Starbucks is a global coffee company based in Seattle, Washington. The company is focused on purchasing and roasting of high quality coffee and selling it along with fresh food items and handcrafted coffee. The predominant objective of Starbucks Corporation is ensuring its coffee brand dominates the industry through enhancing customer experience and offering the ultimate Starbucks experience.The core competence of Starbucks has been its ability to leverage its cornerstone product differentiation strategies by offering high quality snacks and beverages. The global reach of Starbucks Corporation is well diversified and aims at increasing the customer base by expanding internationally through licensed local joint ventures.
The company has more than 18,000 stores in 63 countries and territories. The main subsidiaries and affiliates of Starbucks are in China, Canada, Japan and the United Kingdom. The subsidiaries include Beijing Starbucks Coffee, Guangdong Starbucks Coffee, North America Coffee, Seattles Best Coffee, Evolution Fresh and Ethos water. The company aims at targeting a wide customer base across the globe. The geographical breakdown of income has been depicted by the revenue from various segments such as America (73%), CAP (7%), and EMEA (8%). The geographical breakdown of assets is strategically allocated to its various subsidiaries to cater for the production of its core products. Starbucks` involvement in the international trade has been fostered by the introduction of a full range of products because it does not only sell coffee but also other beverages such as tea and juices in more than 25 countries worldwide.
Foreign Exchange Risk Management Policy
Foreign exchange risk (FX risk) is exposure of a company`s financial strengths to the variations that are inherent in foreign exchange movements. Starbucks is a corporation that operates globally and is, therefore, susceptible to foreign exchange risks. The FX volatility of Starbucks has been subject to exacerbation due to such factors as political uncertainties and economic instabilities. In this respect, the foreign exchange risk management policy revolves around the achievement of visibility. Similarly, lack of visibility may translate to failure to attain the utmost benefits that are related to standardization and streamlining.
The company will derive utmost efficacy from the visibility policy because the transaction of FX payments involve different geographies, various providers and different entities within an organization. It is imperative for every corporation to have a risk management policy so as to make it easier to work in close liaison with international vendors and tap the foreign markets (Mangold, 2010). In addition, the management and stakeholders of Starbucks Corporation should not be complacent about the foreign risk management policy because the policy ought to be reviewed and updated on an annual basis.
Centralization and Decentralization
Starbucks Corporation conforms to a decentralized form of organizational structure. A decentralized organizational structure is one in which the major decisions of a company are not made by one person but by heads of various departments or the major stakeholders. In fact, the structure of Starbucks Corporation greatly differs from the structure that most mom-and-pop coffee shops adopt. The executives control the corporation from its headquarters while the district managers oversee the regional operations and groupings of the corporation. The decentralized organizational structure is suitable for Starbucks Corporation because it has an array of stores on a global scale and every store necessitates a slightly different form of authority.
Similarly, the subordinates and staff members conform to the decentralized organizational structure by working efficiently and communicating with employees of various departments of the company. Improved communication system will be vital especially in a decentralized organizational structure because it fosters improvement in communication thus eliminating delays and lags. Through a decentralized form of organizational structure, the main companys operations will be professionalism and functional differentiation. The structure will consist of different departments that are responsible for the overall success and growth of the organization. An example of Starbucks` decentralized organizational structure is shown in Figure 1 below.
Measurement and Management of Exposure
The exposure management of Starbucks Corporation aims at the management of translation exposure, operating exposure, transaction exposure and economic exposure. Translation exposure is the risk that the results of financial statements may not be rigid due to the innate nature of the exchange rate fluctuations without any other factor undermining the results of the financial statements. Economic exposure is the risk that the exchange rate fluctuations will have an impact on the nature of an organization. Economic exposure is broken down to transaction exposure and operating exposure.
Transaction exposure is the risk that exchange rate fluctuations will undermine the contractual cash flows of a company. Operating exposure is the risk that fluctuating exchange rates will have an impact on non-contractual cash flows of a corporation. Starbucks Corporation has implemented financial contracts and operational tools to manage such kinds of exposure. The financial controls will include but not limited to swaps, options, forward or future contracts and money market hedges. The operational tools will include but not limited to exposure netting, risk sharing and contractual hedging.
Starbucks Corporation adheres to a risk exposure management to aid in the management of foreign currency exposure by transferring it to the hedge management. In addition, the main functions of exposure management are the maintenance of exposure planning profile as well as the maintenance of the exposure management period. The main function of the exposure management is to ensure that there is an adequate provision of central management including history and documentation. It also enhances safe transfer to the hedge management. Exposure to risk is inevitable for any company in any industry. For this reason, organizations should comprehend the nature of risks that they are more vulnerable to and come up with necessary risk management procedures that will counteract the corresponding risks. An effective risk management procedure should aim at prevention of risks, their reduction, transfer and absorption.
Variations of Equity Account and Other Comprehensive Income
Other comprehensive income of Starbucks Corporation has been subject to change over the recent years because of the inherent nature of comprehensive income and the net income as per the income statement. In addition, some other components of other comprehensive income are not rigid and keep on fluctuating. Among such components are unrealized gains and losses on sale securities, variations in the revaluation surplus and gains and losses that stem from translating the books of accounts and financial statements in its subsidiaries. There is also the fluctuation in the fair value that pertains to financial instruments especially in the cash flow hedge.
However, some of the components of other comprehensive income undergo double counting because they will be recognized as other comprehensive income and also recognized whenever an asset is being sold or realized. Other comprehensive income for Starbucks has also been changing as a result of the adjustments of foreign currency translations and the gains and losses related to pension or post-retirement benefits. The concept of other comprehensive income is inclusive of other several gains and losses that do not undergo disclosure in the income statement. Other comprehensive income can be perceived as an expansive asset of the net income. A thorough analysis of other comprehensive income shed some light on the nature of the overseas operations of Starbucks Corporation.
The equity account has also changed over the years because of the changing representation of the owners interest in the companys assets. The equity account cannot be rigid because whenever the liquidation of a company takes place, shareholders can only be left with the remaining assets. Moreover, equity may only be created either through a companys retention of profits or through the companys contributions. The equity accounts will also depend on whether they are capital equity accounts, withdrawal equity accounts, expenses equity accounts or revenue equity accounts.
Hedging Transactions for Different Kinds of Exposure
Hedging transactions are divided into two main categories: operational tools and financial contracts. The latter comprise swaps, options, money market hedges and future or forward contracts. Operational tools are categorized into two major categories: exposure netting and risk sharing. Forward and future market hedges can be used to eliminate risk exposure by buying currency in a forward market and locking the exchange rate.
As for currency options, they will only come in handy in the protection of exchange rate movements while at the same time creating a platform where Starbucks corporation can capture the perks of favorable moments. A firm can only be said to be involved in currency speculation when it utilizes its currency options as a means of hedging. It is also imperative to acknowledge that every time a transaction risk is being addressed, it is possible to imply that the risks encompass hedging currency risk that will emanate from contracted cash flows. Consequently, the chances of two parties negotiating issues regarding risk sharing will be very minimal because it is for their best interest. Similarly, complete hedging negates the risks of cash flows variations which are attributable to the exchange rates.
Forward market hedge will primarily consist of the exchange of one currency from another at a fixed rate in quest of hedging transaction exposure. Selective hedging will attempt to fully do away with the risks that the exchange rates might undermine the system of cash flows while still receiving the perks of favourable exchange rates. However, even though selective hedging is mostly recommended in the realm of currency trading, it may have an effect of changing the treasury of a firm towards a profit center and utilize all advantages of exchange rates at its disposal.
Risk Management Time Frame
The time frame recommended for the management of risk will depend on the nature of the exposure, for example, translation exposure, transaction exposure and economic exposure. Management of various types of exposure will require different time frames. In addition, the foreign exchange markets might be inefficient and some factors such as International Fisher Effect, interest rate parity and purchasing power parity might not hold true.
How Starbucks Corporation Uses Derivatives for Funding, Investing and Other Price Risks
Derivatives are instruments that can derive their value systematically from performance of underlying assets such as commodities and equities. Derivatives can only be traded within two parties or corporations and are inclusive of counter derivatives and exchange traded derivatives. Starbucks uses derivatives for funding including market risk, model risk, credit risk and concentration risk. Market risks relate to changes within the instrument itself or a financial market. Measurement and management of market risks take into consideration changes in volatility, value over time, interest rates as well as value over time. Credit risks are risks of other parties that are stakeholders of Starbucks Corporation. Management of credit risks takes into consideration a counter party`s limits and restrictions on trade volume. Model risks and concentration risks entail risks that are hard to quantify. However, the trading volume of derivatives at some point had recorded a rapid escalation and Starbucks was forced to purchase and sell the derivatives in greater numbers.
Starbucks uses the derivatives for investment by utilizing forwards which are non-standardized contracts that take place between two parties. Forwards involve buying and selling of an asset at a certain period of time at a predetermined price. The company utilizes the derivatives for other price risks by using swaptions which give the owner the mandate to become part of an underlying swap. Swaption can be very efficient because Starbucks may purchase a swaption that will seek to protect the company from all the interest rate swaps that will go below 1% for a certain period of time.
Offshore Funding, Euromarket Funding and Investing Activities of Starbucks Corporation
The offshore investment funding strategies comprise an array of investment strategies that will take advantage of the perks that are offered in another country. Starbucks is an offshore company and does not offer any shortage of equity, bonds or money-market. Moreover, offshore funds of Starbucks Corporation pertain to the collective investment schemes that have been based on an offshore jurisdiction. The company`s offshore domiciling of funds seems to be driven by regulations as opposed to taxes. The incorporation of funds in an offshore jurisdiction will not be posing any taxes to both the funds and income.
In addition, the offshore investment funds are closely correlated with tax leakages and cross boarder investments and this will undermine the investment activities that Starbucks intends to undertake. Starbucks should continue expanding to international markets through product diversification which will counteract stiff competition in international markets. Becoming a first mover even in the domain of international markets will be an excellent way for Starbucks to attain a competitive edge and enhance customer loyalty by upholding its image as an inventive and innovative company.
The main reason that has compelled Starbucks Corporation to embrace offshore investments is the nature of tax reduction that consequently increases the returns. Tax reduction is a phenomenon that is prevalent in some countries which are referred to as tax havens because they offer tax invention perks to foreign investors. An example of a tax perk that is commonly offered by tax havens is tax exemptions. Similarly, foreign businesses carry out their business operations without having their profits taxed, thus, enjoying increased returns. Starbucks has, therefore, considered offshore investment in such countries as Beijing, Brazil and Germany so as to carry out business as a foreign company and be eligible for taxation incentives.
Another reason that compels Starbucks Corporation to undertake offshore investments in other countries is assets protection because offshore centers create a platform for restructuring the ownership of assets. The company will also diversify its investment portfolio. The strategy also fosters investment diversification because in some countries regulations may constrain the opportunities for international investments. However, such constraints will hinder an investment portfolio that is fully diversified.
Starbucks, therefore, feels that diversification of investment through offshore investment will be more flexible. The diversification will also grant the investors an access to major exchanges as well as international markets. As to offshore investments, it makes sense to shift investments from one nation or jurisdiction to another so as to utilize the tax benefits that foreigners in that other country are subject to. Starbucks has increased its investing activities by setting up hedge funds in the European and the Caribbean jurisdictions. The company believes that the generation of future cash flows from cash and operational investments that are received across the globe will suffice to provide distributions to the shareholders in the near future as well as to finance important requirements.
In financial period ending 2014, the financial resources that the company had used for all the investment activities amounted to 817.7 million dollars. However, the amount has significantly reduced compared to 2013 when the investment fund was about 1.4 million dollars. However, such variations can be attributed to the amount of money that the company used to acquire Teavana in the previous year. Similarly, cash used to finance activities in 2014 increased from 108.2 million dollars to 623.3 million dollars. In this case, the increase has been attributed to an increase in cash that had been returned to the shareholders through the payment of high dividends and share repurchases in the 2014 fiscal year.
The international financial marketing strategy has been effective because the company has shown significant growth in sales and the scope of operations. It has effectively applied its global strategy by opening stores all across the globe. The company has also made significant operational changes aimed at reduction of costs. Cost reduction strategy has been fostered by replacing old espresso machines so as to reduce the cost of training provided to baristas and to reduce time needed to serve every customer. Starbucks has created value by enhancing the customer strategy by serving customers and thus satisfying the target market and offering the Starbucks experience.
The company has also created value by becoming part of the American landscape and changing the way in which western companies portray themselves to the consumers using a fourfold strategy. The company has not destroyed any value by embracing the international financial marketing strategy. Starbucks has relied on psychographic segmentation criteria, thus, it attends to the customers` needs based on their lifestyles and attitudes which reduces brand switching by regularly offering an array of products and special coffees. In this respect, Starbucks, as a result of continuing with this strategy, will continue maintaining its position as the main respected and recognized coffee brand.
The company will also continue leveraging the experience that has been obtained from its traditional models and continue offering consumers new products through diversified channels. Starbucks will also continue focusing on its core products and services that comprise high quality coffee, service and ambiance.