S TAR B U CK S

DELIVERING CUSTOMER VALUE

A Case Analysis

Aditya Nagrare (2014PGP453) | Akshay Kohade (2014PGP024) | Anantha Ranganathan (2014PGP035) | Kapil Kanungo (2011IPM038)|
K. Karunakar Reddy (2014PGP161) | Prakash Ramchiary (2014PGP257) | Ruthrakumar U (2014PGP313) | Saurav Maitra (2014PGP336)

Defining the Problem

2002 Starbucks enjoys its 11th consecutive year of 5% or higher sales growth
Data indicates that Starbucks isnt always achieving customer satisfaction. Consider the following exhibit

Exhibit 8 indicates that both

component-wise
and
overall
satisfaction of new customers is far
below that of established customers

A reasonable inference would be

that customer satisfaction is on a
decline, consistent with Christine
Days observations

The Proposal

An investment of an additional $40

million annually

..across 4500 stores..

..an increase of 20 labour hours per

store, per week

Target - to improve speed of service

and customer satisfaction

The Question

An Overview

Would such an investment translate

into excellent customer service?

What would be the impact on sales

and profitability?

Calculating the Investment per Store

Total investment proposed

Total no. of company operated stores
Investment per store

(We neglect the 1078 licensed stores in our calculation, because the investment would not cover these)

Reasoning: To deduce whether the investment of $11,441.65 per store would be justified, it is necessary to
calculate the extra revenue that can be generated from the investment.

The exhibit indicates

that the average ticket
Consider Exhibit 9 below:
size/visit of
highly
satisfied
customers
exceeds
that
of
satisfied
and
unsatisfied customers

=
=
=
=

$40,000,000
3496
40,000,000/3496
$11,441.65

The case further mentions that the most loyal customers visit as frequently as
18 times a month what we consider Ideal customers

Possible CustomerConversions
Consider the following possibilities of generating extra revenue:

Case 1: Convert Highly Satisfied customers to Ideal customers

Case 2: Convert Satisfied customers to Highly Satisfied customers

Case 3: Convert Unsatisfied customers to Satisfied customers

Case 4: A combination of the above

Analysing the Impact on Bottom-Line

(given)
(Exhibit 2)

Thus, extra revenue

could be generated by
converting
some
unsatisfied
and
satisfied customers to
highly
satisfied
customers

Contribution per Customer Existing Scenario

Using Exhibit 9, we calculate contribution earned from each type of customer

Contribution earned from each customer per year = Average Ticket Size per visit x No. of visits per customer
per year
Contribution - Ideal customers
=
$4.42
x
18
=$954.72
Contribution - Highly Satisfied customers
=
$4.42
x
7.2
=$381.89
Contribution - Satisfied customers
=
$4.06
x
4.3
=$209.50
Contribution - Unsatisfied customers
=
$3.88
x
3.9
=$181.58

Contribution per Customer Scenario after Investment

Case 1: Converting Highly Satisfied customers to Ideal customers
Extra contribution received on conversion
= Contribution per Ideal - Contribution per Highly Satisfied
= $954.72 - $381.89 = $572.83
Number of customers to be converted per store per year to break-even after investment
= Investment per store per year / Extra contribution received
= $11441.65 / $572.83
= 19.97
Case 2: Converting Satisfied customers to Highly Satisfied customers
Extra contribution received on conversion
= Contribution per Highly Satisfied - Contribution per Satisfied
= $381.89 - $209.50 = $172.39
Number of customers to be converted per store per year to break-even after investment
= Investment per store per year / Extra contribution received
= $11441.65 / $172.39
= 66.37
Case 3: Converting Unsatisfied customers to Satisfied customers
Extra contribution received on conversion
= Contribution per Satisfied - Contribution per Unatisfied
= $209.50 - $181.58 = $27.91
Number of customers to be converted per store per year to break-even after investment
= Investment per store per year / Extra contribution received
= $11441.65 / $27.91
= 409.92

Analysing the Impact on Bottom-Line

Impact of Increasing Wage Hours

Consider Exhibit 3 below:

Total cost of labour per store per

week = No. of labour hours per
week x Wage rate per hour =
360 x $9 = $3240

Revenue generated per week

per store = Average daily
customer count x No. of days x
Average ticket = 570 x 7 x $3.85
= $15361.50

Contribution generated per store per week = Cost of Labour Revenue = $15361.5 - $3240 = $12121.50

Increasing labour hours per week by 20

Total cost of labour per store per week = No. of labour hours per week x Wage rate per hour = 380 x $9 = $3420
To achieve the same contribution of $12121.50, the revenue that must be generated is $3420 + $12121.50 =
$15541.50

Approach 1 - Expanding Customer Base

Maintaining ticket size at $3.85,

Required customer base to generate revenue of $15541.50 = Revenue / Ticket Size = $15541.50/$3.85 = 576.68

Required increase in the number of customers to achieve desired revenue = 576.68 570 = 6.68

Thus, a 1.16% increase in the customer base is required to achieve desired revenues

Approach 2 Increasing Average Ticket

Maintaining customer base at 570,

Required average ticket to generate a revenue of $15541.50 = Revenue / Customers = $15541.50/570 = $3.90

Thus, a 1.16% increase in the average ticket is required to achieve desired revenues
The case suggests that it would be easy to generate $20,000 per store, in which case the break-even revenue
of $15541.50 would be quite easily achieved.

Analysing the Impact on Bottom-Line

Training:

With the additional training, we could provide soft skills training to baristas, which would help us improve
customer satisfaction measures such as friendlier staff, providing personal touches to service, etc, which
are attributes listed in Exhibits 10 and 11.

We could also train them in hard skills, to improve the quality of coffee, knowledgeable staff, etc.

Quality of Coffee and Service

With the investment of $40,000,000, there would be 20 additional hours of labour per week per store, with
which we could relieve the pressure per barista, thereby leading to faster service to reduce the waiting
time to below 3 minutes.

The above would additionally improve the quality of coffee

And back to the Questions

Would such an investment translate into excellent customer service?

Yes. The investment would allow for training and operational efficiencies which would improve
customer satisfaction measures listed in Exhibits 10 and 11

What would be the impact on sales and profitability?

Converting customers would increase the profitability, thereby justifying the additional investment.
Training also would improve the quality of service, which would further increase sales or generate new
customers.

Conclusion

CONSIDERING THE GAINS AND RETURNS INVOLVED, THE INVESTMENT OF $40,000,000 IS JUSTIFIED

Thank You!
Measures to Improve Customer Satisfaction