The Boston Consulting Group - Hu

BCG VALUE CREATORS REPORT: "SPOTLIGHT ON GROWTH" Axel Roos, Partner, BCG Berlin Berlin, 19 June 2007

The Boston Consulting Group

AGENDA

Introduction: BCG and BCG's Corporate Development Practice Worldwide Value Creation: BCG Value Creators Report 2006 Managing Growth •

Starbucks - A Case Example

•

Integrated Financial Strategy

Question? Comments? Discussion!

HU Berlin-ValueCreators(Presented)-19Jun07-ARO-BER.ppt

-1-

AGENDA

Introduction: BCG and BCG's Corporate Development Practice Worldwide Value Creation: BCG Value Creators Report 2006 Managing Growth •

Starbucks - A Case Example

•

Integrated Financial Strategy

Question? Comments? Discussion!

HU Berlin-ValueCreators(Presented)-19Jun07-ARO-BER.ppt

-2-

BCG – THE FIRST ADDRESS IN STRATEGY CONSULTING 3,300 Strategists in 61 Offices and 36 Countries Toronto New York Washington, D.C. Detroit Atlanta Chicago

San Francisco Los Angeles Dallas Monterrey Mexico City Houston Miami

Boston New Jersey Amsterdam London Brüssel Paris Frankfurt Stuttgart Lissabon Madrid Barcelona Zürich Mailand

Köln Düsseldorf Oslo Kopenhagen Stockholm Helsinki Moskau Hamburg Warschau Berlin Athen Prag Budapest Wien Rom UAE(1) München

Peking Shanghai Seoul Tokyo Nagoya

Neu Delhi Mumbai

Taipei Hongkong Bangkok Kuala Lumpur Singapur Jakarta

São Paulo Santiago Buenos Aires

Sydney Melbourne Auckland

(1) 2007 Source(s): BCG analysis HU Berlin-ValueCreators(Presented)-19Jun07-ARO-BER.ppt

-3-

SUSTAINABLE GROWTH – SATISFIED CLIENTS 265 m€ Revenues – 620 Consultants in Germany in 2005 Mio. €

300

Growth Ø > 10 % p.a. since 1974

250

New clients

200

BCG client since … 2 to 4 years

150

… 5 years or longer

100

50

0 1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Source(s): BCG analysis HU Berlin-ValueCreators(Presented)-19Jun07-ARO-BER.ppt

-4-

WE WANT TO HIRE 310 PROFESSIONALS IN GERMANY IN 2007

Permanent entry: Associate / Consultant „

210 Associates / Consultants in 2007

„

Junior Associate: entry as Bachelor

„

„Entry for a time": Visiting Associate „

Great opportunities for the best: 100 Visiting Associates for 2007

Associate: entry with diploma or PhD

„

„

Consultant: possible with 3+ years of professional experience

Full integration as consultant in a BCG project team

„

Full responsibility for the assigned tasks

„

2 (+2) weeks entry training

„

Presence at the client

„

Immediate staffing on a project

„

Flexible start and end

„

Duration of 8 – 12 weeks

Application

Application

„

Comprehensive written application

„

Application after pre-diploma

„

Two rounds of interviews

„

One round of interviews

Source(s): BCG analysis HU Berlin-ValueCreators(Presented)-19Jun07-ARO-BER.ppt

-5-

FAST CAREER DEVELOPMENT – FLAT HIERARCHIES

Focus 23 %

41 %

17 %

10 %

9%

Client relationship Partner / Managing Director Principal

Project management

Project Leader Consultant

Module responsibility

Associate 0

HU Berlin-ValueCreators(Presented)-19Jun07-ARO-BER.ppt

1

2

3

4

5

6

7

8

Years

-6-

FURTHER DEVELOPMENT AFTER BCG Selected BCG Alumni in Germany Board Members

9%

Entrepreneurs/Private Equity 14 % Ulrich Biffar

Hanno Petersen, MdV

Marcus Englert, MdV

Marc Bitzer, Präsident Europe and Executive Vice President Whirlpool Corporation Johannes Züll, GF

Tobias Bachmüller

Stefan Brand

Guido Colsman, VdG

Michael Hehn

Jens Deerberg-Wittram, GF

Eric Strutz, MdV

Management Matthias Gillner Jochen Olbert

Philipp Busch, GF

47 % Justus Klöker Peter Löffler Marcus Nadenau

Hubert Ströbel Thomas Volland Harald Schmidt Stefan von Dobschütz

Academic Career

4%

Carla Kriwet

Heinz Hackl

Johannes Züll, GF Felix Hufeld, VdGL Klaus Sørensen, GF

Strategy/Planning

17 %

Frieder Kuhn Alexis von Hoensbroech

Prof. Walter Schertler, Prof. Jens Hermsdorf Strategisches Management School of International Business Arndt Rautenberg Gernot Sauerborn

Annette Veltmar

9%

Susan Hennersdorf, GF

Peter Dill

Hanns Ostmeier

Bernhard Heizmann Achim Schmitz-Mertens

Torsten Ecke, CIO

Managing Directors

Assistant Professor Thomas Weber, Stanford Graduate School of Business

Tihamér von Ghyczy, Darden School of Business

Akio Ito Timmo Sturm

Inga Jürgens Helmut Meysenburg Claudia Palme John McNamara Thomas Fischer

Total Total number number of of BCG BCG Alumni Alumni in in Germany: Germany: ca. ca. 1,100 1,100 Source(s): BCG analysis HU Berlin-ValueCreators(Presented)-19Jun07-ARO-BER.ppt

-7-

CORPORATE DEVELOPMENT AS ONE OF OUR WORLD-WIDE PRACTICE AREAS Broad Industry and Functional Expertise Consumer Goods

High Tech Telco

Financial Services

Energy

Industrial Goods

Health Care Pharma

Corporate Development Operations

Organization Information Technology Marketing and Sales Strategy

Source(s): BCG analysis HU Berlin-ValueCreators(Presented)-19Jun07-ARO-BER.ppt

-9-

INTRODUCING BCG'S CORPORATE DEVELOPMENT PRACTICE— OUR TOPIC MAP Corporate Strategy

Corporate Finance

Post-merger Integration

Integrated Financial Strategy

Create

Execute

Integrate

Deliver

Corporate vision

Partnering/alliances

Pre-PMI planning

Industry landscaping

M&A

Portfolio strategy

IPO & divestitures

Growth strategy

Private equity

Value-based management Strategic planning

PMI organization/ setup

Investor management Capital structure

PMI execution

Risk management

Source(s): BCG analysis HU Berlin-ValueCreators(Presented)-19Jun07-ARO-BER.ppt

- 10 -

AGENDA

Introduction: BCG and BCG's Corporate Development Practice Worldwide Value Creation: BCG Value Creators Report 2006 Managing Growth •

Starbucks - A Case Example

•

Integrated Financial Strategy

Question? Comments? Discussion!

HU Berlin-ValueCreators(Presented)-19Jun07-ARO-BER.ppt

- 11 -

BCG WITH ONGOING RESEARCH ON VALUE CREATION

1999 “The Value Creators"

Sources of value creation: • Cash flow margin • Asset productivity • Profitable growth

2000 "New Perspectives on Value Creation"

Key value drivers from the capital, customer and employee view External market expectations

2001 "Dealing with Investors' Expectations"

Importance of expectation premiums Drivers behind expectation premiums

2002 "Succeed in Uncertain Times"

Agenda for improved, sustainable value creation Preventive crisis management necessary

2003 “Back to Fundamentals"

Fundamentals drive TSR • Profitability above cost of capital • Profitable growth • Dividends

2004 “The Next Frontier"

Decomposition of TSR into fundamentals, cash flow and multiple Relative multiple regression

2005 “Balancing Act"

Implementation: • TSR fact base • Appropriate TSR aspiration • Redesigned management processes

2006 “Spotlight on Growth"

Role of growth: • Achieving superior value creation • Managing critical tradeoffs • Setting growth targets

Note: Reports can be downloaded at http://www.bcg.com/corporatedevelopment/cfs_value.html Source(s): BCG analysis HU Berlin-ValueCreators(Presented)-19Jun07-ARO-BER.ppt

- 12 -

NOT ANOTHER "HOW TO GROW" STUDY, BUT HOW TO EVALUATE GROWTH IN AN INTEGRATED FINANCIAL STRATEGY

Content The Role of Growth in Achieving Superior Value Creation The Impact of Growth on Valuation Multiples • Growth, Margins, Multiple and the right kind of Growth Evaluating Growth Investments Against Alternative Uses of Capital • Growth versus Dividend, Debt Repayment and Share Repurchases Setting Growth Targets That Drive TSR • Initial TSR Target, Plan Assessment, Alternative TSR Scenarios Ten Questions About Growth Every CEO Should Know How to Answer Appendix: The 2006 Value Creators Rankings

Source(s): BCG Value Creators Report 2006 HU Berlin-ValueCreators(Presented)-19Jun07-ARO-BER.ppt

- 13 -

SOME INITIAL DEFINITIONS Total shareholder return is often referred to as “TSR”

Value creation (TSR: Total Shareholder Return)

Change in share price plus dividend yield TSR is presented on an annual basis—typically over 1, 3 and 5 year periods Yardstick for all investors including hedge funds and mutual funds Required reporting in proxy statements Easily benchmarked on relative basis as shareholder’s true bottom line

Valuation (P/E or EBITDA multiple) Value based management (VBM)

Contains information about how investors value earnings Change in relative valuation multiples is manageable Calculated on a current or forward basis

Alignment of key management processes • Target setting, performance metrics, budgeting, planning, resource allocation, and incentives

Source(s): BCG analysis HU Berlin-ValueCreators(Presented)-19Jun07-ARO-BER.ppt

- 14 -

CREATING SUPERIOR SHAREHOLDER VALUE YEAR AFTER YEAR IS A DIFFICULT TASK Relative TSR Analysis 1996-2005

Number of 600 companies(1)

569 532

500

400

347

324

300

200

Denmark 132 106

100 31 1

4

0

1

9

1

9

10

0 2

3

4

5

6

7

8

Number of years in which they beat the local market(2) (1) Sample characteristics: 2,056 companies excl. financial service companies; continuously listed for at least 10 years; market cap above $1B as of end 2005 (2) Relative TSR > 0 Source(s): Thomson Financial Datastream; Bloomberg; BCG analysis HU Berlin-ValueCreators(Presented)-19Jun07-ARO-BER.ppt

- 15 -

HOWEVER, HIGH TSR POSSIBLE IN EVERY INDUSTRY High, Low and Average TSR Per Industry 2001–2005

100%

TSR p.a. ‘01 – '05

Mining & Mat.

Transp. Auto- Mach. Chem. & Log. motive & Constr.

Utilitity

Travel& Tourism

88%

Retail

Cons. Goods

Pulp & MultiPharma Paper business

Tech.

Media & Entert.

91% 83%

80%

74%

70%

67%

61%

57%

53%

60%

50%

40%

43%

20%

38%

34%

40%

19% 12%

9%

9%

9%

8%

6%

5%

0%

5%

5% 0%

-3%

-2%

-1%

-6%

-6%

-12%

-20% -19%

-20% -26% -40%

-35%

-60%

High

-18% -25%

-26%

-28%

Weighted Average Total Sample

-31% -38%

-41%

Low

Question: Question: What What are are the the success success factors factors of of top top performing performing companies companies in in our our client's client's industry? industry? Source(s): Thomson Financial Datastream; BCG analysis. HU Berlin-ValueCreators(Presented)-19Jun07-ARO-BER.ppt

- 16 -

TSR DECOMPOSITION IS A PRACTICAL FRAMEWORK LINKING PERFORMANCE TO TSR An Integrated Approach To Value Creation – Here: Based On EBITDA EBITDA growth

Capital gain

%

EBITDA margin change

%

x

x

Growth variables, e.g. asset growth

EBITDA multiple TSR

Sales growth

Profitability variables, e.g. gross margin growth

%

ƒ Cost efficiency variables, e.g. inventory turnover

+ Leverage variables, e.g. debt/capital ratio Dividend yield Free cash flow yield

ƒ

Share buybacks Debt repayment

%

Other variables, e.g. dividend payout ratio

%

Industry specific variables, e.g. average store size

%

%

Contribution to TSR can be calculated

Source(s): BCG analysis HU Berlin-ValueCreators(Presented)-19Jun07-ARO-BER.ppt

- 17 -

WORLD TOP DECILE: SALES GROWTH AND MULTIPLE MOST IMPORTANT TSR Decomposition Profile of Top Decile vs. Total Sample(1) Total shareholder return

Sales index (2000 = 100)

TSR index (2000 = 100) 700

EBITDA/revenue (%)

200

624

20%

177 152

600 445

500 400

150 100

316

300 200

EBITDA margin1

Sales growth

100

100

180

152 88

100

100

68

108

95

86

104 109

115

103

18%

128

106

16%

114

12%

'02

14.5% 14.7%

15.3%

14.7% 14.7%

14.2%

15.8% 15.8%

12.7%

10% 8%

0 '01

15.3%

14%

123

50

0 '00

18.5% 17.7%

'03

'04

'05

6%

'00

'01

'02

'03

'04

'05

'00

'01

'02

'03

'04

'05

ƒ Simplified five-year TSR decomposition2 20%

Enterprise value/EBITDA (x) 11.8 11.1 12 9.9 9.0 10

TSR contribution (%)

9% 4%

6%

4% 1%

2%

8 7.9

6

0%

4

-4% Margin change

Dividend/stock price (%) 6%

Multiple change

6.0

9.1

4.9%

9.4

9.5

Dividend DY yield

8.3

2.8%

2.3%

9.0 1.9%

7.0

3.0%

2% 2.1% 1.3%

0

3.3%

2.5%

2.4%

'04

'05

1.7%

0%

'00

'01

'02

'03

'04

'05

Source(s): Thomson Financial Datastream; Thomson Financial Worldscope; Bloomberg; Annual Reports; BCG analysis. Disclaimer: These financial analyses are based on data and assumptions that have not been verified by BCG and are subject to uncertainty and change. Accordingly, results presented are intended only for relative comparison across alternatives. Actual future values are subject to future capital market conditions and other influences. HU Berlin-ValueCreators(Presented)-19Jun07-ARO-BER.ppt

3.7%

4%

2

-10% Sales growth

Dividend yield3

14

13% 10%

EBITDA multiple1

'00

'01

'02

'03

Top Decile, n = 106 Total sample, n = 1056 1

Industry calculation based on aggregate of entire sample. Share change and net debt change not shown. 3 Industry calculation based on sample average. - 18 2

BUT, TOP PERFORMERS IMPROVED ON ALL THREE DIMENSIONS Global Sample versus Top Decile, 2001-2005

TSR Decomposition Profile

Fundamental value (%)

Cash flow (%)

Valuation multiple (%)

14%

13% 9%

6% 4%

4%

2%

1%

0% -2% -2% -4%

Sales growth EBITDA margin change

EBITDA multiple change Top decile, n = 106 (TSR = 44% p.a.)

Dividend yield

Share change

Net debt change

Total sample, n = 1056 (TSR = 2% p.a.)

Source(s): Thomson Financial Datastream; Thomson Financial Worldscope; Bloomberg; Annual Reports; BCG analysis Disclaimer: These financial analyses are based on data and assumptions that have not been verified by BCG and are subject to uncertainty and change. Accordingly, results presented are intended only for relative comparison across alternatives. Actual future values are subject to future capital market conditions and other influences. Note: Bars show contribution of each factor in percentage points of five-year average annual TSR. HU Berlin-ValueCreators(Presented)-19Jun07-ARO-BER.ppt

- 19 -

FOR TOP PERFORMERS, REVENUE GROWTH IS THE MAIN SOURCE OF LONG-TERM SHAREHOLDER VALUE Sources of TSR for Top-Quartile Performers, S&P500, 1987-2005 Average 40% annual TSR 35% (%) 30% 25%

Dividend yield

20%

Change in shares, cash and debt

15%

Change in Multiple

10% 31%

50%

58%

60%

5%

Margin Improvement Growth

0% 1 year

3 years

5 years

10 years

Note: Sample excludes financial companies; rolling analysis covers one, three, five, and ten-year time frames from 1987 to 2005. Source(s): Compustat, BCG analysis. HU Berlin-ValueCreators(Presented)-19Jun07-ARO-BER.ppt

- 20 -

AGENDA

Introduction: BCG and BCG's Corporate Development Practice Worldwide Value Creation: BCG Value Creators Report 2006 Managing Growth •

Starbucks - A Case Example

•

Integrated Financial Strategy

Question? Comments? Discussion!

HU Berlin-ValueCreators(Presented)-19Jun07-ARO-BER.ppt

- 21 -

EXCURSUS STARBUCKS: A RETAIL STAR MORE THAN QUINTUPLED SHAREHOLDERS' BUCKS Total Shareholder Return (indexed and cumulated)

515%

274% 183% 157%

168%

100%

'99

'00

'01

'02

'03

'04

Company profile

• Vertically integrated brand: purchasing, roasting and selling • High-quality coffee beans and handcrafted beverages • First store in Seattle in 1971 • In 1987 Starbucks acquired Giornale chain of coffee bars (founded by a former employee) • Today more than 6,600 stores in the US and significant international activities • More and more trying to diversify product range and explore new distribution channels for coffee and related products

Source: T.F. Datastream; T.F. Worldscope; Bloomberg; Starbucks; BCG analysis HU Berlin-ValueCreators(Presented)-19Jun07-ARO-BER.ppt

- 22 -

TSR DECOMPOSITION OVERVIEW: STARBUCKS SHOWS IMPRESSIVE GROWTH AND MULTIPLE ABOVE PEERS Total shareholder return(1) 600

350

515

274 157

150

168

100 0

50 100

81

'99

'00

85 '01

93

81

65 '02

'03

15%

158 130 100

100

100

15.7% 15.3% 16.2% 15.3% 15.8% 16.1%

196

200

300

100

113

124

'99

'00

'01

130

136

146

'02

'03

'04

0

'04

20%

243

250

400

200

315

300

500

183

EBITDA margin clearly above peers(2)

Extreme sales growth(1)

10%

8,2%

8,2%

7,9%

7,9%

8,1%

8,3%

'99

'00

'01

'02

'03

'04

5%

ƒ TSR decomposition(3) (five year) 30% 25% 20% 15% 10% 5% 0% -5% -10% -15%

28%

EBITDA multiple(2) growing far above peers 28.7

30

Dividend yield(4) 3%

24.9

Starbucks: no dividend 2,3%

26

12% 2%

0% 1%

18 14

Sales growth

Margin change

Multiple change

16.8

DY Dividend yield

16.7

2% 1,4%

15.5

1,1%

1% 12,1

12 8,7

6 '99

'00

'01

'02

9,8

9,8

'03

'04

0% '99

'00

Starbucks (1) Indexed and cumulated (2) Calculation based on aggregated figures Note: Analysis based on 63 companies; minimum market value 2004: $5bn HU Berlin-ValueCreators(Presented)-19Jun07-ARO-BER.ppt

1,5%

1,1%

16,4

10

-10%

1,9%

19.9

22

8%

'01

'02

'03

'04

Retail sample

(3) Additional components: Share change, Net debt change (4) Sample average Source: T.F. Datastream; T.F. Worldscope; Bloomberg; Annual Reports; BCG analysis

- 23 -

STARBUCKS' GROWTH STORY: SALES MORE THAN TRIPLED IN FIVE YEARS

Sales development (indexed and cumulated)

11%

20%

315%

243%

84% 196%

Retail sales: Sales in companyoperated stores

158% 130%

Sale of beans: JV with Kraft in the grocery channel

100%

Licensing: Revenues from noncompany-operated stores (royalties and sales from beans) '99

'00

'01

'02

'03

'04

Source: T.F. Datastream; T.F. Worldscope; Bloomberg; Starbucks; BCG analysis HU Berlin-ValueCreators(Presented)-19Jun07-ARO-BER.ppt

- 24 -

STARBUCKS ENTERED INTO A FADING COFFEE MARKET After Folgers' & Maxwell's Market Share Wars, Starbucks with New Value Proposition 1980s: Declining consumption and new value proposition market share wars

Since 1990: Starbucks with steady sales growth through new value proposition

Coffee consumption (cups per person per day)

Starbucks sales(3)

•

•

•

3,0 2

2,0 1

1,0 1950

1960

1970

••Maxwell MaxwellHouse Housebrand brand established with established with"affordable "affordable luxury" luxury" (1) ••Loyal Loyalcustomers customers(1) ••Folger's Folger's&&Maxwell MaxwellHouse House highly profitable highly profitable

1980

1990

••Price Pricecuts cuts ••Reduced Reducedquality qualityto to lower lowercosts costs ••Weakened Weakenedbrands/ brands/ consumer loyalty consumer loyalty ••Low Lowgross grossmargins margins ••Losses on coffee Losses on coffeein in the late 80s the late 80s

1990

••Gourmet Gourmetcoffee coffeeagain againas asaffordable affordableluxury luxury (2) (2)as a non-alcohol••Shops as "the third place" Shops as "the third place" as a non-alcoholserving servingbar barwith withsocial socialinteraction interaction ••Price Pricepremium premiumfor forhigh highquality qualityand andagreeable agreeable atmosphere atmosphere ••Increased Increasedsales sales

(1) 80% of Maxwell House consumers would not switch if another brand were on sale (2) Besides home and work Source: U.S. Bureau of the Census; J.C. Bradford & Co.; Press Search; Starbucks annual reports; BCG-Analysis HU Berlin-ValueCreators(Presented)-19Jun07-ARO-BER.ppt

2000

(3) Indexed on 1999

- 25 -

STARBUCKS' GROWTH WAS ALMOST EXCLUSIVELY ORGANIC, BUT IN DIFFERENT GRADUATIONS Different Growth Dimensions—Overview Expand sales per store

Product range • Coffee and related products

Grow number of stores

Domestically

Explore new channels/products

Licensing stores • Domestically • Internationally

• Warm breakfast • Lunch Extended hours, efficiency improvement in selling process

Merchandising

Other non-food • "Hear Music"

Internationally • Company operated • Joint ventures

Distribution channels for coffee beans • Grocery • Club and wholesale market

New products in JV • Frappuccino • Ice cream • DoubleShot

Source: Starbucks; analysts reports; press articles; BCG analysis HU Berlin-ValueCreators(Presented)-19Jun07-ARO-BER.ppt

- 26 -

SALES PER STORE EXPANDED BY INCREASING CUSTOMER BASE, CUSTOMER LOYALTY AND ADDING PRODUCTS Customer base

Expansion of customer base (Survey in 1999 and 2005) • From customer average annual income of $81,000 to $55,000 • From 78% college grads to 56%

Concentrated in metropolises

Product range

73% 54%

Top 50 markets have 73% of sales

32% 22% 5 10 25

50

Top markets

Survey: Most attractive WiFi hotspot

Coffee and related products Warm breakfast Lunch, dessert

• More than hotel lobbies • and airport lounges

Loyal customers Starbucks card already has 15% of sales • Drives frequency • Wins new customers when sold as a gift

High customers frequency • Best customers come 16.2 times per month • Average is six times a month Survey: Sixth among US brands

Source: Starbucks; analysts reports; press articles; BCG analysis HU Berlin-ValueCreators(Presented)-19Jun07-ARO-BER.ppt

- 27 -

"HEAR MUSIC" IS ANOTHER NEW IDEA TO IMPROVE INTRA-STORE SALES And Fits Starbucks' History of Selling Innovative CDs Idea and investment

What customers can do and how to earn money on it 1. Hear music Customers pick their preferred music at a terminal while … … having no interaction with salespersonnel Customers spend more time in store and potentially buy more coffee 2. Burn customized CD Customers can choose from over 200,000 tracks and … … assemble a personal collection of songs and burn them on a CD

Investment: Investment: $20,000 $20,000 per per store store (1) Prices: $7.99 for the first and $0.99 for each additional song Source: Starbucks; analysts reports; press articles; BCG analysis HU Berlin-ValueCreators(Presented)-19Jun07-ARO-BER.ppt

At a price of about $10 per CD(1), breakeven(2) is 11 CDs per store per day (2) Without consuming coffee while listening calculated in

- 28 -

DOMESTIC EXPANSION: GOAL EXCEEDED MANY TIMES OVER … Analysts' Quotes

May 2005 "We think Starbucks' 15,000 store target is reasonable (from 6,600 today)."

November 2001 "Our analysis suggests that there is room for a total of between 5,000 and 7,000 company-owned Starbucks ultimately in the US."

September 1999 "Our analysis ... concludes that, on a very conservative basis, the company still has room to double the number of stores ... to well over 4,000."

Source: Starbucks; analysts reports; press articles; BCG analysis HU Berlin-ValueCreators(Presented)-19Jun07-ARO-BER.ppt

- 29 -

... BUT WHERE IS THE LIMIT ? Possible Saturation of the Domestic Market

Situation today

Historic growth

From 961 stores in 1999 to present number today

About 6,600 stores in the US …

… with highest concentration still on the West Coast where the company has its roots (about 40 % of US stores)

Borders/constraints McDonald's: 13,500 in the US • Starbucks with no clear no. 2 (such as Burger King, Wendy's, ...) • But less accepted in rural areas

Maximum of 7,000; premises • Metropolitan areas: average Seattle(1), Portland, San Francisco, San Diego, Denver: 40,000 residents per store • New regions: Median incomes 10% over national average and more than 175,000 residents in MSA(2)

If Starbucks reaches the saturation point, deterioration in new-unit productivity will be seen; this has not yet been observed however

(1) Seattle has average of 20,000 per store (2) MSA: metropolitan statistical areas. For details on methodology, see DB Report from Sept. 24, 1999; for recalculation Nov. 27, 2001 Source: Starbucks; analysts reports; press articles; BCG analysis HU Berlin-ValueCreators(Presented)-19Jun07-ARO-BER.ppt

- 30 -

EBITDA MARGIN REMAINS CONSTANT ... ... And Clearly Above Peer Group

20%

Interpretation

15%

Majority of sales comes from branded, high margin lifestyle coffee products

10%

5%

Total retail sample Starbucks

Additional increase of margins by royalties from non-company-operated stores

0% '99

'00

'01

'02

'03

'04

Leverage of brand and margins by licensing coffeerelated products Transfer of proven high margin product and store concept by impressive sales growth (no erosion of margins)

Source: T.F. Datastream; T.F. Worldscope; Bloomberg; Starbucks; BCG analysis HU Berlin-ValueCreators(Presented)-19Jun07-ARO-BER.ppt

- 31 -

STARBUCKS' MULTIPLE FAR ABOVE PEERS BUT FIRST DOUBTS ARISE IF SUSTAINABILITY IS STILL GIVEN Almost Doubled between 2002 and 2004 Interpretation 24.9 16.8

EBITDA multiple

28.7 19.9 16.7

15.5

16,4 12,1

'99

'00

12

'01

8,7

9,8

9,8

'02

'03

'04

Starbucks Total retail sample

Stock price reflects future expectations, but EBITDA multiple reflects past (or its extrapolation) Î future growth expected No dividends distributed, thus earnings are distributed to shareholders via price—treasured Brand has a high value, resulting in high immaterial assets (goodwill(1) or premium) Although marketing investment remains reasonable (1.3% of sales in 2004)

November 2004: "20% to 25% growth is not an issue ... what's 20% to 25% worth? ... We ... believe the current valuation either assumes at least 30% growth in FY'05 or the market's pricing SBUX off FY'06 EPS. ... Starbucks' multiple appears to have peaked." (1) Goodwill can only be accounted for if acquired or costs could be activated in certain cases HU Berlin-ValueCreators(Presented)-19Jun07-ARO-BER.ppt

Source: T.F. Datastream; T.F. Worldscope; Bloomberg; Starbucks; BCG analysis

- 32 -

SUMMARY - LESSONS LEARNED Starbuck's performance is a clear growth story •

No dividends distributed: retained to finance further growth

•

Mostly organic because the market is young and no serious competition is in the market yet

•

Establishing a strong brand does not necessarily imply enormous marketing investments

JV and licensing can be important alternatives to pure organic growth •

Reducing capital investment, reduce risk and improve margins

•

Profiting from the partner's knowledge when entering new markets or launch new products

•

But: they necessitate proper control and decision processes can take longer

Chances in different regional markets can differ greatly according to regional circumstances – a success story cannot simply be rolled out Source: Starbucks; Analysts Reports; Press Articles; BCG analysis HU Berlin-ValueCreators(Presented)-19Jun07-ARO-BER.ppt

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AGENDA

Introduction: BCG and BCG's Corporate Development Practice Worldwide Value Creation: BCG Value Creators Report 2006 Managing Growth •

Starbucks - A Case Example

•

Integrated Financial Strategy

Question? Comments? Discussion!

HU Berlin-ValueCreators(Presented)-19Jun07-ARO-BER.ppt

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DRIVING SUPERIOR TSR REQUIRES AN INTEGRATED CORPORATE AND FINANCIAL STRATEGY M&A strategy

“Integrated corporate and financial strategy”

Investor strategy

Revenue growth

Margin (%)

Capital structure target

TSR Portfolio strategy

FCF and ROI P/E multiple

“Value-based management capability”

Real Estate strategy

Metrics

“Diagnose issues, opportunities, constraints, alternative TSR strategy scenarios”

Dividend policy

Share repurchase

Planning

Budgeting

Resource allocation

Role of center

Target setting

Compensation

Training

Reporting

“Ensure current facts, signals, effective processes to enable organization to deliver superior TSR results”

This This effort effort will will focus focus on on “TSR “TSR strategy” strategy” where where we we will will integrate integrate business business strategy strategy and and competitive competitive advantage advantage concepts concepts with with TSR TSR “facts” “facts” and and principles principles to to ensure ensure success success Source(s): BCG analysis HU Berlin-ValueCreators(Presented)-19Jun07-ARO-BER.ppt

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CLIENT’S STRATEGIC OPTIONS MAP TO DIFFERENT ELEMENTS OF THE “TSR STRATEGY” Elements Are Highly Interdependent – Must Assess in an Integrated Fashion 4

M&A strategy

Acquisition of segmentcentric/ segment adjacent players? Investor strategy

Real Estate strategy

6 Revenue growth

Margin (%)

7 Impact of company sell/ LBO?

Capital structure target

Impact of share repurchase?

TSR Portfolio strategy

2 “What if scenarios” for spinoff options?

Impact of sale/ lease-back / 5 reduction of key fixed assets?

FCF and ROI P/E multiple

Share repurchase

Dividend policy

3

1 Future prospects of CLIENT’s underlying business?

Portfolio trimming potential?

Need Need to to diagnose diagnose issues, issues, tradeoffs, tradeoffs, and and options options across across all all levers levers Source(s): BCG analysis HU Berlin-ValueCreators(Presented)-19Jun07-ARO-BER.ppt

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A FEW COMMENTS FROM OUR CLIENTS REGARDING INSIGHTS FROM TSR STRATEGY DISCUSSIONS “It was critical to complement the ‘hard’ financial and valuation analysis with the investor perspective (the ‘soft’ side). All this time we had been listening to the analysts and not the investors. Boy, did we get it wrong! The investor dialog and financial analysis gave us critical insight into how to refine our corporate and financial strategies into an overall “TSR strategy”. We are now heading down a path that we believe will significantly increase our valuation” Chief Financial Officer

“The investor insights enabled me to finally realize that we have been talking right past our investors. We are excited about growth, so we have been speaking mostly about growth with investors and analysts... When what matters to them as value investors are our true strengths– high ROIC and our great free cash flow generation. This is a critical insight for us” Chairman and CEO

“I was dead-set against doing this work because I felt there was little to learn from the investors that I did not already know. I am a full convert and recognize the great value and insights of the work.” Vice President of Investor Relations Source(s): BCG client HU Berlin-ValueCreators(Presented)-19Jun07-ARO-BER.ppt

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AGENDA

Introduction: BCG and BCG's Corporate Development Practice Worldwide Value Creation: BCG Value Creators Report 2006 Managing Growth •

Starbucks - A Case Example

•

Integrated Financial Strategy

Question? Comments? Discussion!

HU Berlin-ValueCreators(Presented)-19Jun07-ARO-BER.ppt

- 38 -

QUESTIONS? COMMENTS? DISCUSSION!

HU Berlin-ValueCreators(Presented)-19Jun07-ARO-BER.ppt

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