Starbucks: Delivering Customer Service

Situational Analysis Customers: Affluent, well-educated, white-collar patrons(skewed female)

between the ages of 25 and 44 Most loyal customers visit Starbucks as often as 18 times a month,
but typical customers visited just 5 times a month Context:

Stores located in high-traffic, high-visibility settings such as retail centers, office buildings and
university campuses Along with whole-bean coffees, company-operated stores also sold rich-brewed
coffees, Italian-style espresso drinks, cold-blended beverages, premium teas, pastries, sodas, juices,
music CDs, games and seasonal novelty items Beverages accounted for the largest 77% of sales in
stores. This represented a change from 10 years earlier, when about half of store revenues had come
from sales of whole-bean coffees. Company encouraged promotions within its own ranks. About 70%
of the company’s store managers were ex-baristas, and about 60% of its district managers were ex-
store managers

Not easy to strike up a conversation with customer as before because today every customers orders
a handcrafted beverage Coffee consumption was on rise in the United States. More than 109 million
populations drank coffee every day, and an additional 52 million drank it on occasion. Consumption of
specialty coffee was rising and it was estimated that about one-third coffee will be consumed outside
of the home New product development process took 12-18 month cycle and its success mainly
dependent on partner acceptance Starbucks’ customer base was evolving. Newer customers tended
to be younger, less well-educated and in the lower income bracket.

Company:

Dominant specialty-coffee brand in North America

Starbucks owned close to one-third of America’s coffee bars, more than its next five biggest
competitors combined Serving 20 million unique customers in well over 5000 stores around the globe
and was opening on average 3 stores a day Starbucks operated over 300 company owned
international stores and about 900 licensed stores across globe Marketing consisted primarily of point-
of-sale materials and local-store marketing(Most fast-food chains had marketing budgets in the 3%-
6% range) 11 consecutive years of 5% or higher comparable store sales growth Excellent
product(coffee), awesome service and lounging environments were the three components of branding
strategy Starbucks controlled as much of the supply chain as possible Lowest employee turnover
rate(70%) compared to industry average of 300% Partner satisfaction rate consistently hovered in the
range of 80% to 90% range

Complementers:

Starbucks worked directly with coffee growers to purchase green coffee beans JV with Pepsi-Cola to
distribute bottled Frappuccino beverages in North America and partnership with Dreyer’s Grand Ice
Cream to develop and distribute a line of premium ice creams

Competitors:

Regionally concentrated small-scale specialty coffee chains differentiated itself on the basis of store
environment and freshest coffee Starbucks also competed against thousands of independent
specialty coffee shops which also sold beer, wine and liquor. Some of them offered satellite
televisions, internet connected computers. Donut and Bagel chains like Dunkin Donuts with 3700
stores also competed with Starbucks. It has started offering flavored coffee and non-coffee
alternatives

SWOT Analysis

Criteria examples

Starbucks was operational in retail centers, office buildings and university campuses.

Starbucks took care of its employees through Health Insurance and Stock options.

Starbucks introduced at least one new hot beverage every holiday season

Starbucks sales were increasing at a CAGR of 40% Strengths

Starbucks had company operated stores located in high-traffic, high-visibility settings. The employee
turnover rate was lowest at Starbucks with only 70% turnover when compared to the industry average
of 300%

Starbucks invested highly on innovations.

Strong financial foundations with since the company had gone public Weaknesses

Customer satisfaction is decreasing and Starbucks is losing the customer loyalty.

Self-cannibalization of at least one third of Starbucks stores everyday

Customer snapshot score not showing reality

Criteria examples

The perception of Starbucks Brand Image in the Recent Findings of people’s experiences: Starbucks
cares primarily about making money - from 54% to 61%. Starbucks cares about building more stores -
from 48% to 55% Starbucks strategy for expanding in retail business was to open stores in new
markets while geographically clustering stores in existing markets. There is service gap between
Starbucks scores on key attributes and customer expectation.

Criteria examples

More than 109 million people now drank coffee every day and an additional 52 million drank it on
occasion. Company was only in 150 of the roughly 300 metropolitan statistical areas in the nation. In
the southeast there was only one store for every 110000 people compared with one store for every
2000 people in the pacific northwest.

Opportunities

Coffee consumption was on the rise in United States. Company has the opportunity to cover 150
metropolitan areas in the nation. It could open new stores in existing markets where saturation level
was not high.

Threats

Increasing consumer perception that Starbucks only cared about the money. New customer
perceived that Starbucks is not so high quality brand. Very little image differentiation between itself
and smaller coffee chains.

Criteria examples

Number of respondents who strongly agreed with the statement that Starbucks cared only about the
money increased from 53% to 61%. Only 34% of new customers believed it to be a high quality
against the established customers whose 51% proportion believed it to be a high quality brand. There
was very little image or product differentiation between Starbucks and the smaller coffee chains.

Problems Statement:

Customer satisfaction is decreasing and Starbucks is losing the customer loyalty. Data revealed that
they are not meeting customers’ expectation in the area of customer satisfaction Complexity of job
increased because of customized demand, which slow down the service for everyone else Starbucks
lacked strategic marketing group. Organizational structure meant that market- and customer- related
trends could sometimes be overlooked. Data were not used judiciously to take marketing decisions.

Little image or product differentiation between Starbucks and the smaller coffee chains in the minds of
specialty coffeehouse customers Increased doubts over clearly communicating values

Newer evolving customers visited the stores less frequently than the established one and their
perceptions regarding high-quality brand, tastes, quality were also on down swing Possible
alternatives:

1. Invest additional 20 hours of labor, per week, per store, at a cost of an extra $40 million per year to
improve speed-of-service and thereby increase customer satisfaction. 2. Focus on Product innovation
& Retail expansion as growth strategy.

Evaluation of alternatives:

The company’s most frequent customers averaged 18 visits a month while the typical customer
visited just five times a month. The following can be analyzed from the customer visit frequency data:
21 % of customers visits 8+ times/month and contribute 62 % of the Starbuck Transaction 37 % of
customers visits 3-7 times/month and contribute 27 % of the Starbuck Transaction 42% of customers
visits 1-2 times/month and contribute 11 % of the Starbuck Transaction

Average Weekly revenue per store = 15400 Average Annual revenue per store = 800800(15400*52)
Average No. of transactions per store = 208000(800800/3.85) Average No. of transactions per
customer per month = 5 Average No. of transactions per customer per year = 60 No. of Ideal
Customer per year = 3467 No. of Highly Satisfied Customers = 728 No. of Satisfied Customers =
1282 No. of Un-satisfied Customers = 1456 Contribution of Highly satisfied customer per year =
$381.88 Contribution of Satisfied customer per year = $209.4

Difference in contribution of highly satisfied customer & satisfied customer = $172.3 Investment per
store(assuming it is done in 4574 stores) = $8745 No. of customers converted from satisfied to highly
satisfied who will contribute the margin ~ 50( 4 % of the Satisfied Customers) We can see that the
$40M investment on the stores ($8475 per store) can be recovered if we can convert 50 “satisfied”
customers to “highly satisfied” customers from the 3467 customers that visit the store every year.

Proposition and our stand

Starbucks should make the $40 M investment to improve the speed of service which will increase the
customer satisfaction. This will increase customer loyalty barring which there is a possibility that the
‘highly satisfied’ and ‘satisfied’ customers might become ‘Unsatisfied’ customer. They should create a
strategic marketing group that would collaborate the efforts of market research group, category group
and marketing group. They should improve the metrics to measure the service performance.

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