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DIVINE WORD COLLEGE OF LAOAG

SCHOOL OF BUSINESS AND ACCOUNTANCY

CHAPTER 1

THE PROBLEM

Rationale

The consumption of coffee has become a common and popular social

activity all around the world. In postmodern society, it encourages coffee to

use in many aspects of life. As a result, drinking coffee in social

environments has become more than just a cup of coffee. It signifies a place

in leisure time, business meetings, and the meditation of people.

Coffee shop businesses have become a popular industry in the

corporate world. However, the commencement of new coffee shops has

increased in the market, resulting in tight competition in the industry.

Coffee shops compete with one another on a local, national, and

worldwide level in this competitive environment. As a result of competition,

customer satisfaction and brand loyalty have been critical to the survival of

each coffee shop. Furthermore, the changing nature of the demand of

customers and requirements intensifies the competition. As a result, coffee

shop owners must track how their customers' demands and requirements

vary over time because shifting trends directly impact customer satisfaction

and brand loyalty, leading to increased sales, business growth, and word-

of-mouth advertisement (Ahmed et al., 2022).

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In the Philippines, consuming coffee has been a long common

occurrence. According to history, coffee was first brought to the country

about two centuries ago. Locally, it is also a source of income for many

farmers and businesses (Tan, 2021). Moreover, coffee is the world's second

most traded commodity, behind petroleum (Chengappa & Devika, 2017).

Furthermore, Filipinos have acquired or experienced a great connection to

their favorite coffee shops. In the study by Tumanan and Lansangan (2012),

most respondents (46 percent) answered that going to coffee shops for

drinking and dining is their top motivation. Other reasons include relaxation,

work, or study, although 81 percent of respondents regard coffee shops as

a public gathering places.

Coffee is one of the most popular drinks in the Philippines, and it is

becoming more popular across the world. Coronavirus disease (COVID) -19

forecasts that the country's love and purchasing of coffee will recover to pre-

pandemic levels and exceed them by the year 2025. Although consumption

decreased during the pandemic, it is anticipated to recover and increase

further by the year 2025; yet, in 2020, the average Filipino consumed 3.05

kg of caffeinated beverages. Furthermore, Filipinos adore coffee, and while

the country has long been known for its love of instant coffee, there is a

rising number of coffee shops and an increased appreciation for specialty

and brewed coffee (MacDonnell, 2022).

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As the number of coffee shops increases, the market becomes

saturated (Lee & Kim, 2016). This rapidly increasing alert owner or manager

must understand the needs of customers in order to satisfy them and

convince them to return. As a result, every owner faces a high failure rate

due to the numerous competitors from franchise brands, independent coffee

shops, non-franchise chains, quick service restaurants, and convenience

stores (Cha et al., 2015).

As a result, any coffee shop must find a way to survive in this industry

by developing strategies and improving its brands by emphasizing higher

service quality. They should develop unique brands that would set them

apart from competitors with high-quality service and products.

Researchers in several areas have looked at service quality as one of

the characteristics that can influence customer satisfaction and

brand loyalty. They claimed that boosting service quality would improve

customer satisfaction and brand loyalty, empowering the employees or

staffs to adapt to changes and difficulties (Kranias & Bourlessa, 2013).

Providing outstanding services is an important and enough condition

for success. Researchers emphasize the significance of evaluating service

quality and its relationship with customer satisfaction and brand loyalty in

various establishment through the years to decide adjustments and trends,

in addition to provide employees and staffs with indicators to decide the

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priority actions and choices they should enhance the service quality and

resolve major service sentiments, concerns, and complaints (Ahmed, 2018).

Customer satisfaction was the result of comparing rewards and costs

with consumers' expectations and the actual performance of the product

purchased concerning the expected outcomes during purchase and usage

(Yi et al., 2021).

The success of a business is determined by whether or not the

marketing comprehends the wants and expectations of its target customers

(Le et al., 2022). Moreover, this study also stated that achieving customer

expectations would create a competitive edge for the business in competing

with competitors.

Customer satisfaction is achieved by providing outstanding services

and goods, such as listening to customers' needs and concerns and being

caring to customers. This is critical in marketing to pay attention to this

problem since it has a major significant, and direct influence on the success

of the business (Parsa et al., 2012). However, customer satisfaction is

influenced by a variety of factors. Such as including waiting time, service

quality, employee attentiveness, variety of menu, cost of goods or services,

food quality, consistency, store atmosphere, and convenience (Suhartanto

et al., 2019). Thus, it is critical to make customers feel valued and unique by

fulfilling even the most basic requirements (Nedra et al., 2019).

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Dandis et al. (2021) found that brand loyalty provides various

significant strategic opportunities for businesses, including being considered

an essential component of brand value, lowering expenditures, being less

price-sensitive, attracting new prospective loyal customers, and benefiting

in the global marketplace. On the other hand, the term brand loyalty through

the concept of "brand resonance" refers to the nature of the customer-brand

connection and the degree to which customers feel "in sync" with the brand.

Customers with genuine brand resonance are highly devoted to the brand.

They actively seek ways to engage with it and share their experiences with

others (Leroi-Werelds & Matthes, 2022).

The significance of brand loyalty to business has a wide variety of

ways, including increased market share and new customers, brand

expansions, lower marketing expenditures, and brand defense against the

threat of the competitor (Zia et al., 2021). In addition, establishing and

sustaining is the foundation of brand loyalty because trust is a vital

component for a successful long-term relationship in the business industry

(Garaus & Treiblmaier, 2021).

Hence, the present study will be conducted to know the service quality

of coffee shops and its effects on their customers’ satisfaction and brand

loyalty in the cities of Ilocos Norte, Philippines. In addition, the study wanted

to determine the level of customer satisfaction and brand loyalty among

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these coffee shops. Thus, this motivated the researchers to conduct this

study.

Theoretical Framework

This study was guided and influenced by the following theories.

Population Ecology Theory. Hannan and Freeman (1977) proposed

population ecology theory, wherein only a certain amount of each sort of

organization may coexist in an ecosystem. After a certain point, there are

decreasing benefits to density, which eventually balance out through the

extinction of organizations.

This idea analyzes the contradiction between the need to compete

and the desire to be considered seriously. As more establishments enter the

market, they gain recognition, increasing competition and making it harder

to survive. Thus, the requirement for legitimacy dominates the early market,

whereas competitive forces of selection dominate the later market.

Mortality rates rise for organizations encountering significant

degrees of resistance to innovation when the environment changes and

advancements are presented by organizations. As a result, based on the

age of establishments, this theory anticipates mortality risks. Due to their

lack of recognition, new businesses are exposed to the danger of failure.

Inertia sets in when age becomes a problem for older businesses, making it
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challenging for them to adapt to changing environmental circumstances.

(Hannan & Freeman, 1977).

This theory was used in the study because this is connected to the

business, including the coffee shop. Additionally, this examined the tension

between a establishment's need to compete and its need to be treated

seriously in order to compete. Moreover, the theory predicted the mortality

risk based on the age of firms. Also, the conflict between the

commencement of a new coffee shop and the aging of the older coffee shop

has become competitive resulting in tight competition, and has been critical

to the survival of each coffee shop.

Service Quality Theory. Researchers in the 1980s and 1990s

focused on service quality theory. Different models and theories emerged to

conceptualize and measure quality (Cronin & Taylor, 1992; Gronroos, 1984;

Parasuraman et al., 1988). The SERVQUAL model defines service quality

as the gap between a customer's expectations for a service to be offered

and the customer's perceptions of the service received, requiring

respondents to answer questions about their expectations and perceptions

(Parasuraman et al., 1988). Because the SERVQUAL measure is based on

perceived rather than actual service received, it is an attitude measure

related to, but not the same as, satisfaction (Parasuraman et al., 1988).

Parasuraman et al. (1991) presented some revisions to the original

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SERVQUAL measure to address problems with high means and standard

deviations found on some questions and to obtain a direct measure of the

importance of each construct to the customer.

SERVQUAL is a multi-item scale comprising two lists of 22 items,

each representing different components of the five service quality

characteristics (Bearden et al., 2011; Parasuraman et al., 1991).

Each component was split into two statements: one measuring views on the

service quality of a specific business, and the other measuring expectations

for businesses in the service establishments under study. There are 44

statements in SERVQUAL, and half of them test the expectations and the

other half its perceived performance (Bearden et al., 2011; Parasuraman et

al., 1991).

The SERVQUAL model, according to Javed (2020), can be called the

RATER model, as shown in Figure 1, because it measures five service

factors: reliability, assurance, tangibles, empathy, and responsiveness.

The initials R-A-T-E-R, as recommended by the SERVQUAL model's

original developers, is a simple method to remember the five dimensions.

R = Reliability. The first dimension is reliability, which is concerned

with questions such as "Is the company reliable in providing the service?" Is

it as good as it claims? Reliability reflects a company's consistency and

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certainty in terms of performance. The most important aspect for a service

customer is reliability.

Customers’
perceptions of the
service quality of the
accounting firms
Reliability

Assurance

Tangibles

Empathy

Responsiveness

Figure 1. Conceptual model of quality according to

SEVQUAL (Javed, 2020)

A = Assurance. Second, assurance refers to whether employees are

well informed, educated, competent, and trustworthy. This dimension

encompasses the company's competence, courtesy, and precision.

T = Tangibility. Third, tangibility inquiries about the service provider's

physical installations, equipment, people, and communication material.

Because there is no physical element to evaluate in services, clients

frequently rely on the tangible evidence surrounding it when making their

decision.
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E = Empathy. Fourth, empathy is the ability to understand another

person's feelings. Is the service provider's attention to detail personalized?

R = Responsiveness. Finally, responsiveness, the question of

whether or not the company's employees are helpful and capable of

providing quick service, is raised. It is in charge of assessing the

responsiveness of the company and its employees to customers.

The study used the SERVQUAL instrument in order to gather

customer satisfaction and brand loyalty by the customers’ expectations and

customers’ perceptions of the service quality among coffee shops. The five

stated dimensions of service quality were used in this study.

Customer Satisfaction Theory. This idea evaluates a

customer's relationship with the business, location, product, or service. The

three psychological elements of satisfaction are cognitive (thinking or

evaluation), active (emotional or feeling), and behavioral.

Customer satisfaction with service performance is also influenced by

the customer's impression of service quality. The following equation

describes the relationship between satisfaction, perception of service

performance, and expectation:

Satisfaction= (Perception of performance) – (Expectations)

Customers will be satisfied and more inclined to return if their

impressions of performance exceed their expectations. This equation

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provides two strategies to boost consumer satisfaction: improve their

perceptions of performance and lower expectations. When the client's

expectations for the second service encounter are high, the consumer is

likely to demand the same high level of service again, raising the stakes for

the service provider (Saragih, 2021).

Customer satisfaction ratings can have a significant impact on firms.

They emphasize to their staff, the necessity of exceeding their customers'

expectations. Furthermore, when these evaluations drop, so do sales and

profitability. These indicators capture a crucial aspect. When a brand has a

repetitive and loyal customer, it benefits from free and incredibly effective

positive word-of-mouth marketing. Businesses want dependable and

repulsive indicators of satisfaction as a result of this.

Businesses usually ask customers whether their product or service

met or exceeded their expectations in order to assess customer satisfaction.

As a result, expectations have a significant role in satisfaction. If customers

have high expectations and the reality falls short, they will be unsatisfied and

likely rate their experience as less than satisfying (Gligor & Bozkurt, 2021).

This theory provided the foundation for the main premises of the study

that a customer’s level of satisfaction and the factors that must be addressed

in its analysis, therefore its application in this study on the factors that affect

customer satisfaction in coffee shops. Some of the items in the

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questionnaires were based on the above customer satisfaction criteria in

coffee shops.

Theory of Assimilation. This theory is based on Festinger’s

dissonance theory of 1957. The customer, according to the theory of

dissonance, does a cognitive evaluation between expectations for the

product and its actual performance. Dissonance will arise if there is a

discrepancy between expectations and the perceived performance of the

services provided (Anderson,1973).

Customers attempt to avoid dissonance by changing their perceptions

of a product in order to make it more consistent with their expectations.

Customers can also increase satisfaction by lowering the relative relevance

of experimental discrepancy in order to lessen the pressure brought on by

the disparity between expectations and service performance (Olson &

Dover, 1979).

The idea believes that customers are motivated enough to adjust their

expectations as well as their perceptions of product performance.

Customers will not be dissatisfied with a service if their expectations or

perceptions of how well it works changed. Customers can lessen their stress

caused by a discrepancy between expectations and product/service

performance by adjusting their expectations to meet perceived product

performance or by increasing satisfaction by decreasing the overall

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objectives of the discrepancy. (Olson & Dover, 1979). Controlling actual

service performance, according to some studies, can lead to a positive

relationship between expectations and satisfaction. (Anderson, 1973). As a

result, it is considered that discontentment would only occur if the review

process started with the customers' negative expectations.

This theory supports the study’s primary variable, specifically,

customer satisfaction which is attributed to the fulfillment of the study. Also,

this theory endeavors to the minimization of customers' expectation-

performance gap.

Behavioral theory. Brand loyalty refers to a customer’s strong

attachment to a single brand, such that when they continue to buy products

from that brand, they no longer recognize other brands. A brand is an

intangible asset that can outlast product life cycles. As a result, if a brand

has a large number of loyal customers, it may keep its leading position even

if its products or services are improved or changed. Sheth (1968) defined

operational brand loyalty as "a brand's relative purchase frequency function

in restricted and non-restrictive conditions." Fader and Schmittlein (1993)

From the standpoint of customers' recurring purchasing behavior, a brand

superiority analysis on the large market share of brand loyalty was

conducted. They feel that high-market-share brands are significantly more

valuable than low-market-share ones. Lyong (1998) synthesized previous

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studies on brand loyalty and expressed brand loyalty as a function of the

relative brand purchase of a particular brand, using the cautious action

theory.

This theory supports the study’s primary variable, specifically brand

loyalty, which is attributed to the fulfillment of the study. Moreover, this

theory determines the customer's strong attachment to a single brand, such

that when they continue to buy products from that brand, they no longer

recognize another brand.

Conceptual Framework

The main concern of the study is to determine the service quality of

coffee shops and its effects on their customers’ satisfaction and brand

loyalty in the cities of Ilocos Norte, Philippines.

The study adopted the Predictor-Criterion Variable Model. There are

two predictor variables of this study. This includes the customers’

expectation of the service quality of the coffee shops and the customers’

perception of the service quality of the coffee shops, along with reliability,

assurance, tangible, empathy, and responsiveness.

The flow of the study is shown in Figure 2. Research paradigm.

Hadiyati (2014) defines service quality as a measurement of how a

service satisfies the consumer's expectations. Furthermore, Chun and

Nyam-Ochir (2020) describe service establishment's success as service

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PREDICTOR VARIABLE CRITERION VARIABLE

Customers’
expectations of the
service quality among
coffee shops
• Reliability Level of
• Assurance Customers’
• Tangibles Satisfaction
• Empathy
• Responsiveness

Customers’
perceptions of the
service quality among
• Reliability
coffee shops Level of
• Assurance Brand
• Tangibles Loyalty
• Empathy
• Responsiveness

Figure 2. Research Paradigm

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quality, which assesses how well a service meets the customer's

expectations.

Customer expectations are the perceived advantages, actions, or

values that customers demand while placing an order or availing of a

service. Also, Customer perception refers to how customers feel or perceive

the product and brand of coffee shops.

Reliability is the ability to consistently and properly deliver the

promised service. Assurance, on the other hand, employees' expertise and

politeness, as well as their capacity to generate confidence and security.

Also, tangible is the existence of physical facilities, equipment, and workers,

as well as the appearance of physical facilities, equipment, and people.

Empathy is individual customer care and attention to hardware, staff, and

correspondence materials. Lastly, responsiveness is eagerness to help

customers and deliver quick service.

On the other hand, there are two criterion variables of the study.

These are the level of customer satisfaction and the level of brand loyalty

among coffee shops.

Customer satisfaction is a the total response of the buyer to their level

of satisfaction. It can also be described as the overall level of fulfillment of a

customer's expectation (Gilbert & Chodzaza, 2013).

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Meanwhile, brand loyalty is described as a customer's unwavering

dedication and great connection with the brand that is unlikely to be affected

under normal circumstances. (Khan & Mahmood, 2012). Maheshwari et al.

(2014) the majority of researchers believe that brand loyalty may result in

company benefits such as fewer marketing expenditures, positive word of

mouth, higher profit, increased market share, and a competitive edge in the

market.

The study determined the customer expectation of the service quality

of the coffee shops and the customer perception of the service quality of the

coffee shops. It also determined the level of customer satisfaction and level

of brand loyalty among coffee shops.

Statement of the Problem

Generally, the objective of this study is to determine the service quality

of coffee shops and its effects on their customers’ satisfaction and brand

loyalty in the cities of Ilocos Norte, Philippines.

Specifically, this study answered the following questions:

1. What are the expectation of the customers on the quality of

service provided by the coffee shops along the following dimensions:

1.1 reliability;

1.2 assurance;

1.3 tangibles;
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1.4 empathy; and

1.5 responsiveness

2. What are the perception of the customers on the quality of

service provided by the coffee shops along the following dimensions:

2.1 reliability;

2.2 assurance;

2.3 tangibles;

2.4 empathy; and

2.5 responsiveness?

3. What are the service quality gaps between the expectations

and perceptions of the customers on the quality of service provided by the

coffee shops?

4. What is the level of customer satisfaction among coffee shops?

5. What is the level of brand loyalty among coffee shops?

6. Is there any significant relationship between the service quality

of the coffee shops and their customers’ level of satisfaction?

7. Is there any significant relationship between the service quality

of the coffee shops and their customers’ brand loyalty?

8. Is there any significant relationship between the level of

customer satisfaction and the level of brand loyalty among coffee shops?
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Hypotheses

The following null hypotheses were tested in this study:

1. There is no significant relationship between the service quality

of coffee shops and their customers’ level of satisfaction.

2. There is no significant relationship between the service quality

of coffee shops and their customers’ brand loyalty.

3. There is no significant relationship between the level of

customer satisfaction and the level of brand loyalty among coffee shops.

Scope and Delimitation

This study analyzed and focused on the service quality of coffee

shops and its effects on their customer satisfaction and brand loyalty in the

cities of Ilocos Norte.

The parameters of the study were the customers of the two cities of

Ilocos Norte: Laoag City and the City of Batac. Purposive sampling was used

in gathering the data, which contributed to the accuracy of the results of this

study.

The respondents of the study were the customers of coffee shops in

Laoag City and the City of Batac Ilocos Norte, Philippines. This study was

limited only to the customers of coffee shops who availed of the services at

least three times and were willing to participate and available at the time of
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the study conducted. Each respondent has given the same questionnaire to

answer.

The study was conducted from July to August 2022.

Importance of the Study

The findings of this study will be beneficial to the following:

Customers of Coffee shops. This study will be beneficial to them to

be more conscious about the products, in general, provided by the coffee

shops. The result of this study will be a great help for them to go to a place

wherein they can purchase the best goods to satisfy their desires and need

in order to have the best experience that is worth the price they are going to

pay.

Owners of the Coffee shops. The result of the study will help the

marketing strategy of the business, which will improve the strategic planning

by the management to produce better service quality for the business.

Aspiring Entrepreneurs. This study will be beneficial to them to

identify trends in the market and to be more aware of the factors that could

potentially affect their products and services so that they will be ready to do

business, including developing a target market, developing products,

planning, and cash flow strategies.

Other Service oriented businesses. The result of this study will

provide information to other service-oriented businesses to be aware of the

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customers' satisfaction and brand loyalty. Through the findings, they will be

able to improve, sustain and enhance their performance in providing their

services to the customers.

Researchers. This study will be beneficial to them to enhance their

research skills as well as their analytical ability. They will be more aware of

the various strategies to make a research paper meaningful and purposeful.

Furthermore, it will help them enhance their understanding, knowledge, and

skills.

Other Researchers. To anyone interested in doing a comparative

study, this study may serve as a method for deepening a study’s point and

enhancing a mature perspective of knowledge, resulting in a new batch of

advancement.

Definition of Terms

The following terms are defined operationally in order to have a

common frame of reference insofar as this study is concerned.

Brand loyalty. This refers to when a customer continues to purchase

from a company, not because it is the only option but because they trust the

company.

Coffee shops. This refers to shops that sell coffee, tea, cakes,

sandwiches, and light meals.

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Customer expectation. This refers to the expected perceived value,

behavior, service, or benefits that the customers seek when purchasing a

good or availing of a service.

Customer perception. This refers to how customers feel or

perceptions about the product and brands of coffee shops.

Customer satisfaction. This is the measurement used to evaluate

customer satisfaction with a service establishment's products, services, and

capabilities. Surveys and assessments of customer satisfaction can help a

firm determine how to enhance or adjust its products and services.

Service Quality. This refers to a part of study that has emerged to

define and describe how services might be offered in such a way that the

customer is satisfied

Reliability. This refers to a degree of consistency in business

performance. This is also the quality of being reliable, dependable, or

being able to be trusted or believed, because of working or behaving

well.

Assurance. This refers to a positive declaration intended to give

confidence. This is also referring to a promise or pledge, full

confidence, and certainty.

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Tangibles. This relates to the ability to be perceived, particularly

through the sense of touch. In short, it is a physical asset that can be

touched or felt by touch.

Empathy. This refers to the ability to detect the emotions of other

people as well as the ability to imagine what another person is thinking

or feeling.

Responsiveness. This refers to the eagerness of a coffee

shop establishment to learn more about its customers. It is about

being attentive, actively listening, and having solutions available that

can be adjusted to the specific customer.