Case

Starbucks: Delivering Customer

Services

Jermia (29115496) - GLEMBA4

Company background

• Founded in 1971, by three coffee fanatics: Gerald Baldwin, Gordon Bowker, and
Ziev Siegl.
• In 1982, Howard Schultz join in the marketing team. He was then inspired by
Milan’s coffee culture.
• Few years later, Schultz buy Starbucks, and realize his vision to create a coffeehouse
chain, that would become America’s “third place”.
• Initially, the target segment was the affluent, well-educated, white-collar patrons
(skewed female) between the ages of 25 and 44.
• By 1992, the company had 140 stores in the Northwest and Chicago.
• Same year, it went public, raising $25 million.
• By 2002, the company served 20 million customers in over 5000 stores around the
globe. Sales CAGR was 40% and net earnings CAGR was 50%.
• Impressively it had spent almost nothing on advertising.

Key role in the case:

1. Christine Day, the VP of administration in North America.
2. Orin Smith, Starbucks CEO, a Harvard MBA (1967), joined the company in 1990.
3. Howard Schultz, chairman.
Starbucks’ value proposition and supporting elements

The Starbucks value proposition is an experience around drinking coffee, based on

three components:
1.the coffee itself
2.the service or customer intimacy, e.g. uplifting welcome, or recognizing customer.
3.the atmosphere or the ambience. It’s based on the human spirit, sense of community,
the need to socializing.

Channels of distribution are:

1.The Starbucks stores located in high visibility/traffic location.
2.Non-company-operated channel – the “special operations” – like hotels, airlines.

Starbucks employees – so called “partners”

Howard Schultz’s DNA – therefore Starbucks’ DNA – is: partner satisfaction leads to
customer satisfaction.
Problem statement

Starbucks found that (through market research), they are not always meeting
their customers’ expectations in the area of customer satisfaction.

1.Does the plan to invest an additional $40 million annually (equivalent to 20

labor hours a week) will improve the speed-of-service and thereby increase the
customer satisfaction?

2.Does the customers telling us that an improved speed-of-service will increase

their satisfaction?

3.What will be the impact to our sales and profitability?

Starbucks’ service delivering

1. Two types partners training: (a) hard skills, (b) soft skills, training to connect with customers.
2. Starbucks “just say yes” policy. Giving service beyond company rules if needed.

Service performance measurement:

1. Monthly status report and self-reported checklist.
2. Mystery shopper: the “Customer Snapshot”, assessing:
1. Service
2. Cleanliness
3. Product quality,
4. Speed of service.
5. Legendary service: created memorable experience.

Important notes on challenges:

1. The job complexity increases over time, e.g. almost half of customers customized their drinks. The concern
is: product quality vs. focus on customers.
2. The heaviest users are always the most demanding. On the other hand, they are the loyal one, the one
contribute high percentage of transactions and $ spent.
3. One alternative is to add the barista, with the implication of higher expense.
Driver for growth

In 2002, the two biggest drivers:

1.Retail expansion
2.Innovation on:
a) Product: e.g. Frappuccino,
b) Service: Starbucks card.
Marketing issues: Are we focusing on customer or on growth only?

Background: Starbucks is considered as one of the world’s most effective

marketing organizations, although it lacked as strategic marketing group.
Everyone is marketing in Starbucks.
Issues that the market research found:
•good at collecting data, but not analyzing it. Tend to overlook the information.
•Had evidence coming in, that contradicted some fundamental assumptions:
– Brand meaning/image: Very little differentiation between Starbucks and other specialty
coffee chains. It was there in the beginning.
– % of respondents who see Starbucks only care about making money and building stores was
increasing.
– Changing customer: newer younger, less well-educated, lower income bracket than the more
established customer.
– Expanded from historical customer profile: large numbers of Hispanic, or Cuban-Americans.
– Customer behavior: regardless of market, the customers tended to use the stores the same
way (same numbers of visits per month).
– Despite the high Customer Snapshot scores, Starbucks was not meeting expectations in terms
of customer satisfaction.
Analysis
Findings:
-Loyalty is strongly correlated with satisfaction. Loyal (+5 years customer) means satisfied
customers. Satisfied customers will likely be a loyal customer.
-They are 21% - 23% of total Starbucks’ customer base, and account for 62% of all
transactions (Figure A, or exhibit 8). This is likely the established customers (5+ years).
-They visits the stores more frequent, as well as spending more. The self-reported customer
activity survey (exhibit 9) shows that Ticket size per month (ticket/visit * visit/month) for
Highly satisfied customer was $31/month, twice of the Satisfied customer with $17/month,
and the Unsatisfied customer with $15/month.
-Customer snapshot scores (exhibit 7) shows that in 2002, the average waiting time was
already improving to 3 minutes 10 seconds, and trending down. The cleanliness was
trending up. The service and product quality were not showing a strong trend, although
looked good. The legendary service scores were also improving in trend.
-The new customers tended to be younger, less well-educated, in a lower income bracket
(more price-sensitive), less visits, and have a different perception of Starbucks brand. They
account for about 77% - 79% of the customers base (Figure A, or exhibit 8).
-The expense data (exhibit 3) shows labor expense per customer count ratio =
(360x$9)/(570x7days) = $0.81/customer. It also shows labor hours per customer =
360/(570x7days) = 0.09 labor hours/customer.
Analysis (cont’d)
Assumptions:
•(Day’s assumption) The most driving factor is speed-of-service. But it’s not (see the
findings).
•The data shows that the unsatisfied customers, who asked for improvement in service and
incentives, most likely comes from the new customers (not the established one).
•They represent about 80% of customers (figure A, customer behavior), with about half of
ticket size/month compared to the highly satisfied customer.
•If these scenario:
»the market is saturated for each store, thus the same number of customer count per week
(after the additional partners), then the labor hours will be 0.095 labor hours/customer (with
the additional investment).
»-------> the impact will be more time for the partners to practice customer intimacy,
friendliness.
»-------> this should turn to loyalty, because friendliness is among the important factor for
customer to feel valued. How many customer can be converted? How much increase to the
21% loyal customer base? This will answer the value added by adding $40 million annually.
»the market is not saturated, then the customer count per week will increase with this
forecast:
»-------> (360+20) / 0.09 labor hours/customer = 4210 customer/week = 600 customer/day.
Given the same average ticker, this converts to $16,100 weekly store volume.
Analysis

In the case, it is mentioned that “speed-of-service” (as part of improvement to service)

was most frequently chosen by customer as a factor driving “valued customer.

However the data (exhibit 11) doesn’t show so. We can see that the most chosen factors
actually are:
a)In the service improvement category, it is Friendlier, more attentive staff (19%),
b)In the price/incentive category, it is Free cup after x visits (19%).
c)Faster service was only getting 10% responses.

The proposal before Day is to invest extra $40 million per year to add 20 labor hours
per week per store (4,500 stores).
•Each $6 million in profit translates to $0.01/share (the investment is $0.066/share).
•Day’s argument: move away from seeing labor as expense to seeing it as customer-
oriented investment.
•The goal is to bring the stores weekly sales to $20,000/store.

•But, as we calculated (see previous page), assuming the market is not saturated, the
weekly sales will only increase to $16,100/store. Further analysis: how many customer
should be converted to loyal customer (spend more and more visits) to reach $20,000?
Conclusion and Recommendation

Alternative actions:
•Increase the verismo machine deployment, because it was proven receiving positive
response from barista and customers. There is less risk in this action, and more
economics, instead of adding a continuous additional operating expense per year on
partners.
•More training for the partners to improve their “friendliness, more attentive behavior”.
Change the performance measurement to include the “legendary service” into the basic
service. This reflect the survey data on factors that makes customers feel valued.
•Improve the incentive program (free drink for every x purchase). This is attractive to
the newcomers, who has lower income bracket. This will first improve their loyalty,
and then increase their visits and wallet share.