Analysed ByMohit Malviya

Kunal AssudaniAniket Bushal

Starbucks: Delivering Customer Service

Howard Schultz’s idea with Starbucks in the mid 1980’s was to create a chain of coffeehouses with a product differentiation of specialty “live coffee”, service or customer intimacy with an “experience”, and an atmosphere of a “third place” to add to their work and home alternatives.

The original stores sold whole beans and premium-priced coffee beverages by the cup and catered primarily to affluent, well educated, white-collar patrons (skewed female) between the ages of 25 and 44.

Sales were comprised as follows:

Beverages

Food Items

Whole Bean Coffee

Equipment & Ac-cessories

Food Services

Domestic Retail Store License

Speciality Revenue

Product Mix with % sales Other- 15% Revenue Source

The company spent minimal dollars on advertising to promote a brand concept.

Enforced exacting coffee standards by controlling the supply chain as much as possible, and maintain control over the operations at the retail level.

Starbucks research indicated that customers did perceive many independent coffee houses as a “third place”, but Starbucks was seen more as a convenient, quick, and consistently good coffee provider. This is in contrast to the way Starbucks management viewed the company.

By 2002, there were over 5,000 stores around the globe.

Background and Problems The specialty items included strategic alliances with Pepsi

Cola to sell alternative beverages, Dreyer’s to develop and distribute a line of ice cream, Kraft Foods handled sales of coffee and alternative products to warehouse clubs, and various grocery store chains for their coffee.

Baristas (employees) were encouraged to interact with customers in a friendly and prompt manner, and were paid higher than average wages and benefits. Employees were considered partners and promotions were usually from within the company.

Recent indications were that customer satisfaction was declining due to the time required to be served and employee attitude. Starbucks had a system set up to track customer satisfaction

While Starbucks was the largest specialty coffee chain, many other chains competed directly with Starbucks, and many other chains could at any time enter retail specialty coffee sales (e.g. Dunkin Donuts, convenience stores, and many similar retail food stores.

Background and Problems New innovation was based upon partner acceptance.

Customers rated the new innovations as being much lower in importance than customer service, yet Starbucks was placing a high importance on developing them. Many new products were introduced which greatly expanded the menu items available.

Baristas jobs were complicated by the fact that many products required numerous steps to complete the order.

They had installed automated espresso machines in some stores for the customers use to reduce wait time.

Introduced a prepaid card that could be used to pay for products in the stores.

Starbucks had no centralized marketing program. Sales data was accumulated, and it was the responsibility of management to request that specific data be analyzed.

The goal of Starbucks was to expand store openings as rapidly as possible. They were opening almost 3 new stores a day.

Background and Problems

New stores cannibalized existing store sales, but Starbucks did not see that as an important issue.

There was very little image or product differentiation between Starbucks and competing chains.

The newer customers were younger, less educated, in lower income brackets, had less frequent visits, and had a different perception of Starbucks.

Concern had been expressed that Starbucks had lost the connection between satisfying our customers and growing the business,

Starbucks wanted to serve the customer within 3 minute time window. Is that going to add customer loyalty?

Starbucks wanted more handcrafted time consuming choices for consumers. Is that going to add to customer loyalty

Starbucks sees themselves as selling innovative products, do the customers see them this way or as a specialty coffee commodity store?

Background and Problems

Rise of coffee consumption in the US with the largest growth being that of specialty coffee.

Starbucks had no operations in 6 states, and was operating in only 150 of 300 metro areas.

In the home segment, specialty coffee was estimated to be 3.2 billion. Starbucks only had 4% of this market.

The opposing chart depicts the total coffee market, and the representative share of specialty coffee.

Specialty Coffee Market

Traditional Market

2002 Estimate - $21.5bStarbucks- 42% share in specialty

Alternatives & Evaluations1. Redefine their marketing strategies starting with a

proper research and evaluation of what the customer wants. Starbucks has lost track of the customer when their determination of what is served to the customer is determined by what makes the barista happy.

2. Analyze the customers, and potential customers through their specialty sales to see the impact upon current or potential retail sales in stores. Out of store sales is obviously helping drive Starbucks retail sales. 40% of the new customers have tried Starbucks products prior to coming into the store the first time. How do we increase these sales? Is it because of the coffee purchased at the grocery stores? Did they find what they expected when they tried the Starbucks retail store?

3. Research customers who do not frequent Starbucks, or who have never been inside a Starbucks store to determine why. What is their perception of Starbucks? Do they drink coffee or specialty coffee? What would get them to try it for the first time?

Alternatives & Evaluations4. Create a centralized marketing department which can

attempt to coordinate all marketing efforts. There appears to be a lack of harmony between collecting data and the proper evaluation of the data. The snapshot methodology they used may not reflect a universal measure of customer satisfaction.

5. Analyze the innovative sales to determine the effect on labor costs to determine if the sales support the costs and the potential decrease in the time available to quickly serve the customer. Case research indicates that innovative products are not as important to the customer as quick and pleasant sales. Are these sales actually impeding the object of quick and pleasant sales without providing important income? Their marketing product mix may be inappropriate.

6. Concentrate new store openings in areas that would not cannibalize existing sales. There are many areas that Starbucks is not in. Why cannibalize?

Alternatives and Evaluations7. Advertise more to establish the branding of Starbucks.

Why is Starbucks different? While Starbucks may think they know what distinguishes Starbucks from others, they should do more research and develop a real strategy prior to initiating any major advertising campaign. They have developed over time, and their customers are different than before.

8. Quick term fix to add more employee hours to reduce wait time, although this should be allocated according to an established need per store. The quick, convenient, and friendly service are obviously important based on customer satisfaction surveys. For the short term this obviously should be addressed and fixed. At some point, the product mix should be addressed to help reduced wait time.

Alternatives & Evaluations & Solutions

9. Separate serving customers with customized orders from those which will require less time, such as the customer just wanting coffee. Use the more experienced baristas to handle the more complicated orders. The layout of the new stores that are opened could more utilize this concept.

10. Extend the utility of the cards by embedding RFID tags to identify the customer and the orders to add to a database.

11. Introduce more customer operated machines to reduce wait time.

12. Use additional advertising for sales of coffee in grocery stores. Their 4% of home specialty coffee sales appears very small. Nestle exited specialty coffee in grocery stores during this time frame. There was a large void of specialty coffee in grocery stores. A concentrated effort in this type of distribution could have established more sales and some brand loyalty for coffee. Peets is a competitor chain in the California area. They see no difference between grocery store sales and their retail store sales per an interview with Patrick O’Dea. They have achieved considerable brand loyalty for a limited number of coffee lines, and charge a higher per unit sale price than Starbucks. Peets does not see innovative sales as a big option.

SOLUTIONS Starbucks should pursue all of these alternatives Starbucks appears to consider competition as minimal,

and that they are somewhat insulated. Probably, entertaining either idea is a strategic mistake.