Starbucks Case Study - HBR | Dineshkumar M H

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Starbucks: Delivering Customer Service

From a single store operating from the historic Pike Place Market in Seattle, selling arabica
whole coffee beans to becoming a stalwart in the daily beverage industry with over 21,000 stores
in over 65 countries under the wings of Howard Schultz, Starbucks is a case of pioneering
example in the customer service sector industry.
However, Starbucks did not always flourish without losing track of its philosophy when coming
to serving customers. From 1992 to 2002 Starbucks and its management entirely focused on
retail expansion and product innovation. This caused a service gap with their continued
perception of satisfying customers and actual customer satisfaction to grow steadily.
Christiane Day, the senior VP of administration in North America soon started to get a wind of
this situation and realized that it was important that she addressed this issue of the failing
customer satisfaction imminently. She plans to invest $40 million annually across 4,500 stores to
add labor hours and to reduce service wait times in their stores vying to increase customer
satisfaction in return. She has two days to present this plan to Schultz and Orin Smith (CEO) and
to tie the idea of customer satisfaction with the bottom line.
Company Background:
Starbucks core competency was its ability to differentiate itself from the beverage industry by
offering a premium product mix of beverages, whole bean coffee and snacks including pastries,
salads and sandwiches all while promising to provide their customers with a unique Starbucks
Experience of drinking coffee while integrating the product with premium quality and intangible
emotional value associated with it.
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Their philosophy was to build a binding customer loyalty, to reach customers at work, while they
travel, shop or dine and focus on retention of these customers. Starbucks, impressed everyone
with its popularity and growth for not having spent almost anything on advertising and relying
only on word of mouth publicity and local store marketing.
Factors for Success of Starbucks in the early 90s:
Howard Schultz joined the Starbucks marketing team in 1982 and soon took over the company.
By 1992 the company operated 140 stores competing with small-scale coffee chains selling
whole beans and premium priced coffees to the affluent. Almost all of Starbucks stores were
located in high traffic high visibility setting Initially, Schultz was against franchising and wanted
to own only company operated stores to keep control of the quality of its products and services,
controlling as much of the supply chain to monitor the quality of the beans from the plantations.
Another reason for being successful in servicing its customers is because Starbucks treats their
bottom-line employees as partners giving them titles, health benefits and stock options to instil
employee (partner) satisfaction thus leading to customer satisfaction.
Thought Starbucks initially targeted the affluent section who were usually coffee connoisseurs,
mostly preferred to purchase the high quality whole coffee beans, the customers started to change
and the baristas had to evolve to cater to the customisable needs of every customer and to help
choose for an undecided customer. Every partner irrespective of their designations or job title
were given training in how to be a barista and baristas were given training in both hard skills
such as making the beverages customised to the requirement of the customers, taking care of the
cash register; and soft skills or people skills, to engage the customers in a conversation,
remember the regulars and keep the customers happy. They were taught to not win an argument
against a customer.
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Lastly, the factor owing to Starbucks extraordinary success in the early 90s was that there was
minimal competition from other coffee house chains or none of them ordered a product as unique
as Starbucks both with quality and experience. Even though they were retail operated stores they
bought the culture of coffee to its customers and other intangible benefits.
Starbucks of 2002:
By 2002, Starbucks establishes itself as a dominant specialty coffee-house chain in North
America with the sales and net earnings increasing remarkably year over year. The company had
grown from 140 stores in North America to well 5,000 stores globally and serving over 20
million unique customers. Also, Orin Smith who joined the company in 1990 was made the CEO
of Starbuck while Schultz remained as the Chief Strategist. Under this management, the
company changed its objective to establish itself as the most recognized and respected brand in
the world which called for an aggressive strategy and to name retail expansion and product
innovation as its drivers. Schultz envisioned to expand the North American market by opening
10,000 stores eventually.
Though initially Starbucks believed in only company-operated stores to regulate quality, it
started slowly expanding into non-company operated ventures like, acquiring international
licensed stores, expanding products line into grocery stores and retail outlets, and also getting
into a joint venture with PepsiCo for the bottling and distributing their new product,
Frappuccino as well as with Dreyers Grand to develop a premium line of ice-creams.
Starbucks strategy for retail expansion was to open stores in new markets and geographically
cluster with stores in existing markets. However expanding stores in existing markets lead to

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cannibalization of sales in existing stores sales. Thus, the location for new stores had to be
carefully selected considering the demographics and anticipating the average stores sales growth.
Product and Service Innovation:
As a part of the action to implement the second driver Starbucks introduced at least one new hot
beverage every holiday season along with its successful innovation of the Frappuccino in
collaboration with PepsiCo as mentioned earlier. Starbucks viewed this is a major factor for
increasing comp store sales growth. In terms of non-product innovation, Starbucks tried to
increase the value of its customers by offering them more incentives in terms of rewards for
shopping at Starbucks and by making their purchase convenient by introducing the store-value
card (SVC) which saw the cardholders visit twice as often than regular customers.
Declining Customer Satisfaction:
Service performance and customer satisfaction in the Starbucks stores were tracked using various
self-thought out metrics on which the partners were evaluated with. Customer Snapshot was
their measurement tool, where an anonymous shopper would visit a Starbuck outlet and evaluate
the store on 4 basic service criteria and also legendary criteria defined as the factors that
provide a satisfactory service, that inspired the customers to spread the word to their friends and
return to the store.
However, with all the expansion factors, rebranding and entering retail market lead to Starbucks
losing their product or image differentiation from other coffee chains and specialty coffee
houses. Starbucks also risked losing its value proposition in terms of quality, atmosphere and
service. Soon this changed the perception of its brand among its customers (who were evolving
and were failed to be noticed) too as more started believing that Starbucks cared about making
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money and building more stores. With the ubiquitous presence of Starbucks stores, it had
become a place of convenience to get a coffee rather than a place to relax, socialize or meet
people over coffee.
Though the snapshot scores as defined above were consistently increasing the dissatisfaction
with customers brought to light the fact that these service measuring tools were inaccurate and
only good for measuring quarterly performances. From Table 2 in Exhibit 8 it is evident that the
reason for declining customer satisfaction were the younger new customers while the Starbucks
veterans (customers who have been visiting for 5+ years) still have a better attitude towards the
brand which leads to the fact that the service quality might not have changed but it hasnt
evolved either.
Value of a customer highly satisfied customer:
It is primary that Starbucks focuses on these first time customers and to bring them back
considering the life of a highly satisfied loyal customer is 8.3 years (Exhibit 9) Starbucks may
soon start losing a majority of its customer base within years (not to mention the other segments
who may have already been lost). Also in terms of profitability, a highly satisfied customer
spends on average $4.42 per visit and for 18 visits per month. Thus considering the lifetime the
customer brings about $954.72 per year or $7924.18 in their lifetime as revenue. Given the cost
of products sold in store brings more value and revenue than retail products, the retail products
should be seen as drivers for the consumers to visit the stores to experience the coffee rather than
brewing at home.

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Christine Days decision:

Christine Day wants to propose spending of $40 million across 4574 (Exhibit 2) stores in the US
amounting to $8745 for each store for additional labor hours, hoping decreasing service wait
time would increase customer satisfaction. This is a major assumption by Christine since from
Exhibit 10 we see that fast service was only ranked 6th in key attributes for customer
satisfaction and also taking the fact that only 10% of customers suggested for it. Despite these
measures should she proceed, turning an unsatisfied customer into a satisfied one just by
increasing labor hours is a long shot however maybe satisfied customers can be highly satisfied
through this and since the difference in revenue from these two segments is $172.5 (from Exhibit
9), each store should be able to convert $8745/$172.5 ~ 50 satisfied customers to highly satisfied
customers for breakeven. Despite the spending if the customer satisfaction doesnt increase then
either the customer spending by current numbers should increase by 42 cents ($8754/ (570*365))
per year or an additional ($8754/ ($3.85*365)) ~ 7 customers should visit the store daily to
breakeven within the year.
Given these number Christine should also consider that from table 2, Exhibit 8 the evident
problem is that Starbucks is not able to connect personally with its customers as only 15% of
customers think its for someone like me, a decline from 40% and only 8% think its worth
paying for more which again sharply declined from 32%. Considering these Christine should
also propose to conduct research to understand its new customers and to increase value for
customers than what Starbucks already provides and distributing the $40 million investment
accordingly.