Starbucks: Delivering Customer ServiceHoward Schultz’s idea with Starbucks in the mid 1980’s was to create a chain of coffeehouses with a product differentiation ofspecialty “live coffee”, service or customer intimacy with an “experience”, and an atmosphere of a “third place” to add to theirwork and home alternatives.The original stores sold whole beans and premium-priced coffee beverages by the cup and catered primarily to affluent, welleducated, white-collar patrons (skewed female) between the ages of 25 and 44.By 2002, there were over 5,000 stores around the globe.The company spent minimal dollars on advertising to promote a brand concept.Enforced exacting coffee standards by controlling the supply chain as much as possible, and maintain control over theoperations at the retail level.Starbucks research indicated that customers did perceive many independent coffee houses as a “third place”, but Starbuckswas seen more as a convenient, quick, and consistently good coffee provider. This is in contrast to the way Starbucksmanagement viewed the company.Sales were comprised as follows:Product Mix with % salesOther- 15% Revenue Source
IssueRecent Market Research shows a decline in Customer Satisfaction at Starbucks. To stay on plan with their aggressive growthstrategy, should $40 million be invested in the 4,500 stores focusing on improving the speed of customer service? Will this improvement lead to increased satisfaction that will translate in to an increase in sales and profitability? Does this investment align with the growth strategy of retail expansion and product innovation? Mission Statement “live coffee”The Starbucks Value Proposition:To create an “experience” around the consumption of coffee, an experience that people would weave into their livesTo create an uplifting experience in “Customer intimacy”To create an “ambience” based on human spirit, sense of community, and the need for people to come togetherMatters of ConcernStarbucks is suddenly in a position of: Consistent salesBUT 1. Low customer satisfaction Low speed of service 2. Customized drinks Slows down the service process Strain on workers 3. Hand crafted Drinks Involve Time Slows down the service process 4. Competition A variety of regionally concentrated small scale Specialty coffee, bagel and donut chains Recent Findings of people’s experiences: Starbucks cares primarily about making money Up from 54% to 61%
Starbucks cares about building more stores Up from 48% to 55% Top 5 Attributes of Starbucks: 1. Known for specialty/gourmet coffee (54% strongly agree) 2. Widely available (43% strongly agree) 3. Corporate (42% strongly agree) 4. Trendy (41.5% strongly agree) 5. Always feel welcome at Starbucks (39% strongly agree)Background and ProblemsThe specialty items included strategic alliances with Pepsi Cola to sell alternative beverages, Dreyer’s to develop and distributea line of ice cream, Kraft Foods handled sales of coffee and alternative products to warehouse clubs, and various grocery storechains for their coffee.Baristas (employees) were encouraged to interact with customers in a friendly and prompt manner, and were paid higher thanaverage wages and benefits. Employees were considered partners and promotions were usually from within the company.Recent indications were that customer satisfaction was declining due to the time required to be served and employee attitude.Starbucks had a system set up to track customer satisfactionWhile Starbucks was the largest specialty coffee chain, many other chains competed directly with Starbucks, and many otherchains could at any time enter retail specialty coffee sales (e.g. Dunkin Donuts, convenience stores, and many similar retail foodstores.New innovation was based upon partner acceptance. Customers rated the new innovations as being much lower in importancethan customer service, yet Starbucks was placing a high importance on developing them. Many new products were introducedwhich greatly expanded the menu items available.Baristas jobs were complicated by the fact that many products required numerous steps to complete the order.They had installed automated espresso machines in some stores for the customers use to reduce wait time.Introduced a prepaid card that could be used to pay for products in the storesStarbucks had no centralized marketing program. Sales data was accumulated, and it was the responsibility of management torequest that specific data be analyzed.The goal of Starbucks was to expand store openings as rapidly as possible. They were opening almost 3 new stores a day.New stores cannibalized existing store sales, but Starbucks did not see that as an important issue.There was very little image or product differentiation between Starbucks and competing chains.The newer customers were younger, less educated, in lower income brackets, had less frequent visits, and had a differentperception of Starbucks.
Concern had been expressed that Starbucks had lost the connection between satisfying our customers and growing thebusiness,Starbucks wanted to serve the customer within 3 minute time window. Is that going to add customer loyalty?Starbucks wanted more handcrafted time consuming choices for consumers. Is that going to add to customer loyaltyStarbucks sees themselves as selling innovative products, do the customers see them this way or as a specialty coffeecommodity store?Rise of coffee consumption in the US with the largest growth being that of specialty coffee.Starbucks had no operations in 6 states, and was operating in only 150 of 300 metro areas.In the home segment, specialty coffee was estimated to be 3.2 billion. Starbucks only had 4% of this market.The opposing chart depicts the total coffee market, and the representative share of specialty coffee.2002 Estimate - $21.5b Starbucks- 42% share in specialtyAlternatives & Evaluations 1. Redefine their marketing strategies starting with a proper research and evaluation of what the customer wants. Starbucks has lost track of the customer when their determination of what is served to the customer is determined by what makes the barista happy. 2. Analyze the customers, and potential customers through their specialty sales to see the impact upon current or potential retail sales in stores. Out of store sales is obviously helping drive Starbucks retail sales. 40% of the new customers have tried Starbucks products prior to coming into the store the first time. How do we increase these sales? Is it because of the coffee purchased at the grocery stores? Did they find what they expected when they tried the Starbucks retail store? 3. Research customers who do not frequent Starbucks, or who have never been inside a Starbucks store to determine why. What is their perception of Starbucks? Do they drink coffee or specialty coffee? What would get them to try it for the first time? 4. Create a centralized marketing department which can attempt to coordinate all marketing efforts. There appears to be a lack of harmony between collecting data and the proper evaluation of the data. The snapshot methodology they used may not reflect a universal measure of customer satisfaction. 5. Analyze the innovative sales to determine the effect on labor costs to determine if the sales support the costs and the potential decrease in the time available to quickly serve the customer. Case research indicates that innovative products are not as important to the customer as quick and pleasant sales. Are these sales actually impeding the object of quick and pleasant sales without providing important income? Their marketing product mix may be inappropriate. 6. Concentrate new store openings in areas that would not cannibalize existing sales. There are many areas that Starbucks is not in. Why cannibalize? 7. Advertise more to establish the branding of Starbucks. Why is Starbucks different? While Starbucks may think they know what distinguishes Starbucks from others, they should do more research and develop a real strategy prior to
initiating any major advertising campaign. They have developed over time, and their customers are different than before.8. Quick term fix to add more employee hours to reduce wait time, although this should be allocated according to an established need per store. The quick, convenient, and friendly service are obviously important based on customer satisfaction surveys. For the short term this obviously should be addressed and fixed. At some point, the product mix should be addressed to help reduced wait time.9. Separate serving customers with customized orders from those which will require less time, such as the customer just wanting coffee. Use the more experienced baristas to handle the more complicated orders. The layout of the new stores that are opened could more utilize this concept.10. Extend the utility of the cards by embedding RFID tags to identify the customer and the orders to add to a database.11. Introduce more customer operated machines to reduce wait time.12. Use additional advertising for sales of coffee in grocery stores. Their 4% of home specialty coffee sales appears very small. Nestle exited specialty coffee in grocery stores during this time frame. There was a large void of specialty coffee in grocery stores. A concentrated effort in this type of distribution could have established more sales and some brand loyalty for coffee. Peets is a competitor chain in the California area. They see no difference between grocery store sales and their retail store sales per an interview with Patrick O’Dea. They have achieved considerable brand loyalty for a limited number of coffee lines, and charge a higher per unit sale price than Starbucks. Peets does not see innovative sales as a big option. Starbucks’ Options 1. Investment of $40 million annually to increase speed of service (impact = 2. Alter the product mix Determine change depending on store size and location 3. Process of Measuring Service performance Categories: Service, Cleanliness, Product Quality, Speed of Service 4. Retail Expansion New stores in new markets Geographically cluster stores in existing markets 5. Product innovation Priority of Mgmt given that the prices were stable in recent years 6. Service Innovation Starbucks store Value Card 7. Effort to identify and demonstrate in very concrete terms on how to determine Market Research Data Solutions Starbucks should pursue all of these alternatives Starbucks appears to consider competition as minimal, and that they are somewhat insulated. Probably, entertaining either idea is a strategic mistake. Starbucks’ Forte th 11 consecutive year of consistent sales of 5% or greater Company spent close to nothing to achieve this goal Sales climbed at an annual compound growth rate of 40% and net earnings to 50% since Starbucks went public Good strategic alliances with Pepsi-Cola and Kraft foods to distribute some of their products Lowest employee turnover rates in the industry (just 70% as compared to 300% the average of the fast food industry)
Implemented good policies to insure competitive advantage “Just say Yes” policy Measuring service performance Expect business projections to rise and be steady and consistent Plan of Action Plan based Starbucks’ strengths relative to the presented issues :1. Proceed with investing the $40 million annually in the 4,500 stores to increase service efficiency (impacting customer satisfaction. Goal ~ customer retention in the competitive coffee house market)2. While the investment enables additional labor hours, research efforts to increase efficiency through set-up and equipment (e.g. automated espresso machine, specialized work stations)3. Use secondary market research data to identify, analyze, and alter product differentiation strategies, with respect to smaller chains and Starbucks obliquities4. Alter the product mix depending on the store size and location of the outlet (demographics) i. Sample to find out what customers mainly look for ii. Sample data results would narrow the customization and train baristas with those special concoctions5. Marketing Research showing that existing markets are far from saturation i. Analyze this particular area with specific concrete terms targeting a particular objective 6. Continue with Product and Service innovation, proactively conduct an environmental scan to launch new products7. Validate Market Research metrics and methods of sampling, data analysis ii. Service Performance categories iii. Does the data translate in to measurable metrics that can impact sales and profitability? What we Can Learn from Starbucks Focus on the experience. Starbucks is masterful at wrapping its product in a deeply-textured gestalt. The choice of furniture and fixtures, the names of its drinks, the messages on the cups, the graphics, its all been studiously crafted. My local Starbucks in New York City even has a little tray at the register with the business cards of the manager and the assistant manager. Very clever. Makes them feel good, and it lets customers know that someone is in charge and accountable no less -- an increasingly rare commodity in todays retail environment. In short, there are no throwaways at Starbucks, and there shouldnt be at your company, either. Indeed, every business -- no matter how narrow the niche -- creates one experience or another around its customer interaction, its unique ecosystem. Think of your business in those terms, because attention to the small things sends a big message. It says that you really value your customers, that you credit them with the sensitivity to recognize the proliferation of quality and discipline. And -- importantly -- that you dont take them for granted. Pay attention to your "brand consciousness." F. Scott Fitzgerald -- on the first page of The Great Gatsby -- defined personality as an "unbroken string of successful gestures." Starbucks has got this down to a science; its whats behind the experience I talk about earlier. The brand has a distinct and recognizable voice, and through that syntax it radiates a clear and alluring identity, as well as a smart understanding of its customers--their values, their lifestyles, their needs. Why else, in heavens name, would someone care what music "were listening to" -- as they put it? Would you value the musical tastes of GM? Of Hewlett-Packard? Or of Dunkin Donuts, for that matter? I dont think so. But we respect Starbucks opinion because when it says "we," it means something to us. Starbucks has earned it, through a shared sensibility. Is that true of your business? What would it take to make it true? Imagine
if you could become a valued partner outside the narrow niche you compete in, because your judgment and taste andcontinued ability to surprise and please were trusted implicitly. Thats marketing power.Dont try to squeeze every last cent out of a customer. Imagine the radical illogic: you can sit for fivehours with a single cup of coffee. An MBA culture would never allow this -- it would be busy calculating the patheticROI on this customer loitering, analyzing the time value of the real estate, dividing it by the marginal cost of thecoffee, and soon recommending that Starbucks charge by the hour, like a parking garage.The truth is, though, that the comfortable chairs and couches have turned out to be a counterintuitive economicasset. They create loyalty. They drive business that might otherwise go elsewhere. They contribute to multiplecustomers gathering -- and spending.Are you too wrapped up in "monetizing" your customers, instead of creating a business environment where theydont feel like a spending gun is always being held to their heads? Remarkable things will happen when youdemonstrate some patience and confidence; confidence that if treated well, your customers will come back even ifyoure not the cheapest cup of coffee in town.Dont accept conventional price ceilings. Industry experts (and consumer research) would have killed theidea before it started. I can hear the objections now: No one would ever pay $1.75 for a cup of coffee they can buy for85 cents -- not to mention a $3 specialty drink. The concept is too sophisticated for Americans. People are in toomuch of a hurry to stay and linger. Theyll try it once and never come back.In todays hyper price-sensitive world, where all of us are faced with driving down costs every day, its easy to forgetthat markets -- if developed properly -- have more upward elasticity than many give them credit for. Of course,commanding this higher price demands relentless attention to the brand delivery system Ive been talking about.Pastiche is powerful. Starbucks is a master at recombinant cultural marketing. Theres a bit of America: Thename, for one, is out of Moby Dick, a quintessentially American novel. The multiplicity of beverage choices -- andendless customization potential -- is also an acknowledgement of our uniquely empowered (and opinionated)consumer. Of course, theres a savvy bit of Italy: the barista, the faux Italian drink names, the entire caf é gestalt.Finally, theres a global, New Age-y feel to the entire experience: the environmental sensibility, the focus on "fairtrade," the conscious availability of soy milk, even the way Starbucks markets the company as a progressive employer(health insurance for part-timers).But if youre not in the coffee shop business, how relevant is this to you? Very. Were an increasingly diverse culture --consumer and business -- so you need to make sure your company is sending the right signals. This can be from everylevel: conceptually, product-wise, graphically, from a personnel perspective.The other thing, of course, is that Starbucks venerates its product. And thats contagious. So next time youre facing abusiness dilemma, leave your desk, get in your car -- or take a walk -- to the nearest Starbucks. You could learnsomething.