STARBUCKS

Delivering Customer Service

Section A Group 4
[Email address]

CASE FACTS
Starbucks is an international coffeehouse chain headquartered in Seattle, Washington. It was
opened as a small coffee shop in Seattle that specialized in selling whole Arabica coffee beans
to a niche market of coffee purist. Espresso bars were set up with the vision of developing a
third place for Americans, other than home and work. The stores catered to affluent, welleducated, white-collar patrons between ages 25-44.
Starbucks was enjoying its 11th consecutive year of 5% or higher store sales growth rate, and
became a dominant name in the market in the year 2002, with a CAGR of 40%. The company
had incurred negligible advertising expenses to attain this position, rather used point-of-sale
materials and local-store marketing.
Live Coffee Experience- 3 components:

Highest quality coffee- for this, Starbucks controlled most of its supply chain
Customer intimacy- Creating an uplifting experience for the customers, to encourage revisits
Atmosphere- Ambience was given special attention, to provide an upscale yet inviting
environment

Channels of Distribution: All of Starbucks locations in North America were company-operated

stores in high-traffic, high visibility settings. The stores sold rich-brewed coffees, Italian-style
espresso drinks, cold beverages, etc. Non-company operated retail channels called Specialty
Operations generated 15% revenues, 55% of specialty revenues from international licensed
stores, etc. and 18% from domestic retail store licenses.
Philosophy-reaching customers where they work, travel, shop and dine.
Starbucks believed in calling its employees- partners. They offered huge benefits to
employees like health insurance, etc. as they believed that partner satisfaction lead to
customer satisfaction.
Hard and soft skills were given huge emphasis by Starbucks, as they believed these to be
essential for quality services.
Recently, there has been huge dissatisfaction among consumers, causing them to drift away.
There has been a lapse on the companys part to look at the bigger picture.
There is an urgent need to take needful measures, in order to retain its position and image.

STATEMENT OF PROBLEM

Falling consumer satisfaction

o According to exhibit 11 already satisfied customers form only 28 percent
o Starbucks not living up to the mark of meeting customer expectations in the
area of customer satisfaction
o The number of people believing it cares about money and increasing stores has
increased from 53% in 2000 to 61% in 2001 and 48% to 55% respectively
o Despite high customers snapshots scores Starbucks was not satisfying in terms of
meeting customer expectations
o The number of visits per month for a unsatisfied customer were 3.9, satisfied
customers 4.3 and 7.2 for highly satisfied customers
o The average customer life for an unsatisfied customers happens to be 1.1 year,
satisfied customers 4.4 and highly satisfied 8.3 years.
Product differentiation and competition.
o The competition was quite stiff from the major coffee chains and the regional
players
o Every coffee chain had a differentiating factor but that was absent in the case of
Starbucks
o In order to capture the market Starbucks opened stores in new regions and
existing areas but opening stores in existing areas led to cannibalisation
Ambiguity in the marketing department
o Starbucks was an effective marketing organisation but lacked a strategic
marketing group
o There was no marketing chief and the marketing group functioned as three
separate groups
o Even though the company went great strides in collecting marketing data this
data was not put to efficient use in the decision making
Changing customer base
o The customer wanted their coffee to be customized according to their needs and
this put a great deal of complexity on the barista
o A solution to this problem was to higher more baristas but the company was
quite hesitant to do that given the economic downturn coupled with the labour
cost of the company
o The labour cost was the largest expense of the company with the total labour
cost being 3240 per store
Measuring service performance was not perfect and it was quite ambiguous

o The snapshot tool is not a perfect measurement tool against the expectations of
the company
o Given that a measurement by Starbucks the company continuously improved on
services, cleanliness, product control and average wait time
Other problems faced by Christian day
o The company had to come up with a plan to invest additional 40 million annually
in its 4500 stores
o The plan was being met with severe internal resistance
o There was a general belief that Starbucks was doing well on customer service but
the reality was that they had to lose sight of the customer

Situation Analysis
Company:

Brand component
o First component was coffee itself. They had whole bean coffees, rich brewed
coffees, Italian styled espresso drinks, cold blended beverages and premium teas
o Second was service or what the company referred to as customer intimacy
o Third was atmosphere. People came for coffee but it was the ambience that
made them want to stay
Goals
o They wanted to be the "most recognized and respected brand in the world"
o They also ultimately wanted to have 15000 international stores
Culture
o Starbucks employee were called Partners. Even the entry level partners were
provided with health insurance and stock options
o Partner satisfaction rate consistently hovered in range of 80-90% and turnover
rate was 70%, which was considerably lower as per industry standard of 300%.
o Also it was ranked 47th in Fortune Magazine's list of best places to work.
Serving over 20 million unique customers in well over 5000 stores around the globe

Competitors:

Starbucks competed against a variety of small scale regionally concentrated coffee

chains. Eg: Caribou Coffee differentiated on store environment, Peets Coffee competed
by providing freshest coffee
Independent specialty shops which offered wide range of food and beverages including
beer, wine and liquor, satellite TV and internet and personalized services
Dunkin Donuts and Bagel chains were also major competitors who offered flavoured
coffee and non-coffee alternatives

Collaborators:

Starbucks prided in sourcing the highest quality coffee of the world from Africa, Central
and South America and Asia Pacific region.
To control the distribution to retail and supply chain, it worked directly with growers,
oversaw the custom roasting process for the company's various blends and single origin
coffee
Starbucks sold coffee products through company operated stores in high traffic and high
visibility areas, specialty operations, international license stores, grocery stores,
warehouse clubs and online and mail order channels
Starbucks also had a JV with Pepsi-Cola to distribute bottled Frappuccino beverages as
well as with Dreyer's Grand Ice-cream to distribute a line of premium ice creams

Customer:

Customers associated attributes like excellent gourmet coffee, wide availability, trendy
and always feel welcome with Starbucks brand
Primarily catered to affluent, well educated, white collar patrons (skewed female)
between the ages of 24 and 44 years
New customers tended to be younger, less well-educated and in lower income bracket
Most frequent customers averaged 18 visits a month and a typical customer averaged 5
times a month

Context:

Coffee consumption was on the rise in the United States, more than 109 million people
drank coffee every day and another 52 million drank it occasionally
Industry estimates showed a visible shift from traditional coffee consumption to that of
specialty coffee
In the home, specialty coffee was estimated to be a $3.2 billion dollar business and $5
billion business in food service channel

Decision Criteria and Alternative Solutions :

Most prominent issue with the company right now is that they are not able to meet customers
expectations in the area of customer satisfaction.
They need to come up with ideas to improve speed-of-service and thereby increase cudtomer
satisfaction.
Alternative Solution 1 :
Invest an additional $ 40 million in the companys 4500 stores which would allow each store to
add the equivalent of 20 hours of labor a week, leading to increased customer satisfaction.
Unsatisfied
Customer

3.9
$3.88

Highly
Satisfied
Customer
4.3
7.2
$4.06
$4.42

Satisfied
Customer

Number of Starbucks Visits/Month

Average Ticket Size/Visit
Total Revenue per
customer/month

$15.13

$17.46

$31.82

Total Revenue per customer/year

$181.56

$209.52

$381.84

Difference between total revenue generated per customer by highly satisfied customer
and unsatisfied customer = $ 381.84 - $ 181.56 = $ 200.28
Difference between total revenue generated per customer by highly satisfied customer
and satisfied customer = $ 381.84 - $ 209.52 = $ 172.32

Number of unique customers1

Investment
Difference between highly satisfied and
unsatisfied customer revenue per year

20,000,000
40,000,000
200.28

Break even customer turnover

40,000,000/200.28= 199,720

No. of customers that will move from2

unsatisfied to highly satisfied category

0.1*0.42*20,000,000 = 840,000

Source: 1- Page 2 para 7

2- Exhibit 11-added investment on labor will produce faster service- 10% customers
shift. Pg. 11 Fig A- 42% of the customer base makes <2 visits/month- unsatisfied
customer
Conclusion: Considering the additional revenues arising from customers shifting from
unsatisfied to satisfied category due to the investment in labor ($40 million) 840,000 customers
need to turnover to achieve breakeven.

Alternative Solution 2:
Apart from providing reduced transaction times stored value card (SVC) can be used for
information collection to aim for design focused and customized direct marketing. It has
following pros and cons.
Pros:

Customer can be targeted more effectively by designing the marketing prospects

keeping the customers at the centre
Better utilization of marketing resources
Reduced wastage

Cons:

Over emphasis on information and unnecessary conclusions

Validity of the information provided
Information collected is only limited to card holders

Alternative Solution 3:Mechanization leading to standardized processes.

Pros:

Faster service
Greater satisfaction of customers
Inbuilt quality checks
Reduction in number of baristas

Cons:

High capital expenditure

Less customization leading to customer dissatisfaction
Brand dilution (handmade to machine coffee)

Recommendations

Starbucks can significantly increase its sales by converting satisfied customers into loyal
customers. It thus needs to have a separate Strategic marketing department so as to
develop a better understanding of customer needs and expectations and fulfil them so as
to satisfy them and build customer loyalty. The group will also be responsible for
developing and managing various marketing and promotional plans.
The market research team discovered that their brand image had taken a serious hit and
customers were complaining about Starbucks primarily caring about money and number
of stores. Hence there is urgent need to address this problem by partnering with some
brand management company or taking some steps on its own for brand building
The team also found out that customer base was evolving hence there is an opportunity
to expand and build loyal customers in these new segments. This would require extensive
research into needs and aspirations of the target customers and a change in one or all 4Ps
From the alternatives presented above we can see that alternative 1 will be successful if
they can convert 199,720 customers per year from unsatisfied to highly satisfied
customers using 40 million than we will go ahead with this plan.
In case we are unable to churn the above numbers the company should aggressively
pursue the direct marketing strategy using the SVC data (Alternative 2).