Starbucks: Delivering Customer Service

Group 6, Section C

IIM INDORE Case Analysis: Marketing II

Starbucks: Delivering Customer Service

Professor: Lubna Nafees Submitted By: Group 6, Section C

Name Aman Srivastava Jashanjot Singh Sekhon Kashyap Suruchi Brhamprakash Punit Moris Ekka Saindani Pranit S. Senthooran K A Shivendra Raizada

Roll Number 2011PGP532 2011PGP663 2011PGP686 2011PGP801 2011PGP844 2011PGP864 2011PGP876

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Starbucks: Delivering Customer Service

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Introduction
Starbucks was established by Gerald Baldwin, Gordon Bowker and Ziev Siegl in 1971, as a specialized arabica beans coffee shop in Seattles Pike Place Market. Later in 1982, the company was sold by the owners to Howard Schultz, a member of the marketing team of the company. The company was taken to its greatest heights by Howard Schultz who opened several new stores and later went on to list the company as a public company in 1992. By 1992, the company had 140 stores and had raised a capital of over $25 million. The company has witnessed strong growth as compared to the industry, exhibiting above 5% year on year growth even in recessionary periods. During 2002, Net Revenues stood at $3,288.9 million having witnessed an increase at CAGR of 40% as compared to 1992 revenues. Net profits in the same duration had grown at a CAGR of 50%. In addition, total number of stores had increased at a CAGR of 25.5% to reach 5,886 in 2002 from 1,886 in 1998.

Success Factors and Value Proposition

The success witnessed by Starbucks in its initial days can be attributed to the efforts of Howard Schultz and his vision of coffeehouses as a third place apart from home and work, where people can relax and enjoy good coffee. Also, the experiential branding strategy of Live Coffee, could create a connect with the customers. The three components of the strategy were: y Coffee quality: Since Starbucks operated through company owned stores and no franchising it could control the quality of its products while maintaining consistency in serving and other factors. Also, the company overlooked coffee bean growing and other processes to ensure quality. y Service: Partners were trained on both hard skills and soft skills when hired to work for a Starbucks retail store. This equal emphasis on the hard and soft skills further highlighted Starbucks strategy to make the experience pleasant for the customer. The soft skills were a way to teach the partners on how to connect with the customer, by establishing eye contact, smiling and greeting them with their names when the customers were regulars. In addition to that there was also the Just Say Yes policy for which the partners went beyond company rules. These again created a friendly environment for customers who felt special and in combination with the two points mentioned above increased their customer satisfaction.
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Starbucks: Delivering Customer Service

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Atmosphere: Schultzs idea was to make Starbucks Americas third place. By recreating the Italian coffee culture he met in Milan, he managed to make Starbucks a place where people can enjoy their social interactions, relax, or just spent some time by themselves. In essence, the Starbucks idea changed the norm from buying coffee as a drink to the experience of enjoying coffee. People viewed Starbucks as a place they wanted to be at and they spent as much time as they could in the stores. It was an uplifting experience that was complemented with the layout designed to provide an inviting environment

Apart from these components of branding strategy there were several other factors that compelled customers to pay such a premium for the coffee consumed at Starbucks. y Product Variety and Customization: Starbucks offered a wide range of beverages to choose from and also allowed to customers to tailor-make their own drinks. This provided customers with greater freedom of choice and enhanced customer retention as the customer did not get bored of the beverages. y Reach: Starbucks had over 4500 stores in North America itself and in some of the most accessible locations (high-traffic, high-visibility setting) facilitating greater product reach. Also, Starbucks provides selected product y Other In-Store Products: Apart from the usual Coffee line, Starbucks offers products such as Food items, equipment and accessories, T-Shirts and other sources of entertainment (Music CDs, etc.) Other reasons for success were: y Partner Satisfaction: Schultzs belief was that if the Starbucks employees were happy, then this would lead to higher customer satisfaction. For this reason, Starbucks partners were among the highest paid hourly workers, they enjoyed health benefits and they had stock options. This resulted in one of the lowest employee turnover rates in the industry and a consistently high employee satisfaction rate. Furthermore, the majority of promotions for Starbucks were within its own ranks. Even though there is no evidence that the satisfaction of partners led to customer satisfaction, it would be safe to assume that the low employee turnover meant that partners stayed at their positions for longer time, were more experienced in treating the customer and could provide a faster service.

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Specific target audience: Starbucks coffee in the 1990s was targeted primarily towards the affluent, well educated, white collar people. These customers were essentially connoisseurs of coffee who can differentiate between origin of coffee bean, roasting process and production process, just by the look and aroma of the serving. Such kind of customers eventually established a consumption pattern of high quality and variety rich coffee. Being able to attract such an affluent demographic and serving them by providing superior service, helped in being able to provide the service at a consistent level and keep the customers satisfied

Attractive market: The concept of Starbucks was new and the notion of turning the coffee drinking into a social experience was almost unexploited in the U.S. In the early 1990s Starbucks did not face fierce competition. The presence of other coffeehouses such as Peets Coffee and Caribou Coffee and donut and bagel chains such as Dunkin Donuts was insignificant and hence helped Starbucks succeed

With these factors Starbucks offered both tangible benefits that coffee offers such as taste, aroma, alertness, concentration etc. and intangible benefits such as experience.

Problem Definition
The primary problem faced by Starbucks was the declining customer satisfaction scores. In addition, market research revealed that there was very little image or product differentiation between Starbucks and other smaller coffee chains in the minds of Specialty Coffeehouse customers Analyzing, the graphs given in Exhibit 7, it is evident that though company has steadily increased its Customer Snapshot scores in parameters such as Services and Cleanliness, it has failed in improving its product quality and Average Waiting time score which has been constantly declining. Even after such a dismal performance, the company has been increasingly given higher ratings in Legendary Service scores. This indicates that a larger time is being spent in striking up a conversation with the customer and being responsive at the expense of increasing average waiting time for all the customers. In addition, the companies rating in attitude towards Starbucks has fallen in all respects such as High-quality brand, brand I trust, worth paying for, best tasting coffee etc.

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Customer Satisfaction Evaluation Method

The mystery shopper technique of evaluating customer satisfaction is apparently very subjective in approach and depends on the perception of the mystery shopper. Hence this is not a very effective method. Also, customers should be broken down into regular and nonregular to identify opportunities of increasing sales. Instead, all customers are taken together and their satisfaction is evaluated which does not give a very clear picture. In addition, the Legendary Service Scores are given on criteria which are again very subjective.

Rationale
The reason for this decline of sales could be attributed to the change in consumer profile witnessed by the company. The new consumers visiting the coffeehouse are on an average 36 years old, having a lesser average income of $65,000 and reduced average cups of coffee per week of 15. These new customers have apparently higher expectations from the store as compared to customers who have been visiting the shop for more than 5 years. This is evident from the fact that they have given lower score to Starbucks in various parameters as discussed above. This indicates that it is not necessary that service quality of Starbucks has fallen. Moreover, since the number of consumers and coffeehouses has increased many folds over the years, this may have led to dilution of value proposition of quality, service and atmosphere. The expansion of menu items and customization of beverages may have also put additional pressure on baristas and hence increased average waiting time and reduced quality. Also, with increase in customers per shop, customer intimacy element was lost. In addition, competition from other chains has increased over the years and hence satisfaction levels from Starbucks store may have fallen as customers have other options to explore. Correct calculations of satisfaction of customers are of extreme importance because of the opportunity cost associated with an unsatisfied customer. An unsatisfied customer provides sales of $15.13 per month as compared to more than double sales of $31.82 per month provided by a highly satisfied customer. Also, a satisfied customer tends to remain associated with Starbucks for a larger amount of time.

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Starbucks: Delivering Customer Service

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Changes in Starbucks 1992 to 2002

During these ten years, Starbucks followed an expansionary policy and grew from 140 stores to 4500 stores worldwide. It captured new markets and clustered existing markets. Starbucks basically chose locations based on whether the demographics of the area matched those of a typical Starbucks drinker. It also considered aspects such as coffee consumption levels and the intensity of competition. There were a few localities where Starbucks opened up more than one retail outlets, even though Starbucks knew this would cannibalize the sales of the existing outlet. This expansionary policy took away, to some extent, the ambience that Starbucks used to provide earlier, and its customers started viewing it as a corporate interested in making money instead of a relaxed place where one could enjoy good coffee. In 1992, Starbucks menu was much simpler. A major chunk of its sales came from wholebean coffees. By 2002 Starbucks had added food items and beverages to its menu. On top of that, Starbucks even started selling equipment and accessories at all of its retail outlets. The complex menu resulted in slower delivery, which tarnished its image. Earlier Starbucks used to mainly target the affluent, mid to upper class professionals, who went to Starbucks to enjoy their coffee. Starbucks was viewed as a place where the Best Coffee was served. By 2002 Starbucks target market shifted to younger, low income group who viewed it mainly as a place to hang out with friends and have normal coffee, rather than a place where one simply came to enjoy the good coffee in a great atmosphere.

Customer Behavior and Satisfaction

Starbucks initially catered primarily to affluent, well-educated, white collar patrons between the ages of 25 and 44. But the customer base was evolving and the newer customers where younger, less well-educated and in lower income bracket than the more established customers. They visited stores less frequently. There was a direct link between customer satisfaction and customer loyalty that was reflected in the number of visits per month and was therefore linked to the profitability. As it can be seen from the below table, the most frequent or ideal customer visited Starbucks 18 times a month. Assuming this customer is highly satisfied, this customer spends $4.42 on an average on every visit and the average customer life is 8.3 years. The ideal Starbucks customer brings an average revenue of about $954.72 per year or $7924.18 over its lifetime. Also a highly satisfied customer who visits 7.2 times brings average revenue of $381.89 per year or $3169 over the lifetime.
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Starbucks: Delivering Customer Service

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Customer Behavior by Satisfaction Level Number of Visits per Month Avg. Ticket Size per Visit Avg. Customer Life (yrs) Total Revenue from Customer per Year Total Revenue over Customer Life Variation from Unsatisfied Customer Variation from Satisfied Customer

Unsatisfied Customer 3.9 $3.88 1.1

Satisfied Highly Satisfied Customer Customer 4.3 7.2 $4.06 $4.42 4.4 8.3

Ideal Customer 18 $4.42 8.3

$181.58 $199.74

$209.50 $921.78

$381.89 $3,169.67

$954.72 $7,924.18

$722.04

$2,969.93 $2,247.89

$7,724.43 $7,002.39

Also, it can be seen that satisfaction level is directly linked to revenues, which will eventually lead to higher profits, therefore Starbucks should work on raising the satisfaction level of its current customer base and make them visit its stores more frequently. Starbucks should concentrate on reducing the gap between the score of key attributes and customer expectation. Based on the rankings of the key attributes that create customer satisfaction, Starbucks should ensure that its stores are kept clean all the time. Starbucks should also place more emphasis in its partners utilizing their soft skills to treat the customers as valuable. Starbucks can also try to promote its stored-value card (SCV) further and utilize the data collected to speed up the service. The SVC will reduced transaction times, and the data present can help the partner customized the order faster.

Analysis of the $40 million investment

Starbucks investment of $40 million is intended to increase customer satisfaction. The number of customers that need to go from being satisfied to being highly satisfied can be calculated as follows: Difference in revenue per year between a highly satisfied and satisfied customer = $172 Investment in each store = $40 million / 4500 = $8,880 Break Even Customers per store = $8880 / $172 = 51 Average daily customer count, per store = 570 Starbucks needs to turn 51/570 = 9% of its customers from satisfied to highly satisfied in order to break even.
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Starbucks: Delivering Customer Service

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However, the assumption is that speed of service is the number one driver for satisfaction and that the additional labor will provide the increase of speed of service. As we can see from the rankings of the key attributes by Starbucks customers, fast service come sixth in importance. There are other factors such as cleanliness and customer value that holder higher importance. Based on the companys research, only 10% of the Starbucks customers have asked for a faster, more efficient service. Even if the $40 million investment is made and customers get a faster service, there is a big risk in losing value in some of the other perceptions. For example, having more partners in the store might lead to loss of the personal treatment of customers. Also, not all stores are equal in size, number of people they serve and location therefore it would make sense to allocate the money on the basis of the amount of resources actually needed. There would be no need to invest in a store where all customers are highly satisfied and there would be higher need to invest in a store where there is a high percentage of less satisfied customers.

Recommendations
y Starbucks should develop an internal strategic marketing group that would coordinate actions of the market research group, the category group and the marketing group. This would give the opportunity for Starbucks to get faster feedback from customers and be proactive. y They should focus on improving efficiency of existing partners by removing non value added task, simplifying the preparation methods and investing in new machines like the versimo. y The proposed investment of $40 million should be carried out in phases. First Starbucks should test idea by monitoring the results of proportional investment in some stores. Also, the investment should be made as per each stores requirement and not uniformly across all stores. y Starbucks must also work on other parameters that are important to customers, like cleanliness, value to customer, customer perceptions and image or product differentiation.

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