Marketing II

Case Analysis on Starbucks: Delivering Customer Service

28th December, 2011

Submitted by, Group 5, Section F Akshat Saxena Amit Kumar Aparajit S Himadri Basumatary Kiran Benny Shruti S Subhanan Sahoo

Introduction
In 1971, three coffee fanatics Gerald Baldwin, Gordon Bowker and Ziev Siegl opened a small coffee shop in Seattles Pike Place Market. The shop specialized in selling whole Arabica beans to a niche market of coffee connoisseurs. In 1982, Howard Schultz joined the marketing team. Schultz was fascinated by Milans coffee culture and the role of espresso bars in the Italians social lives. Schultz soon took over the company and began opening new stores. By 1992, the company had 140 such stores that sold whole beans and premium-priced coffee beverages. By 2002, Schultz had established Starbucks as the dominant specialty-coffee brand in North America. Sales had grown at a CAGR of 40% since going public and net earnings had risen at a CAGR of 50%. In 2002, Starbucks recorded around $3.3 billion in revenues and $215.1 million in net profits. The total number of stores, both in the US and abroad including company-operated stores and licensed retailers, had risen to 5886.

Situation Analysis & Starbucks Value Proposition

Early Days
The vision of founder, Howard Schultz, has contributed in a large way to the success of Starbucks in the early 1990s. Schultz wanted to make the customer the centre of its success and wanted to change the coffee drinking experience in the US. To achieve this, Schultz successfully utilized his human resources by establishing benefits that would enable all employees of Starbucks (called partners) to create value in the process of the coffee drinking experience. Starbucks always placed value to the customers first in its value proposition. This was one of the prime factors for their success. Starbucks value proposition is compelling because it places the customer and the service delivered to the customer above everything else. Even thou gh Starbucks is a retailcoffee store, the value proposition is not about the coffee exclusively but about the coffee culture and the experience of drinking coffee. With its value proposition, Starbucks not only focuses on the tangible benefits that coffee offers, such as taste, stimulation and alertness but also concentrates on the quality of its coffee and the intangible benefits of the experience of drinking Starbucks coffee. Starbucks value proposition is not about coffee, it is about the experience of drinking coffee in a Starbucks store integrating the product with the emotional benefits.

Target Market
Starbucks targeted customers who tended to be serious coffee lovers white collar, affluent, well-educated, often female, typically between the ages of 25 and 44 who were looking to indulge themselves by paying a premium price for a premium coffee experience. These consumers embraced the premium coffee lifestyle that Starbucks was trying to promote and quickly became part of the live coffee culture.

Value Proposition
Starbucks tightly-integrated value proposition was perfectly aligned with the needs (both utilitarian and emotional) of a carefully-conceptualized target market. This value proposition consisted of three primary elements

Great Coffee Ambience Customer Intimacy

1. Great Coffee When Starbucks was introduced, there were not many alternatives for consumers interested in premium coffee. Thus, Starbucks highest quality coffee in the world formed the core of a highly-differentiated value proposition. 2. Customer Intimacy and Service Philosophy At Starbucks, great service was defined as customer intimacy. The goal was to give each customer a sense of belonging by personalizing the experience as much as possible. This service philosophy permeated Starbucks hiring philosophy, which focused not just on hard skills (how to make the drinks), but on soft skills (how to treat customers in a friendly,

individualized way) as well. In this regard, the baristas were expected to be knowledgeable coffee experts who offered warm, personalized service. 3. Physical Atmosphere The company made sure that the environment in each of its coffee houses was just right. Each Starbucks location had seating areas to encourage lounging and layouts that were designed to provide an upscale yet inviting environment for those who wanted to linger. Tight control over store ambience and operations was maintained always. By appealing to this target customer with a unique value proposition, Starbucks was able to establish a brand position that was head-and-shoulders above the existing competition.

Consumer Behaviour
Consumers tended to lounge around in the coffeehouses while they drank their coffee. They liked the ambience and felt it added to the overall coffee-drinking experience. Some of them even made it a habit to drink Starbucks coffee (like doing the Sunday crossword while enjoying a hazelnut latte). Starbucks also became a good hangout spot and people liked to go to a coffeehouse, whether it be for a meeting, or just a catch-up with friends or even if just to get some time alone to themselves. Many of them also struck up a chord with the baristas and engaged in conversations with them.

Customer Snapshot
The Customer Snapshot was an important measurement tool used by Starbucks. It was a mystery shopper program where every store was visited by an anonymous mystery shopper at least three times every quarter. The mystery shopper rated each store on four Basic Service criteria Service Cleanliness Product quality Speed of service

In addition to this, stores were also related on Legendary Service, which was behavior that made a customers visit truly memorable.

Competition
In the United States, Starbucks competed against a variety of small-scale specialty coffee chains. Most of these chains were regionally concentrated. None of them had the scale of

Starbucks. It also competed against thousands of independent specialty coffee shops. Some of these independents offered a wide range of food and beverages too. Starbucks also competed against donut and bagel chains like Dunkin Donuts. Dunkin Donuts had over 3700 stores in 38 states and attribute almost half of its sales to coffee.

Caffeinating the World

1. Retail Expansion In 2002, Starbucks had over 4500 stores scattered throughout the U.S and internationally. Over the years, Starbucks had established itself as the number one coffee store in the U.S by following an expansion strategy. Starbucks had stores in 42 of the 50 states and was continuing this expansion strategy in order to capture new markets and cluster existing markets. Starbucks retail expansion strategy consisted of the company selecting locations based on whether the demographics of an area matched the profile of a typical Starbucks drinker, the level of coffee consumption and the nature and intensity of competition. An important component of this strategy was that Starbucks did not mind cannibalizing the sales of its stores as long as the incremental sales resulting from the opening of a new store were higher than before. 2. Product Innovation The company had added new products such as food items and new beverages in its menu and also sold equipment and accessories. In addition to that, the company introduced at least a new beverage every holiday season. The new product development process typically ran on a 12 to 18-month cycle. An important aspect of new products was partner acceptance and this was given priority for all new products. Recently, the most successful innovation had been the introduction of the Frappucino line of beverages. 3. Service Innovation One of the most successful non-product innovations had been the introduction of the storevalue card (SVC). This prepaid smart card could be used to pay for transactions in any Starbucks store in North America. More such innovations were on the way, like the T-Mobile HotSpot wireless internet service.

Changing Scenario
As a result of its extraordinary growth, however, Starbucks had changed in a number of ways. 1. Accessibility

Starbucks retail footprint has dramatically increased. The company has undergone huge expansion and has also been experimenting with new retail formats such as drive-throughs. Also, 15% of its net revenues now come from non-company-operated retail channel like airplanes, hotels and restaurants, supermarkets and warehouse clubs, and the Internet. 2. The Changing Customer The profile of the typical Starbucks customer has also changed. Starbucks newest customers tend to be younger, less affluent, and less sophisticated than its original customers (see case Exhibit 8), and they are undoubtedly bringing an entirely different set of expectations to the brand. Although the case is not explicit about who these new acquisitions are, students should be able to figure out that many of them are commuters, and a huge number of them (about 40%) have already experienced the Starbucks brand through other routes (case p. 4); in other words, Starbucks various non-coffeehouse channels its distribution through kiosks, supermarkets, airplanes, and restaurants have become important customer acquisition tools for the company. 3. Increasing Product Diversity A greater percentage of Starbucks revenue now comes from hand-crafted beverages. The fact that new beverages are launched on a regular basis means there is much more menu complexity compared to earlier. Also, the menu now includes a number of drinks for the noncoffee drinker. Thus, many of Starbucks drinks are now targeted to a much more mainstream consumer opposed to earlier when the companys target customer was limited to the coffee loving fanatic. 4. Increasing Pressure on Baristas Rapid growth has led to a certain degree of inconsistency among baristas. All of Starbucks partners are not coffee experts anymore. Also, mastering the hard skills has become more difficult because there are so many more drink variations for baristas to learn. Another point to be noted is that many customers now order a hand-crafted beverage. This leads to tremendous pressure on the baristas to serve drinks as quickly as possible, leaving little time for striking up conversations. These changes have caused some tension between the companys value propositions and the current strategy the company is following. Starbucks new customers have also developed a different set of perceptions about the Starbucks brand. It is also given that new customers are less likely to consider Starbucks to be a high-quality brand, less likely to trust Starbucks and less likely to consider its products worth paying for.

Thus, there is a conflict between the strategic intentions of the company and the core values of the company. This needs to be sorted out soon as the customer satisfaction seems to be on the decline and this slide needs to be arrested as soon as possible.

Problem Identification
One of the main problems as seen in the above situation analysis is the declining customer satisfaction levels and the deterioration of the Starbucks brand image. This has happened mainly due to changes in the consumer behaviour and is also a by product of the massive expansion carried out by Starbucks.

Problem Analysis
The biggest challenge facing Starbucks is the fact that it is no longer generating high levels of customer satisfaction among its patrons. This realization is disturbing because at Starbucks, customer satisfaction is directly tied to the bottom line. The economic payoff for increasing customer satisfaction can be calculated as follows Unsatisfied 3.9 46.8 3.88 181.58 Satisfied 4.3 51.6 4.06 209.496 Highly Satisfied 7.2 86.4 4.02 347.32

Visit/month Visit/year $ per transaction Revenue/year

Difference in revenue per year for the Unsatisfied and the Satisfied Customer is = $28/yr Difference in revenue per year for the Satisfied and Highly Satisfied Customer is = $172/yr Unsatisfied 1.1 200 Satisfied 4.4 922 Highly Satisfied 8.3 3170

Avg Life Revenue/ Life

According to this calculation, the annual value of a highly satisfied customer is $172 more than the annual value of a satisfied customer, and $200 more than that of an unsatisfied customer. Meanwhile, the lifetime value of a highly satisfied customer is $2,248 more than the lifetime value of a satisfied customer, and $2,970 more than the lifetime value of an unsatisfied customer. Given this, it is clearly in Starbucks interest to raise its customer satisfaction score s. Based on the analysis above, Starbucks original service philosophy is having trouble simultaneously meeting the expectations of its new acquisitions and its established customers.

This problem is exacerbated by the fact that the behaviors and expectations of each customer segment are negatively impacting the experience of the other. Established customers who ask the baristas to prepare an extremely customized beverage end up slowing down the service for rushed commuters, who want to be able to dash into the store for a latte to take to work. Conversely, a long line of commuters crowding the store during the morning rush hour destroys the third place ambience that established customers are looking for. Thus, because the two different customer types define great service in very different ways, many of the sources of dissatisfaction can be traced to a clash between customer bases.

Established Customers
want a peaceful ambience want friendly employees want their customized beverages prepared just right

New Acquisitions
crowd the store, create a rushed environment make the employees grumpy put pressure on the baristas to rush

This balancing act is made even more difficult by the fact that the same customer can take on different characteristics at different times of the day or week. While customers evaluate their Starbucks experience on the basis of attributes like convenience (77%), fast service (65%), and appropriate prices (65%), they also evaluate their Starbucks experience on the basis of attributes like treated as a valuable customer (75%), and friendly staff (73%). While customers would like to see Starbucks offer a friendlier, more attentive staff, they would also like to see Starbucks offer faster, more efficient service. These same tensions are even reflected in Starbucks current customer service metrics, which include factors like service (friendliness), product quality (order accuracy), and speed of service. These metrics are to some extent self-contradictory and internally inconsistent because: The more friendly the baristas are, the slower the service tends to be The more time the barista takes to make sure the order is filled exactly right, the slower the line tends to be

The legendary service metric which encourages partners to initiate conversations with customers is at odds with the companys three-minute service goal.

In sum, the combination of new customer acquisitions, increased product complexity, and customer customization demands has created a vicious cycle in which lines at Starbucks have become longer, there is less time for the baristas to chat, there is greater employee turnover, and there is increased customer dissatisfaction. Starbucks brand image is also starting to show signs of strain. A growing number of consumers view the Starbucks brand as being corporate (42%), and associate the brand with greed (61%) and store expansion (55%). Even the more positive brand attributes that consumers associate with the Starbucks brand reflect a shift from the old Starbucks image.

Old Image (1992)

the best quality coffee available a third place a sanctuary from the real world

New Image (2002)

good coffee on the run place to meet and move on convenient, accessible, and consistent Exacerbating the brand pressure on Starbucks is the fact that the competitive landscape looks very different in 2002 than it did in 1992. For example, in the early 1990s, the respective customer bases of Starbucks and Dunkin Donuts were completely different. But in 2002, growth is forcing both chains to encroach on each others customers . Certainly, there is still significant differentiation between the two brands Dunkin Donuts is still about food, Starbucks is still about coffee. At the same time, Starbucks cannot afford to ignore Dunkin Donuts coffee strategy altogether. Meanwhile, no high-end national coffee chain competitor has been able to take advantage of Starbucks brand dilution and service decline. The regional chains are simply not large enough to pose a significant threat. However, the case does provide evidence that the independent coffeehouses may be siphoning off some of the hardcore coffee-lovers in the market by offering a more authentic coffeehouse experience than Starbucks corporate, cookie cutterlike outlets.

STARBUCKS Convinient,High Quality coffee in a clean comfortable seating

DUNKIN' DONUTS Increasing number of flavoured coffee alternatives

Objectives
Long term objectives
The long term objectives of Starbucks are to provide customers with a coffee-drinking experience and achieve high levels of customer and partner satisfaction. They also have massive expansion plans, with an aim to have 10000 stores in the US and 15000 stores internationally.

Short term objectives

The immediate problem at hand is the declining customer satisfaction and the potential harm to the Starbucks brand image. There is also a $40 million proposal on the table and it needs to be seen if this proposal will be effective and useful.

Options Available
Maintain status quo and do not take up the $40 million proposal Changing the whole experience by quicker service, and extra 20 hours of service by investment of $40 million per year Putting in place more Verismo machines as done in few of the stores More new innovations and offerings, new products in place to boost sales SVC cards, matching the changing trend of consumers Allowing more workforce per store to tackle peak hour demand gap Managing store clustering

Criteria for Evaluation of Alternatives

a. b. c. d. e. f. Changing customer requirement Speed/Responsiveness of customer service Experience provided to customers Ease of implementation Measurement of customer satisfaction Long term vs. short term impact

Evaluation of Alternatives
As Starbucks did not have a specialized marketing or strategy department, they needed direction in their thinking. They needed to deliver customer satisfaction to a varied range of customers and had to address the changing needs of the customers. Also, they need to balance the economic value of the various segments and the brand image that is facing the challenge of dilution as per the surveys. To tackle this, they need to have a proper balance between the new customers, that give scope for growth, and the established customers, who look for the experience that Starbucks provides as the third place concept. If status quo is maintained, then the $40 million proposal will not be implemented. As per the market research, in such a case, the sales will go down. The CFO and finance department will be happier as the bottom line wont get affected in the short run, but in the long run th e implication will be adverse. The Verismo machines will definitely make the experience faster and will help satisfy the onthe-run customers. The baristas will be able to tend to the customer even without extra cost on labour force but the feasibility of this plan in not properly known in all the places. Though it is a very good option, the implementation issues are not known. More innovative products like the Frappucino will help maintain a pull for the new product that will keep the sales high. This could adversely affect the baristas as they will have more offerings added to their over-burdened work, so this has to be accompanied with other efficiency measures. SVC cards are the solution to the frequent visitors who do not have time to wait and generally look for convenience. The payment system can go along with the new customers who prefer fast service, and are on the go. And as these are gifted to people by present customers too, it can help broaden the customer base.

As Starbucks pays its workers on hourly basis, another alternative can be to have less trained workers just to help in the rush hours. This will help customers have a better experience even during the rush hours. Managing store clustering in the nearby areas, though it helps ease the working of the individual stores, it also cannibalizes the share of one another. So there is a trade off to be addressed. It has also led to the dilution of the brand image as per the survey. People dont think of it as different from any ordinary coffee outlet now. Thus, choosing locations more judiciously to open a store will help revamp its brand image. The major alternative is to invest in the $40 million proposal. If Starbucks makes the $40 million investment in labor for its 3496 stores, the investment comes to be about $40 million/ 3496 stores = $ 11.4 k per store Since the goal is to increase customer satisfaction, this translates into number of customers that need to go from being satisfied to being highly satisfied. We can observe that the difference in revenue per year from a highly satisfied to a satisfied customer is about $172. Satisfied customer 4.3 $4.06 $17.46 $209.50 Highly satisfied customer 7.2 $4.42 $31.82 $381.89

Number of Starbucks visits/ month Average ticket size/ Visit Total revenue/ month Total revenue/ year

Difference between revenue of Satisfied Customer vs. Highly Satisfied customer = $172.39 So, the break-even point (BEP) for Starbucks will be given by $11,400/ $172 = 67 Thus, Starbucks needs to convert 67 of its satisfied customers to highly-satisfied. Now the numbers of customers that visit in a one year period are Per store revenue each year is $759k Average ticket size is $4.06 Transactions per year in each store is $759/$4.06 = 186.95k If the average customer visits 5 times per month = 60 times per year So, total number of customers = 186945/60 = 3115.76 = approximately 3116 customers per store in a year We know that the average yearly customer count per store is 3116. This means that Starbucks needs to turn 67 of 3116 or 2.15% of its customers from satisfied to highly-satisfied in order to break even. There are however some major assumptions that are being made. These assumptions are

The speed of service is the major driver for customer satisfaction and that the additional labor of 20 hours per week will provide the increase of speed of service for sure. This may not be true. As we can see from the rankings of the key attributes by Starbucks customers, fast service ranks only number 6 in importance. All stores are equal in size, in the number of people they serve and that all the stores need this additional investment. Satisfaction is correlated with loyalty and that if a satisfied customer becomes highly satisfied then the number of visits per month to the store will increase along with his ticket size.

If the situation doesnt take a turn for the better and customer satisfaction does not improve, an alternative method for Starbucks would be to acquire new customers. In this case, 7 more customers should be acquired by each store every day to break even. This translates to an additional 32,000 customers in aggregate per year for all the stores. Alternatively, if the number of customers remains the same, $0.05 additional should be spent by each customer in each visit in order to break even. This means the average ticket of each transaction has to be increased by $ 0.05. Current situation Average hourly rate Total labour hours per day, per store Labour cost/ day, per store Average ticket Average daily customer count Revenue Revenue Labour Cost $9.00 51.4 $462.6 $3.85 570 $2194.5 $1731.90 Breakeven customer count $9.00 54.3 $488.70 $3.85 577 $2220.6 $1731.90 Breakeven ticket size $9.00 54.3 $488.70 $3.90 570 $2220.6 $1731.90

As per the market research, it is found that 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 customers who come for an experience. Thus, a proper identification mechanism should be in place. Having more partners in a store might lead to the risk of less attentive, less friendlier staff and may create a situation leading to the loss of the personal treatment. It is impractical to allocate the $40 million equally

to the 3496 stores. It would be better to allocate the money based on number of customers visiting, size of store, location, taking into consideration of any nearby stores and need for more labor. It would be a waste to invest in stores where all customers are highly satisfied and it would be of higher urgency to invest in stores where there are a high percentage of less satisfied customers or unsatisfied customers.

Recommendations
Based on the above evaluation, Starbucks should invest in labor wherever needed and in the adequate amount needed. One better way to do that would be to do a more thorough analysis of its customer base, profile, and requirements and identify locations where people are less satisfied because of the speed of service and invest in those particular locations. If they maintain a database of customers past orders and if possible complaints etc, they can serve them according to their requirement. If someone is visiting for an experience, they should not be rushed by providing speed-service and vice versa. Along with this, it would be a good idea to establish an internal strategic marketing group and a dedicated marketing group, which they dont have now, that would coordinate actions of the market research group, the category group and the marketing group. This would allow them to get feedback from customers and implement those swiftly. The money could also be spent on better training of partners soft skills in order to ensure that the customers are treated in the original Starbucks way. It also appears that Starbucks has a lot of other problems that they need to tackle. They need to reevaluate their value proposition, examine how their expansion strategy has led to the deterioration of their brand image and find new ways to satisfy the customer.