Starbucks MUST be Making a Lot of Money!
Let's face it: a trip to Starbucks is not cheap. No matter how much you love your favorite blend, you gotta admit that nearly five bucks for a cup of Joe is amazing! Books have been written about the phenomenon of Starbucks undefined I mean how do you take a commodity as old as the hills, wrap an experience around it, and price it so high? As interesting as that is, the focus of this month's newsletter is to use Starbucks as a simple way of explaining the three levels of margin within a business undefined gross, operational, and net.
Margin is often referred to as an efficiency measure undefined how much of every dollar in sales can we hold onto at each of the three levels of margin.
Let's look at gross margin first undefined what is that? Well if a business has a cost of goods sold (also known as cost of merchandise sold), that's deducted from the sale to arrive at gross margin. Service businesses don't have a cost of goods sold as they don't sell a tangible product, but Starbucks does of course! What are the costs of goods sold items at Starbucks when they sell a café latte for example? Well it would be the consumable items such as the cup (if it's disposable), the stirrer, the plastic lid, the card sleeve, the sugar packets, etc., and of course, the oh so glorious, expensive, special coffee! Taking a quick peak at the latest annual report from Starbucks shows their gross margins to be about 75% (so there's about 25 cents of product cost on every cup of Joe!)
What about operating margin? Well hang with me a while in the Starbucks Store undefined what do you see, hear, and feel as operating costs that are deducted from the gross margin to bring us down to operating margin? Yep, you got it undefined that would be the staff, the store rent; advertising, utilities, and insurance for that store, Wi-Fi costs, etc. Looking over the latest annual report on the coffee table (forgive the pun) shows this at about 27% (so there's about another 48 cents of store costs tied up in that same cup of Joe). Are you feeling for Starbucks yet?
Now imagine ALL of the operating margins from all 20,266 stores being dropped on the doorstep of the corporate headquarters in Seattle. What do you see has to be paid for at the overhead level to get us down to net margin? Yep, you can see it undefined all the central functions such as human resources; finance; I.T.; sales and marketing; research and development; legal; as well the executives (and they earn more than minimum wage!) and of course all the utility and property costs associated with that big office building. So what are we down to now, I hear you ask? About 10% net margin! So for every $1 in sales, Starbucks holds onto about 10 cents of profit at the bottom. So next time you're in Starbucks, feel sorry for them, upgrade your product choice, and give them a lift on their margin!
What's the point of this little anecdote? Well, think about the work you do everyday undefined where do you impact your organization's money-making model? Can you help improve gross margin by reducing the cost of goods sold? You are most likely part of the operating or overhead expense of your organization undefined what could you start, stop, or continue to improve margin at these levels? How could you educate your team and colleagues on the importance of margin? Remember from a previous artile, every wasted dollar has tremendous ramifications on margin. In the case of Starbucks they need to generate $11 of new sales for every $1 of wasted expense just to still get a 10% margin based on their present money-making model!
It may just be a cup of coffee, but it all adds up!
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