Brand Activism at Starbucks - A Tall Order? Net Present Value (NPV) / MBA Resources

Introduction to Net Present Value (NPV) - What is Net Present Value (NPV) ? How it impacts financial decisions regarding project management?

NPV solution for Brand Activism at Starbucks - A Tall Order? case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Brand Activism at Starbucks - A Tall Order? case study is a Harvard Business School (HBR) case study written by Luca Cian, Bidhan Parmar, Jeff Boichuk, Jenny Craddock. The Brand Activism at Starbucks - A Tall Order? (referred as “Starbucks Activism” from here on) case study provides evaluation & decision scenario in field of Sales & Marketing. It also touches upon business topics such as - Value proposition, Public relations.

The net present value (NPV) of an investment proposal is the present value of the proposal’s net cash flows less the proposal’s initial cash outflow. If a project’s NPV is greater than or equal to zero, the project should be accepted.

NPV = Present Value of Future Cash Flows LESS Project’s Initial Investment

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Case Description of Brand Activism at Starbucks - A Tall Order? Case Study

In April 2017, Kevin Johnson took over the reigns as CEO of Starbucks, the iconic coffee giant. He faced a number of key decisions to keep the global retail giant competitive, but one in particular loomed large. Over the last few years, Johnson's predecessor, Howard Schultz, had increasingly used Starbucks as a progressive platform in an attempt to influence the world around its stores, whether he was aiming to smooth out race relations in the United States or support marriage equality. (Schultz was so vocal about these issues, in fact, that many people speculated he harbored secret political ambitions for his post-Starbucks career.) The case examines Schultz's memorable 2015 Race Together campaign and invites students to debate whether Johnson's work should be focused on (1) similar attempts to align Starbucks with progressive ideals and social causes, or (2) Starbucks' profitability and shareholder value alone. Were there certain times or circumstances where it was appropriate to engage in brand activism, and what impact might these initiatives have on brand integrity and the bottom line? In addition to inviting students to analyze the financial, branding, and employee- and customer-relations implications of social activism at Starbucks, the case also allows them to develop a framework for when and how brand activism might be appropriate in the future.

Case Authors : Luca Cian, Bidhan Parmar, Jeff Boichuk, Jenny Craddock

Topic : Sales & Marketing

Related Areas : Public relations

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Calculating Net Present Value (NPV) at 6% for Brand Activism at Starbucks - A Tall Order? Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10016524)	-10016524	-	-
Year 1	3449601	-6566923	3449601	0.9434	3254341
Year 2	3981997	-2584926	7431598	0.89	3543963
Year 3	3945131	1360205	11376729	0.8396	3312408
Year 4	3222777	4582982	14599506	0.7921	2552741
TOTAL			14599506		12663453

The Net Present Value at 6% discount rate is 2646929

In isolation the NPV number doesn't mean much but put in right context then it is one of the best method to evaluate project returns. In this article we will cover -

Different methods of capital budgeting

What is NPV & Formula of NPV,
How it is calculated,
How to use NPV number for project evaluation, and
Scenario Planning given risks and management priorities.

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Capital Budgeting Approaches

Methods of Capital Budgeting

There are four types of capital budgeting techniques that are widely used in the corporate world –

1. Profitability Index
2. Payback Period
3. Net Present Value
4. Internal Rate of Return

Apart from the Payback period method which is an additive method, rest of the methods are based on Discounted Cash Flow technique. Even though cash flow can be calculated based on the nature of the project, for the simplicity of the article we are assuming that all the expected cash flows are realized at the end of the year.

Discounted Cash Flow approaches provide a more objective basis for evaluating and selecting investment projects. They take into consideration both –

1. Magnitude of both incoming and outgoing cash flows – Projects can be capital intensive, time intensive, or both. Starbucks Activism shareholders have preference for diversified projects investment rather than prospective high income from a single capital intensive project.
2. Timing of the expected cash flows – stockholders of Starbucks Activism have higher preference for cash returns over 4-5 years rather than 10-15 years given the nature of the volatility in the industry.

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Formula and Steps to Calculate Net Present Value (NPV) of Brand Activism at Starbucks - A Tall Order?

NPV = Net Cash In Flowt1 / (1+r)t1 + Net Cash In Flowt2 / (1+r)t2 + … Net Cash In Flowtn / (1+r)tn
Less Net Cash Out Flowt0 / (1+r)t0

Where t = time period, in this case year 1, year 2 and so on.
r = discount rate or return that could be earned using other safe proposition such as fixed deposit or treasury bond rate. Net Cash In Flow – What the firm will get each year.
Net Cash Out Flow – What the firm needs to invest initially in the project.

Step 1 – Understand the nature of the project and calculate cash flow for each year.
Step 2 – Discount those cash flow based on the discount rate.
Step 3 – Add all the discounted cash flow.
Step 4 – Selection of the project

Why Sales & Marketing Managers need to know Financial Tools such as Net Present Value (NPV)?

In our daily workplace we often come across people and colleagues who are just focused on their core competency and targets they have to deliver. For example marketing managers at Starbucks Activism often design programs whose objective is to drive brand awareness and customer reach. But how that 30 point increase in brand awareness or 10 point increase in customer touch points will result into shareholders’ value is not specified.

To overcome such scenarios managers at Starbucks Activism needs to not only know the financial aspect of project management but also needs to have tools to integrate them into part of the project development and monitoring plan.

Calculating Net Present Value (NPV) at 15%

After working through various assumptions we reached a conclusion that risk is far higher than 6%. In a reasonably stable industry with weak competition - 15% discount rate can be a good benchmark.

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 15 %	Discounted Cash Flows
Year 0	(10016524)	-10016524	-	-
Year 1	3449601	-6566923	3449601	0.8696	2999653
Year 2	3981997	-2584926	7431598	0.7561	3010962
Year 3	3945131	1360205	11376729	0.6575	2593988
Year 4	3222777	4582982	14599506	0.5718	1842633
TOTAL					10447236

The Net NPV after 4 years is 430712

(10447236 - 10016524 )

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Calculating Net Present Value (NPV) at 20%

If the risk component is high in the industry then we should go for a higher hurdle rate / discount rate of 20%.

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 20 %	Discounted Cash Flows
Year 0	(10016524)	-10016524	-	-
Year 1	3449601	-6566923	3449601	0.8333	2874668
Year 2	3981997	-2584926	7431598	0.6944	2765276
Year 3	3945131	1360205	11376729	0.5787	2283062
Year 4	3222777	4582982	14599506	0.4823	1554194
TOTAL					9477199

The Net NPV after 4 years is -539325

At 20% discount rate the NPV is negative (9477199 - 10016524 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Starbucks Activism to discount cash flow at lower discount rates such as 15%.

Acceptance Criteria of a Project based on NPV

Simplest Approach – If the investment project of Starbucks Activism has a NPV value higher than Zero then finance managers at Starbucks Activism can ACCEPT the project, otherwise they can reject the project. This means that project will deliver higher returns over the period of time than any alternate investment strategy.

In theory if the required rate of return or discount rate is chosen correctly by finance managers at Starbucks Activism, then the stock price of the Starbucks Activism should change by same amount of the NPV. In real world we know that share price also reflects various other factors that can be related to both macro and micro environment.

In the same vein – accepting the project with zero NPV should result in stagnant share price. Finance managers use discount rates as a measure of risk components in the project execution process.

Sensitivity Analysis

Project selection is often a far more complex decision than just choosing it based on the NPV number. Finance managers at Starbucks Activism should conduct a sensitivity analysis to better understand not only the inherent risk of the projects but also how those risks can be either factored in or mitigated during the project execution. Sensitivity analysis helps in –

What will be a multi year spillover effect of various taxation regulations.

What are the key aspects of the projects that need to be monitored, refined, and retuned for continuous delivery of projected cash flows.

What are the uncertainties surrounding the project Initial Cash Outlay (ICO’s). ICO’s often have several different components such as land, machinery, building, and other equipment.

What can impact the cash flow of the project.

Understanding of risks involved in the project.

Some of the assumptions while using the Discounted Cash Flow Methods –

Projects are assumed to be Mutually Exclusive – This is seldom the came in modern day giant organizations where projects are often inter-related and rejecting a project solely based on NPV can result in sunk cost from a related project.

Independent projects have independent cash flows – As explained in the marketing project – though the project may look independent but in reality it is not as the brand awareness project can be closely associated with the spending on sales promotions and product specific advertising.

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Negotiation Strategy of Brand Activism at Starbucks - A Tall Order?

References & Further Readings

Luca Cian, Bidhan Parmar, Jeff Boichuk, Jenny Craddock (2018), "Brand Activism at Starbucks - A Tall Order? Harvard Business Review Case Study. Published by HBR Publications.