level >5.8 (>58% of total software acquirements) indicates that the country acquires software through piracy at an above average rate. In this case, Starbucks Entertainment forecasts that selling music in the market is unviable and will therefore not proceed.

30. Medium Criteria Skew of ages: This figure shows the percentage of the population that were born post 1978. That is, Generation Y and younger. Starbucks Entertainment research indicated that this age group is more likely to adopt technology – and therefore more likely to embrace digital music downloads. Although older generations are able to access music through technology, their purchase preference often lies with traditional mediums (i.e.: CDs). Percentage of internet usage: This figure shows the proportion of the population with internet access. Starbucks Entertainment have taken this figure to be the most appropriate indication of a country’s openness to technological adoption. Starbucks Entertainment deem that if >50% of the population has access to internet, then the country is technologically established and therefore more likely to embrace digital music downloads.

31. Product Criteria Level of Globalization:This figure refers to external research that ranks countries according to their level of involvement in international business. We believe that the higher the level of globalization in a country, the higher is the sales potential for global music. English speaking population: This figure indicates what percentage of the population communicate in English either as their native or second language. Because English provides the best format for global music, we believe that countries with high proportions of English speakers will be more likely to embrace global music technology.

33. Change in Profit

34. Potential Profit

35. Simulation

36. Simulation Assumptions • The uncertainty involved with the music sales and revenue projections was simulated using a Monte Carlo model. • This was simulated 100 times, allowing for a balance probabilities approach.

37. Simulation Assumptions • Company Beta = 1.21 • Therefore, Starbucks is 21% “riskier” than the market. • Adjust the normal distribution to reflect the company’s sensitivity. • This was simulated 100 times, allowing for a balance probabilities approach.

38. International Store Information

39. CD vs. Digital Profit • CD Profit: • Label (Hear Music) – 59cents / CD • Starbucks - $6.49 / CD • Overall per song (12 per CD) – 59cents per song • Digital Profit: • Label (Hear Music) – 65cents / download • Starbucks – unknown commission / per download

40. CD v.s Digital Simulation

41. WACC Information

42. Assumptions on WACC • Risk Free Rate – 10 year bond rate (3.58%) • Beta – 1.21 (volatility) • International Market Return – MSCI World Index (12.08%) • Cost of Equity = Riskfree + β *(market premium) • Ke = 13.87%

43. Assumptions on WACC • Starbucks Listed Bond Premium – 6.28% (Reuters, 2007) • Tax – 34% • D/E Ratio – 48% • WACC = ke*(E/V) + kd(1-tc)*(D/V) • WACC = 13.87%*(67.6%) + 6.28%(1-34%)*(32.4%) • WACC = 10.71%

44. Study Information • Studies show 38.2% of customers in restaurant will stay longer and purchase an extra item when music is playing. • Modelled uncertainty • 18% of each product is profit

45. Competitive Advantage • Against our competitors, we posses the ability to: • To be able to access music where and when you are inspired by it • Experience a atmosphere • Provide a new an exciting way to access music

46. Pricing Strategy • Starbucks branding and distribution means that we do not compete on price. • Well established and offers the ‘instantaneous gratification” service which will allow us to charge a premium price • Increased emotional attachment will allow us not to focus on price.

47. Background music • Should: • help customers relax • create memorable coffeehouse atmosphere • reinforce firm image • be pleasant to majority • be jointly selected by local consultants and employees • Shouldn’t: • be repetitive • be loud • be fast

48. Music selection Local consultants Employees Hear MusicTM