Moody's Credit Rating

Moody’s credit rating looks at the probability of a debt instrument defaulting and the amount of loss this default will cause on the debt-holder. Moody’s credit ratings are expressed in terms of letters and numbers (United States, 2011). The characters range from AAA to C forming twenty-one categories. A rating of AAA means that the expected credit loss is at its lowest. A is the highest intrinsic financial strength.

           Moody’s credit rating does not address the possibility of prepayment, particular securities being relatively valued, risk of liquidity, terms and the price during the investment process. Moody being the oldest rating agency in the world played a role in the subprime mortgage meltdown which made investors lose confidence in Moody. As a result of the subprime mortgage meltdown, initiatives that promote market transparency and rating of rating agencies have been implemented (United States et.al, 2011).

Moody’s credit rating has its limitation. It only assesses the risk of credit loss which is important to investors when buying a security. However, a security is affected by other factors other than credit such as currency risk, interest rate risk and liquidity risk (Darbellay, 2013). If the Moody credit rating is used alone, it is a vague and incomplete substitution for the price of a security.

           Part of the problem is ideological. At the most basic level, the combined income of all three sectors of an economy - the domestic private sector (including households and businesses), the government sector, and the foreign sector – must equal its expenditures. Sectors in the economy that are net issuing new financial liabilities are matched by sectors willingly owning new financial assets (Mattarocci, 2013). This is not only true of the income and expenditure sides of the equation, but also the financing side, which is rarely well integrated into macro analysis. But the neoliberals hate the idea of placing the government sector on par with the private and external sectors (Mattarocci, 2013). They view it as an unwanted appendage which adversely afflicts the operation of the private sector in a “free market” economy.

           Moody’s credit rating relies on documentation of macroeconomic factors, scenarios and third parties. Moody should enhance transparency in relation to the assumptions they obtain from this documents. In conjunction with Moody’s credit rating, additional measurement tools should be developed that go beyond expected credit loss to include structured finance market pricing services and valuation (Deventer, 2013). This sets the groundwork for structured products by strengthening the secondary market (Great Britain, 2009).

           There are measures instituted to protect the integrity of Moody’s credit rating as stipulated in their code of professional conduct (Lawrence &Weber, 2011). However, Moody should work at further enhancing the conflict of interest protections. There should be clear disclosure of rating agencies performance metrics, procedures and methodologies (Mattarocci, 2013).

References

Darbellay, A. (2013). Regulating credit rating agencies. Cheltenham. Edward Elgar.

Deventer, D. R. (2013). Advanced financial risk management: Tools and techniques for   integrated credit risk and interest rate risk management. Singapore: John Wiley & Sons.

Great Britain. (2009). Local authority investments: Report, together with formal minutes.  London: TSO.

Lawrence, A.T., Weber, J. (2011). The Meaning of Corporate Social Responsibility. Business &  society: stakeholders, ethics, public policy (13th Ed.) (pp. 50). New York: McGraw- Hill/Irwin

Mattarocci, G. (2013). The Independence of Credit Rating Agencies: How Business Models and  Regulators Interact. Burlington: Elsevier Science.

United States, Levin, C., & Coburn, T. A. (2011). Wall Street and the financial crisis: Anatomy   of a financial collapse. New York: Cosimo Reports.

United States. (2011). The financial crisis inquiry report: Final report of the National       Commission on the Causes of the Financial and Economic Crisis in the United States.  New York, NY: Public Affairs.

Starbucks Coffee Company: Transformation and Renewal

The coffee industry has significantly changed, and the strategies that conventionally worked in 1970s and 1980s may no longer work. Traditionally Starbucks purchased and sold only high-quality coffee at a premium price. However, the coffee experience that was special in the last decades is no longer unique, and the company has failed to recognize these changes in customer tastes and preferences. Additionally, competition has increased, and there are competitors selling the same quality of coffee at a lower price. Starbuck’s attempt to make its coffee special will only harm its sales volume as consumers will buy from competitors (Giovannucci, 2001). Below is a graph for annual revenue performance per employee in the four major coffee dealers in the U.S.

The coffee industry has changed and the decision to close 600 stores in 2007 is an indication that the company needs to change its current strategy. After conducting an industry analysis with the help of Porter Five Forces, it is clear that competition and Fair trade have affected our business. The analysis revealed that the young coffee consumers are not as sensitive to coffee taste as the elderly users. Additionally, the varieties of beverages have increased, and they offer alternatives to coffee (Batsell, 2001).

The analysis indicated that the reasons for the decline in the Starbucks’ sale are that the older generation that valued the club-like environment over a cup of coffee has reduced significantly (McClure, 1999). The decision to introduce so many products affected the trust that customers had on the integrity of Starbucks’ coffee. Finally, the process of creating new stores was not well thought-out, and it only created an imaginary growth while the fundamentals of the business remained the same or deteriorated (Mathew, 2008).

I recommend closing of more stores, reduce our product lines and change our target market from the specialty to mass branding.

Closing more stores in the U.S., China and Europe will help the company reduce operational costs. The company has been making losses in most of the recently opened shops, and they should all close. The company needs to sell these stores so that it can use the money to aggressively market its products and fund research and development (Pendergrast, 1999).

The company should reduce its product line to earn back the trust from the coffee lovers. The perception of the quality of Starbucks coffee has been affected by the many brands. By specializing in two or three brands will make the marketing activities easier and cheaper. The company will not have to employ so many promoters for its coffee (Quelch, 2008).

In the current market conditions, most customers are sensitive to the product prices and not the quality. It is essential that the company find ways of reducing the cost of production of our coffee so that we can decrease the price of coffee. Our prices should be able to compete with competitors’.

These changes are critical for Starbucks’ survival and its future performance. Failure to take these corrective measures will see the company share price continue to go down, and this may attract a hostile takeover, and the company will be no more. Competitors are watching keenly into the problems of Starbucks, and are eagerly waiting for the strategy the company will take so that they can decide on their next move. Starbucks dominance in the coffee industry in the past creates a feeling of success among hostile investors. Some have waited for a long time for the current situation to occur so that they can take over the company at a cheap price.

 References

Batsell, J. (2001). Starbucks Achieves Worldwide Renown with Some Costs. The Seattle

Times. 83(2), 33-37.

Gill, D. (2013). Starbucks Shares Looking Frothy; Where is Howard’s Head? Retrieved on 06^th June 2015 from http://ycharts.com/analysis/story/starbucks_shares_looking_frothy_where_is_howards_head

Giovannucci, D. (2001). Sustainable Coffee Survey of the North American Specialty Coffee

Industry. New York Times. 15(2), 25-32.

Mathew, L. (2008). The decline of the empire of Starbucks. Retrieved on 06^th June 2015 from http://www.spectator.co.uk/columnists/any-other-business/852391/the-decline-of-the-empire-of-starbucks

McClure, R. (1999). Starbucks soon to have it Made in the Shade. Seattle-Post Intelligencer. 3(2), 53-67.

Pendergrast, M. (1999). Uncommon Grounds: The History of Coffee and How It Transformed our world. New York: Basic Books.

Quelch, J. (2008). How Starbucks’ growth destroyed brand value. Retrieved on 06^th June 2015 from https://hbr.org/2008/07/how-starbucks-growth-destroyed

http://ycharts.com/analysis/story/starbucks_shares_looking_frothy_where_is_howards_head