MKII Section C Group 6 Starbucks

Starbucks: Delivering Customer Service Group 6, Section C

IIM INDORECase Analysis: Marketing II

Starbucks: Delivering Customer ServiceProfessor: Lubna Nafees

Submitted By: Group 6, Section C

Name Roll Number Aman Srivastava 2011PGP532

Jashanjot Singh Sekhon 2011PGP663 Kashyap Suruchi Brhamprakash 2011PGP686

Punit Moris Ekka 2011PGP801 Saindani Pranit S. 2011PGP844 Senthooran K A 2011PGP864

Shivendra Raizada 2011PGP876

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Introduction

Starbucks was established by Gerald Baldwin, Gordon Bowker and Ziev Siegl in 1971, as a

specialized arabica beans coffee shop in Seattle’s “Pike Place Market”. Later in 1982, the

company was sold by the owners to Howard Schultz, a member of the marketing team of the

company. The company was taken to its greatest heights by Howard Schultz who opened

several new stores and later went on to list the company as a public company in 1992.

By 1992, the company had 140 stores and had raised a capital of over $25 million.

The company has witnessed strong growth as compared to the industry, exhibiting above 5%

year on year growth even in recessionary periods. During 2002, Net Revenues stood at

$3,288.9 million having witnessed an increase at CAGR of 40% as compared to 1992

revenues. Net profits in the same duration had grown at a CAGR of 50%. In addition, total

number of stores had increased at a CAGR of 25.5% to reach 5,886 in 2002 from 1,886 in

1998.

Success Factors and Value Proposition

The success witnessed by Starbucks in its initial days can be attributed to the efforts of

Howard Schultz and his vision of coffeehouses as a third place apart from home and work,

where people can relax and enjoy good coffee. Also, the experiential branding strategy of

“Live Coffee”, could create a connect with the customers. The three components of the

strategy were:

Coffee quality: Since Starbucks operated through company owned stores and no

franchising it could control the quality of its products while maintaining consistency

in serving and other factors. Also, the company overlooked coffee bean growing and

other processes to ensure quality.

Service: Partners were trained on both “hard skills” and “soft skills” when hired to

work for a Starbucks retail store. This equal emphasis on the “hard” and “soft” skills

further highlighted Starbucks strategy to make the experience pleasant for the

customer. The “soft skills” were a way to teach the partners on how to connect with

the customer, by establishing eye contact, smiling and greeting them with their names

when the customers were regulars. In addition to that there was also the “Just Say

Yes” policy for which the partners went beyond company rules. These again created a

friendly environment for customers who felt special and in combination with the two

points mentioned above increased their customer satisfaction.

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Atmosphere: Schultz’s idea was to make Starbucks America’s “third place”. By

recreating the Italian coffee culture he met in Milan, he managed to make Starbucks a

place where people can enjoy their social interactions, relax, or just spent some time

by themselves. In essence, the Starbucks idea changed the norm from “buying coffee

as a drink” to “the experience of enjoying coffee”. People viewed Starbucks as a place

they wanted to be at and they spent as much time as they could in the stores. It was an

uplifting experience that was complemented with the layout designed to provide an

inviting environment

Apart from these components of branding strategy there were several other factors that

compelled customers to pay such a premium for the coffee consumed at Starbucks.

Product Variety and Customization: Starbucks offered a wide range of beverages to

choose from and also allowed to customers to tailor-make their own drinks. This

provided customers with greater freedom of choice and enhanced customer retention

as the customer did not get bored of the beverages.

Reach: Starbucks had over 4500 stores in North America itself and in some of the

most accessible locations (high-traffic, high-visibility setting) facilitating greater

product reach. Also, Starbucks provides selected product

Other In-Store Products: Apart from the usual Coffee line, Starbucks offers products

such as Food items, equipment and accessories, T-Shirts and other sources of

entertainment (Music CDs, etc.)

Other reasons for success were:

Partner Satisfaction: Schultz’s belief was that if the Starbucks employees were

happy, then this would lead to higher customer satisfaction. For this reason, Starbucks

partners were among the highest paid hourly workers, they enjoyed health benefits

and they had stock options. This resulted in one of the lowest employee turnover rates

in the industry and a consistently high employee satisfaction rate. Furthermore, the

majority of promotions for Starbucks were within its own ranks. Even though there is

no evidence that the satisfaction of partners led to customer satisfaction, it would be

safe to assume that the low employee turnover meant that partners stayed at their

positions for longer time, were more experienced in treating the customer and could

provide a faster service.

Specific target audience: Starbucks coffee in the 1990’s was targeted primarily

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towards the affluent, well educated, white collar people. These customers were

essentially connoisseurs of coffee who can differentiate between origin of coffee bean,

roasting process and production process, just by the look and aroma of the serving.

Such kind of customers eventually established a consumption pattern of high quality

and variety rich coffee. Being able to attract such an affluent demographic and serving

them by providing superior service, helped in being able to provide the service at a

consistent level and keep the customers satisfied

Attractive market: The concept of Starbucks was new and the notion of turning the

coffee drinking into a social experience was almost unexploited in the U.S. In the

early 1990’s Starbucks did not face fierce competition. The presence of other

coffeehouses such as Peet’s Coffee and Caribou Coffee and donut and bagel chains

such as Dunkin Donuts was insignificant and hence helped Starbucks succeed

With these factors Starbucks offered both tangible benefits that coffee offers such as taste,

aroma, alertness, concentration etc. and intangible benefits such as experience.

Problem Definition

The primary problem faced by Starbucks was the declining customer satisfaction scores. In

addition, market research revealed that there was very little image or product differentiation

between Starbucks and other smaller coffee chains in the minds of Specialty Coffeehouse

customers

Analyzing, the graphs given in Exhibit 7, it is evident that though company has steadily

increased its Customer Snapshot scores in parameters such as Services and Cleanliness, it has

failed in improving its product quality and Average Waiting time score which has been

constantly declining. Even after such a dismal performance, the company has been

increasingly given higher ratings in Legendary Service scores. This indicates that a larger

time is being spent in striking up a conversation with the customer and being responsive at

the expense of increasing average waiting time for all the customers. In addition, the

companies rating in attitude towards Starbucks has fallen in all respects such as High-quality

brand, brand I trust, worth paying for, best tasting coffee etc.

Customer Satisfaction Evaluation Method

The mystery shopper technique of evaluating customer satisfaction is apparently very

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subjective in approach and depends on the perception of the mystery shopper. Hence this is

not a very effective method. Also, customers should be broken down into regular and non-

regular to identify opportunities of increasing sales. Instead, all customers are taken together

and their satisfaction is evaluated which does not give a very clear picture. In addition, the

Legendary Service Scores are given on criteria which are again very subjective.

Rationale

The reason for this decline of sales could be attributed to the change in consumer profile

witnessed by the company. The new consumers visiting the coffeehouse are on an average 36

years old, having a lesser average income of $65,000 and reduced average cups of coffee per

week of 15. These new customers have apparently higher expectations from the store as

compared to customers who have been visiting the shop for more than 5 years. This is evident

from the fact that they have given lower score to Starbucks in various parameters as

discussed above. This indicates that it is not necessary that service quality of Starbucks has

fallen.

Moreover, since the number of consumers and coffeehouses has increased many folds over

the years, this may have led to dilution of value proposition of quality, service and

atmosphere. The expansion of menu items and customization of beverages may have also put

additional pressure on baristas and hence increased average waiting time and reduced quality.

Also, with increase in customers per shop, “customer intimacy” element was lost.

In addition, competition from other chains has increased over the years and hence satisfaction

levels from Starbucks store may have fallen as customers have other options to explore.

Correct calculations of satisfaction of customers are of extreme importance because of the

opportunity cost associated with an unsatisfied customer. An unsatisfied customer provides

sales of $15.13 per month as compared to more than double sales of $31.82 per month

provided by a highly satisfied customer. Also, a satisfied customer tends to remain associated

with Starbucks for a larger amount of time.

Changes in Starbucks – 1992 to 2002

During these ten years, Starbucks followed an expansionary policy and grew from 140 stores

to 4500 stores worldwide. It captured new markets and clustered existing markets. Starbucks

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basically chose locations based on whether the demographics of the area matched those of a

typical Starbucks drinker. It also considered aspects such as coffee consumption levels and

the intensity of competition. There were a few localities where Starbucks opened up more

than one retail outlets, even though Starbucks knew this would cannibalize the sales of the

existing outlet. This expansionary policy took away, to some extent, the ambience that

Starbucks used to provide earlier, and its customers started viewing it as a corporate

interested in making money instead of a relaxed place where one could enjoy good coffee.

In 1992, Starbucks’ menu was much simpler. A major chunk of its sales came from whole-

bean coffees. By 2002 Starbucks had added food items and beverages to its menu. On top of

that, Starbucks even started selling equipment and accessories at all of its retail outlets. The

complex menu resulted in slower delivery, which tarnished its image.

Earlier Starbucks used to mainly target the affluent, mid to upper class professionals, who

went to Starbucks to enjoy their coffee. Starbucks was viewed as a place where the Best

Coffee was served. By 2002 Starbucks’ target market shifted to younger, low income group

who viewed it mainly as a place to hang out with friends and have normal coffee, rather than

a place where one simply came to enjoy the good coffee in a great atmosphere.

Customer Behavior and Satisfaction

Starbucks initially catered primarily to affluent, well-educated, white collar patrons between

the ages of 25 and 44. But the customer base was evolving and the newer customers where

younger, less well-educated and in lower income bracket than the more established

customers. They visited stores less frequently. There was a direct link between customer

satisfaction and customer loyalty that was reflected in the number of visits per month and was

therefore linked to the profitability.

As it can be seen from the below table, the most frequent or ideal customer visited Starbucks

18 times a month. Assuming this customer is highly satisfied, this customer spends $4.42 on

an average on every visit and the average customer life is 8.3 years. The ideal Starbucks

customer brings an average revenue of about $954.72 per year or $7924.18 over its lifetime.

Also a highly satisfied customer who visits 7.2 times brings average revenue of $381.89 per

year or $3169 over the lifetime.

Customer Behavior by Satisfaction Level

Unsatisfied Customer

Satisfied Customer

Highly Satisfied Customer

Ideal Customer

Number of Visits per Month 3.9 4.3 7.2 18Avg. Ticket Size per Visit $3.88 $4.06 $4.42 $4.42

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Avg. Customer Life (yrs) 1.1 4.4 8.3 8.3

Total Revenue from Customer per Year $181.58 $209.50 $381.89 $954.72 Total Revenue over Customer Life $199.74 $921.78 $3,169.67 $7,924.18

Variation from Unsatisfied Customer $722.04 $2,969.93 $7,724.43 Variation from Satisfied Customer $2,247.89 $7,002.39

Also, it can be seen that satisfaction level is directly linked to revenues, which will eventually

lead to higher profits, therefore Starbucks should work on raising the satisfaction level of its

current customer base and make them visit its stores more frequently.

Starbucks should concentrate on reducing the gap between the score of key attributes and

customer expectation. Based on the rankings of the key attributes that create customer

satisfaction, Starbucks should ensure that its stores are kept clean all the time. Starbucks

should also place more emphasis in its partners utilizing their soft skills to treat the customers

as valuable.

Starbucks can also try to promote its stored‐value card (SCV) further and utilize the data

collected to speed up the service. The SVC will reduced transaction times, and the data

present can help the partner customized the order faster.

Analysis of the $40 million investment

Starbucks investment of $40 million is intended to increase customer satisfaction. The

number of customers that need to go from being satisfied to being highly satisfied can be

calculated as follows:

Difference in revenue per year between a highly satisfied and satisfied customer = $172

Investment in each store = $40 million / 4500 = $8,880

Break Even Customers per store = $8880 / $172 = 51

Average daily customer count, per store = 570

Starbucks needs to turn 51/570 = 9% of its customers from satisfied to highly satisfied in

order to break even.

However, the assumption is that speed of service is the number one driver for satisfaction and

that the additional labor will provide the increase of speed of service.

As we can see from the rankings of the key attributes by Starbucks customers, fast service

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come sixth in importance. There are other factors such as cleanliness and customer value that

holder higher importance.

Based on the company’s research, only 10% of the Starbucks customers have asked for a

faster, more efficient service. Even if the $40 million investment is made and customers get a

faster service, there is a big risk in losing value in some of the other perceptions. For

example, having more partners in the store might lead to loss of the personal treatment of

customers.

Also, not all stores are equal in size, number of people they serve and location therefore it

would make sense to allocate the money on the basis of the amount of resources actually

needed. There would be no need to invest in a store where all customers are highly satisfied

and there would be higher need to invest in a store where there is a high percentage of less

satisfied customers.

Recommendations

Starbucks should develop an internal strategic marketing group that would coordinate

actions of the market research group, the category group and the marketing group.

This would give the opportunity for Starbucks to get faster feedback from customers

and be proactive.

They should focus on improving efficiency of existing partners by removing non

value added task, simplifying the preparation methods and investing in new machines

like the versimo.

The proposed investment of $40 million should be carried out in phases. First

Starbucks should test idea by monitoring the results of proportional investment in

some stores. Also, the investment should be made as per each store’s requirement and

not uniformly across all stores.

Starbucks must also work on other parameters that are important to customers, like

cleanliness, value to customer, customer perceptions and image or product

differentiation.

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Documents

MKII Section C Group 6 Starbucks