Business Breakdown Part III: Projections & Planning

Business breakdown part III

This is the final installment of a multi-part case study on Starbucks Corp. We previously covered the business model, profit model, unit economics, and financial statement analysis (links below).

1. ​(Part I) Business model and unit economics​
2. ​(Part II) Financial statement analysis​
3. (Part III) Projections and planning

The goal for today is to create a quick-and-dirty financial projection and build an action plan for this company.

Quick recap — Starbucks is a vertically integrated retailer of coffee, tea, and food through a 50/50 mix of company-owned and licensed stores. Their profit model works out to 14-15% operating margins from high-margin licensing revenue and retail store sales.

Forecasting and planning can feel intimidating, but we'll stick to the basics to get the ball rolling (note: this is basically a teaser version of what we cover in Profit Mastery):

1. Forecasting P&L
2. Action plan

1) Forecasting the P&L

When forecasting, the first question is always: what's the goal? Are we aiming for monthly projections to set revenue targets and navigate seasonality? Or are we building a long-range projection with 3-5 year targets?

Some forecasting tips before we start:

• Keep things simple — get a rough draft going before you add and overcomplicate your projections
• Don't aim for perfection — you'll never get it 100% accurate so paint with a broad brush and use it to make tactical decisions on costs, sales & marketing, pricing, etc.
• Know your cost structure — it helps to know your cost structure (gross margins and fixed costs at a minimum)
• Start with the end in mind — in long-range projections, know your endgame (i.e. target margins, revenue goals, etc.) and work backward... if your targets are unrealistic, then re-cut and try again
• Start high-level before getting granular — get your big picture sales, gross profit, and overhead figures in there before you break them down to sub-categories

With that, here are my estimates and a quick walkthrough:

• Sales — If you're new to forecasting, keep it simple and use recent growth trends as your guide (i.e. if growing 5% a year, then it's probably safe to expect that next year). For advanced folks, try drilling down to your unit economics (customer transactions x average sale price x quantity purchased with estimates for each).
• Margins — Gross margins are on a 9-year downtrend; the conservative approach is to keep margins flat (I assumed they stabilize in 2026). When approaching your business, try sticking to your contribution margin or unit economics when figuring gross margins.
• Overhead — If you know your fixed costs, then projecting overhead should be easy. If your business is growing fast, you should anticipate step-changes like salaries, rent, etc.
• Operating Income — These projections work out to $6.3bn operating income by 2028 at 14.3% margins. An alternative approach would be to pick a margin goal (say 15%) and work backward (i.e. solve for revenue or costs instead of profit).

Now we have something on paper (or excel). Is it perfect? Definitely not. But it's a starting point!

From here we can add detail or fine tune our estimates. Details like breaking apart overhead into sub-categories, or breaking down our sales estimates into units and prices.

Put a pin in these projections for a moment.

2) Planning (action items)

An action plan is the culmination of the analysis we've done on Starbucks over the past few weeks. To meet or beat our projections, we need to take our scorecard + forecast inputs and pinpoint the key drivers; here's a sample from our case study:

• Debt — Interest is well-covered by profits (interest coverage ratio) and leverage is reasonable (debt to profit). That said, most businesses can't borrow large sums indefinitely... sales will eventually slow and/or a recession will kick in. Action? Monitor debt ratios closely and keep guardrails in place.
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• Gross margins — Just 1% of additional margin at $40bn sales = $400m profit annually. Where could that come from? Maybe it's price increases, or supplier discounts, or better efficiency with staff hours. Action? First identify which components of COGS have gotten worse over the years, then determine how to fix them.
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• Overhead — Costs are consistently below 13% of sales but I expect to see some improvement as revenue grows (i.e. spread fixed costs over more revenue). Action? Target overhead growth below sales growth annually, get a breakdown of overhead costs and identify any cost cutting potential.

Key takeaways — Forecasting takes practice, so get your reps in. Nobody is perfect (see the quote from John Kenneth Galbraith above). Remember, this is just a financial tool to help you make tactical business decisions.

Your homework — Grab your financial statements and make your first attempt at a 2-3 year projection. Start broad and then go narrow. If it doesn't feel write, just grab another sheet and work it out again. For added accountability, reply to us with your 2025 revenue and profit target and we'll send some encouragement next year :)

P.S. if you're looking for someone to build this type of financial analysis for you and your business, drop us a note!

Quick disclaimer: this is NOT intended to be financial advice, it's for educational and entertainment purposes only; be sure to do your own research if considering an investment in Starbucks!