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Starbucks Entertainment

Starbucks Entertainment. March 29 th 2008. Sanghoon Lee Jinwoo Park Kyungwon Kim Hanup Park. Defining Our Vision. Vision of Starbucks Entertainment. Strategic Harmony. International Entry Solution. Profitability should be Starbucks entertainment’s priority. Group Vision.

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Starbucks Entertainment

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  1. Starbucks Entertainment March 29th 2008 Sanghoon Lee Jinwoo Park Kyungwon Kim Hanup Park

  2. Defining Our Vision

  3. Vision of Starbucks Entertainment Strategic Harmony International Entry Solution Profitability should be Starbucks entertainment’s priority Group Vision “The finest coffee experience” Harmony Positive Influence on coffee sales? StarbucksEntertainment Profit oriented business! Profit Purchase to experience Initiatives to turn around Maximize the profit while the main coffee business receives the spotlight

  4. Vision of Starbucks Entertainment Strategic Harmony International Entry Solution Starbucks would emphasize on the image of complex cultural space VS. Diluting music store image Coffee House & Music Store ?? Complex cultural space

  5. Vision of Starbucks Entertainment Strategic Harmony International Entry Solution Starbucks need to focus more on digital music as time goes by

  6. Vision of Starbucks Entertainment Strategic Harmony International Entry Solution Starbucks will create a blue ocean market through the digital music Red ocean Blue ocean Red ocean Blue ocean + Mobile carrier

  7. Vision of Starbucks Entertainment Strategic Harmony International Entry Solution Our Solution How to Enter ? Profitability ? Where to Enter ? - Most relevant market - High potential market • Strategy for • England • Korea - Forecast - Implication Expansion Candidates Business Model Investment Adequacy

  8. Expansion Candidates Selection

  9. Country Selection Lucrative Group High Potential Group Country Selection Global Presence Addressable Market Final Selection Japan United Kingdom China South Korea Taiwan Mexico Philippines Germany Thailand Malaysia Australia Turkey Spain Greece Indonesia New Zealand Singapore France Switzerland Lucrative Group High Potential Group Selection Criteria Criteria to select Store number / Population Music industry market size Hours Stayed in Starbucks Compulsive Buying Tendency

  10. Country Selection Lucrative Group High Potential Group Country Selection Example 1 Lucrative group England Japan High Recognition Example 2Potential group Korea Taiwan Regression Line (Cut-off line) Low Recognition X : Population Y : No. of Starbucks Area : Music Industry Market Size

  11. Country Selection Lucrative Group High Potential Group Country Selection Lucrative group -- - 0 ++ + Criteria I IT & Infra Bargaining Power Criteria II Stay hour Criteria III Japan England Criteria IV Compulsiveness +1 +5

  12. Country Selection Lucrative Group High Potential Group Country Selection Potential group -- - 0 ++ + Criteria I IT & Infra Bargaining Power Criteria II Stay hour Criteria III Taiwan Korea Criteria IV Compulsiveness +1 +4

  13. Business Model of England

  14. UK Product Mix (Format) UK Product Mix (Contents) UK Strategy Execution U.K Product Mix (Format) - U.K should pursue both CDs and Digital • 10% of global • CD sales in U.K • Highest CD sales • per capita (2.7) • 60 million albums sold H1 ‘07 (96.5% physical CDs) • Greatest penetration of music phones in Europe (43%) • 90% of all singles • sold through online and mobile • iPhone wifi issue • Strong Compilation • CD sales (ex. Now 66) • U.K is a highly • wired country • (PCs, iphone…) • Costs $18,000 • ~ $35,000 YES LATER NO

  15. UK Product Mix (Format) UK Product Mix (Contents) UK Strategy Execution U.K Product Mix (Contents) - U.K should market both intl. and local music U.K Starbucks 1. International Artist Local Music • Similar music taste as Americans • Leverage existing product line •  Less risk 2. Local i-tunes List 3. Local Artist • Finding talent is relatively easy • Can use own label • to produce in U.S, market in U.K • Strong success • of U.K artists • in the U.S • “Filtering” is • relatively easy • U.K acts dominate U.K music market • (59 of 100 top • selling albums)

  16. UK Product Mix (Format) UK Product Mix (Contents) UK Strategy Execution U.K Strategy Execution – First CD, then digital… deal with O2 ASAP i-phone WiFi Problem • Switch to O2 • (similar to U.S Starbucks • switching to AT&T) • Provide same service • as in the U.S X U.K Strategic Timeline 2008 2009 2010 2011 2012 Deal with O2 Maintain strong CD Business & Increase proportion of revenue from Digital Launch CD CD & Launch Digital

  17. Business Model of Korea

  18. Korean Product Mix (Format) Adjustments Execution Korean Product Mix (Contents) Decline of the CD, and the boom of the digital music market $370M Digital Music Market. First market where digital overtook physical sales. Total Music Market $65M CD Market. Impossible to sell CDs. $435M Source: Korean Digital Music Development Association

  19. Korean Product Mix (Format) Adjustments Execution Korean Product Mix (Contents) The Gadget, the Vendor, and the Connection – Starbucks’ current plans Purchase restricted in Korea

  20. Korean Product Mix (Format) Adjustments Execution Korean Product Mix (Contents) The Gadget, the Vendor, and the Connection – Plans that will work If in-store Melon access weren’t free, no one would use it. Thus, Starbucks needs to negotiate with the carrier. Cell phones are more adequate in the Korean market. Music vendor dealing with cell phones

  21. Korean Product Mix (Format) Adjustments Execution Korean Product Mix (Contents) The Gadget, the Vendor, and the Connection Utilize RFID Better Deal in Starbucks Reduce Connection Fees • Send song info to cell phone through RFID • Cheap and Efficient for customer • Requires investment • Special price deals in Starbucks • Better music selection • Many possible plans negotiable. • Create direct download, reducing • time and money for customers • Increase contents expenditure for carrier.

  22. Korean Product Mix (Format) Adjustments Execution Korean Product Mix (Contents) Providing better music and a better experience Localize to meet customer taste better. Utilize Melon’s knowledge in customers. Entirely Global Reasons for Localizing Localize on the national level. Welcome Korean artists’ songs to meet local taste. Create a few unique flagship stores for various tastes. Localize By Country Reasons for Globalizing Localize By Store Management can’t control quality of music in each store. Protect brand image.

  23. Korean Product Mix (Format) Adjustments Execution Korean Product Mix (Contents) Execution – Negotiate with NESPOT, Melon.. And Install RFID ASAP Establish Infrastructure Make business possible Establish Product Mix Make business lucrative Korea Strategic Timeline 2008 2009 2010 2011 2012 Deal with Carriers Partner with Melon Install RFID Build Flagship Starbucks Stores& Add Korean artists’ songs into the music list Lookout for Apple’s entry in the Korean market

  24. Korean Product Mix (Format) Adjustments Execution Korean Product Mix (Contents) Execution - Plan B What can go wrong? What then …? Partner Problems Melon might not work out, SKTelecom might not offer lower connection fees Use Alternatives Music vendors: Dosirak, Mnet Alternative Carriers: KTF, LGT Competitors Chasing Coffee Bean & Tea Leaf, McDonalds may offer music or other cultural activities Hurry Gain more know-how and bargaining power Profitability Question Music sales might be too bleak ONCE STARTED, Must Continue because initial investment on RFID and equipment is the only significant cost Current Degree of Threat : Profitability > Partner Problems >>> Competitors

  25. Valuation

  26. Valuation outline Benefit & Cost Value added Valuation Method Market Information • Market Value • Implied growth rate • Trend Analysis • Coffee Operation Margin • Cost of Equity • Beta • Risk-free rate • Market Premium KOR Coffee Country Division Value Market Value #of Stores = Country Division Value UK Coffee Assumptions Starbucks Entertainment • Business Plan • UK - CDs, Postponed iPhone service launch • KOR - Mobile Music • Margin Information • iTunes Affiliates Margin • Mobile music Margin estimates •  Rev. / Cost estimates KOR Coffee Residual Income Model • w/ 5 year sales Forecast • Coffee Division • Entertainment Division Starbucks Entertainment UK Coffee

  27. Valuation outline Benefit & Cost Value added Valuation Method Starbucks As Is UK / Korea Trend Analysis Residual Income Model Breakdown&Valuation • V= BV + ∑RI • RI = Earnings - Required Return(BV×Cost of Equity) • 2-stage growth Model • Core Coffee Revenue • Breakdown in proportion to #of stores • UK: 580 Company owned • Korea: 215 Licensed • Operation Margin: 11.6% • Growth Rate: 3.6% • Sales Growth • Operation Margin • Profit Margin • ROE Core CoffeeParameters Implied Growth Rate Cost of Equity • Implied Growth Rate= 3.6% • Market CAP as of 11 APR = $12,520 Millions • 2 stage growth Model • g=ROE×Retention Ratio • ROE = 30% (Assumption) • Cost of Equity: 7.49% (CAPM model) • Risk free rate: 3.49% (10-year T-bond Rate) • Market Premium: 5% (Assumption) • Beta: 0.89 (Google finance) UK $ 685.6 Millions Korea $ 32.3 Millions Appendix “implied Cost of Equity” $12,520 Millions Appendix “Trend Analysis”

  28. Valuation outline Benefit & Cost Value added Valuation Method UK / Korea UK / Korea Core Coffee W/ Entertainment • Core Coffee Revenue • Breakdown in proportion to #of stores • UK: 580 Company owned • Korea: 215 Licensed • Operation Margin: 11.6% • Growth Rate: 3.6% • Core Coffee Revenue • Breakdown in proportion to #of stores • UK: 580 Company owned • Korea: 215 Licensed • Operation Margin: 11.6% • Growth Rate: 3.6% • Starbucks Entertainment • Operation Margin: Differ from CD/iTunes/E-music • Synergy W/ Entertain. • Additional Core Revenue Value Added = Entertainment + Synergy Value Added Core Coffee $ 685.6 Millions UK $ 32.3 Millions Korea

  29. Valuation outline Benefit & Cost Value added Valuation Method Benefit Cost UK • Additional Sales • Enhanced Starbucks Experience through Music • Brand Identity • Coffee House or Music Store? Focus Strategy Synergy Increase in Sales= 0.18% • CD Sales • iTunes • Incremental Gain • Low Margin. Multi-Volume • iTunes • Akamai Server per Store • Maintenance Cost • Starbucks Entertainment • CD Sales • iTunes Sales Korea • Additional Sales • Enhanced Starbucks Experience through Music • Brand Identity • Coffee House or Music Store? Focus Strategy Synergy? • Digital Music • Incremental Gain • Low Margin. Multi-Volume • Digital Music • Through which Network? • RFID • Maintenance Cost • Starbucks Entertainment • Mobile Music w/ RFID

  30. Valuation outline Benefit & Cost Value added Valuation Method Before W/ Entertainment UK Value: 700 $ Million Growth Rate: 4% Synergy Increase in Sales= 0.18% Value: 685 $ Million Growth Rate: 3.6% • Starbucks Entertainment • CD Sales • iTunes Sales Korea Synergy? Value: 33 $ Million Growth Rate: 3.6% Value: 32 $ Million Growth Rate: 3.6% • Starbucks Entertainment • Mobile Music w/ RFID

  31. Conclusion

  32. Our conclusion Starbucks Entertainment Synergy Synergy Huge Potential Less Potential Unit Profitability Great Value Unit Profitability Low Margin • Enter markets with great CD prospects • - Profitability, great experience, less risk, less initial investment • - Can accompany digital, but the model should not be dependent on digital • Exercise extremely caution when looking at markets with only digital prospects

  33. Additional Materials

  34. Appendix 1-1. Infrastructure Source: Sofrecom (27th Oct 2006)

  35. Appendix 1-2. UK Mobile Internet Usage There is increasing focus on encouraging internet access from consumer mobile handsets, e.g. many operators launched mobile TV services in 2005. There are now over 4.5 million 3G subscriptions (Q4 2005) Estimates vary considerably on how many people are actually using the mobile internet: •6% of UK adults access the internet via a portable device •11% of UK users have browsed the web using a mobile (May 2006) •15% of UK users browsed news and information at least monthly on their mobiles (based on quarter ended June 2006) •27% of UK users have surfed the web using a mobile (August 2006). The differences may be explained by lack of clarity about what respondents mean by ‘surfing the web’. Other UK monthly mobile usage figures based on the quarter ended June 2006include: •6.6% of subscribers used personal email •5.7% purchased a ring tone •4.3% downloaded a mobile game •4.1% used mobile Instant Messenger •2.2% purchased wallpaper or screensaver Many of these figures represent a decrease on previous usage – particularly those involving purchasing or downloading. •44% of people in the UK who tried mobile data services for the first time during the 2006 World Cup said they will not be doing so again. •75% of mobile phone users who request more information about a product and are sent a message with a call to action never follow it through. Mobile operator 3’s SeeMeTV service had 4 million downloads of thirty-second videos created by its subscribers in less than five months. Creators get a small slice of the download revenues which earned them £100,000 in total by March 2006. (Source: http://www.participateonline.co.uk/)

  36. Appendix 2-1. Cross-Cultural Compulsive Buying Tendency (1/2) ** * *** Self-tr Power Distance (-) Value Orientation Online Buying Motives Dysfunctional Behavior Materialistic Values Emotional and mood-related Compulsive Buying Tendency Online (+) Self-en Individualism (0) Open Uncertainty Avoidance Identity-related Cross-Cultural Difference Materialistic Values Compulsive Buying *** * Hofstede(1983) shows cultural differences of 50 countries in following 4 dimensions. 1, Individualism versus Collectivism: 2. Large or Small Power Distance; 3. Strong or Weak Uncertainty Avoidance; and 4. Masculinity versus Femininity. Dittmar(2007) suggests 2-factor model for explaining compulsive buying behavior. The 2 factors are largely affected by the degree of materialism in personal value. ** Kilborune(2005) argues Power distance(equivalent to Self- transcendence) values is negatively related and Individualism (equivalent to Self-enhancement) positively related to Materialist Values Strong Materialistic Values High Tendency of Compulsive Buying Two Factor * The Cultural Relativity of Organizational Practices and Theories Geert Hofstede, Journal of International Business Studies, Vol. 14, No. 2, Special Issue on Cross-Cultural Management. (Autumn, 1983), pp. 75-89. ** A cross-cultural examination of the relationship between materialism and individual values, W. Kilbourne et al. / Journal of Economic Psychology 26 (2005) 624–641. *** When A Better Self Is Only A Button Click Away: Associations Between Materialistic Values, Emotional And Identity–Related Buying Motives, And Compulsive Buying Tendency Online, Helga Dittmar, Karen Long, And Rod Bond, University Of Sussex, UK, Journal Of Social And Clinical Psychology, Vol. 26, No. 3, 2007, Pp. 334–361.

  37. Appendix 2-2. Cross-Cultural Compulsive Buying Tendency (2/2) * High Material Values TAI KOR Acronym Country TAI KOR GBR JPN Taiwan Korea Britain Japan JPN High Individualism GBR Low Power Distance * The Cultural Relativity of Organizational Practices and Theories Geert Hofstede, Journal of International Business Studies, Vol. 14, No. 2, Special Issue on Cross-Cultural Management. (Autumn, 1983), p. 82.

  38. Appendix 3. U.K Product Mix (Format) Source : www.ifpi.org

  39. Appendix 4-1. Strong dominance of iPod & iTunes in the US Market iTunes surpasses RealPlayer in unique users Source: Forbes Dominance in the US mp3 player market

  40. Appendix 4-2. Relatively strong position of iPod & iTunes in the UK Market iTunes remains strong in the UK Market Source: Forbes Over 50% of the UK mp3 player market

  41. Appendix 4-3. Weak Position of iPod & iTunes in the Korean Market Apple only provides partial services in Korea Koreans cannot purchase contents at iTunes due to intellectual rights issues. iPod Touch does not provide Korean, thus limiting web browsing. Safari goes against Korean network provider NESPOT. Source: LG Electronics iPod’s weak position in the Korean mp3 player market

  42. Appendix 5. Localize on the country level and add flagship shops to add diversity HIGH NEED to localize, due to different culture, taste, and music contents providers. Our local partner Melon would like to boost its overall sales. Nonetheless, Starbucks has to maintain it’s “exotic, foreign” image. Still meet Global standards Localize on the national level. Welcome Korean artists’ songs to meet local customers’ tastes. Maintaining national level control is easier than managing individual stores. Localize By Country Localizing by each store may hurt the Starbucks image. Management can’t control quality of music in each store. Build unique flagship stores in popular districts to add variety. Add Variety By Store

  43. Appendix 6-1. Valuation Method “Implied Growth Rate” Implied Growth Rate The growth rate that equates Intrinsic Value to Market Cap Given Market CAP of 12,520,000 indicates that the market estimate of Starbucks’ growth rate is approximately 3.6% Key Parameters RI model Pro-forma

  44. Appendix 6-2. Valuation Method “Trend Analysis” Trend Analysis Simple regression analysis reveals that Starbucks is mature industry, and urgent need to open up new markets. Growth Rate Operation Margin Operation Margin in increasing with diminishing return, converging to 12%implies Starbucks’ efficient operation Growth Rate of Recent 3yrs is continuously low, approaching 2%in contrast to market expectation of 3.6%

  45. Appendix 6-3. Valuation Method of UK UK Starbucks Valuation

  46. Appendix 6-4. Valuation Method of Korea Korea Valuation

  47. Appendix 7-1. Sales Forecast – CDs Total Visitors to Starbucks Number of private label CDs sold in U.K Total Visitors to U.K Starbucks (based on #store) Number of other label CDs sold in U.K Number of albums sold in the U.S for a particular release Apply respective margin to each album sold Number of visits required to result in a purchase for U.S Sales Forecast for CDs in the U.K Number of albums sold in U.K Starbucks for a particular release

  48. Appendix 7-2. Sales Forecast - Digital Total Mobile Subscribers in U.K Number of visits required to result in a purchase of 1 song Expected market share of iPhone in 2009 Scale to account for the magnitude of electronic single market in U.K Population of U.K “1 out of how many people own an iPhone?” Number of downloads per year at Starbucks Number of visits to U.K Starbucks by iPhone owners Apply appropriate margin to each download Number of visits required to result in a purchase for U.S Sales Forecast for digital sales in the U.K

  49. Appendix 7-3. Sales Forecast backup information – iTunes Margin Source : www.appleinsider.com

  50. Appendix 7-3. Sales Forecast backup information – CD Margin Source : www.cnn.com

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