This document summarizes a presentation about improving operations at a specific Starbucks location. It outlines recommendations to: 1) revamp the employee reward system to better motivate workers; 2) tighten the focus on creating a relaxing atmosphere as the "third place"; and 3) measure profitability based on sales of profitable items rather than just reducing labor costs. A three-step action plan is proposed to decrease turnover, improve accessibility and cleanliness, and enhance the store's atmosphere. Potential risks and benefits of the recommendations are also discussed.

1. Starbucks Presented by: Adam Berger, Justin Buchman, Donald Chase & Suzana Hsu THE FRAPPUCCINOS

2. Presentation Outline Introduction to Starbucks Industry Overview Company Overview Site Analysis Recommendations for Improvement Focused Recommendation for Improvement Final Action Plan Impact Analysis Wrap Up

3. Introduction to Starbucks Company started in 1971 in Seattle, Washington Grew from 55 stores in 1989 to over 2,200 stores today Products sold include: - beverages - pastries - whole coffee beans - coffee-related retail items

4. Industry Overview

5. Industry Definition Specialty Eatery Industry Fits within the largest segment of disposable income spending -- food and beverages Steady growth in this segment in the 1990’s has led to an abundant number of new companies As demand for convenience has made eating out a normal routine, the demand for specialty food services has increased in recent years

6. Industry and Competitive Analysis Market Structure Monopolistic Competition Competitive Activity Many companies are in the market and competition is fierce Competitors use location, product mix, and store atmosphere differentiation to establish market niche Industry Costs and Capital Structure Low to moderate costs for each location Major start-up expenditures are property and equipment Major operating costs are labor and cost of sales

7. Industry PEST Analysis Political Influences Relationships between coffee producing nations and US State & Local government controls Economic Influences Constant demand for food and beverages Changes in disposable income could influence purchase levels Social Influences Consumer preferences could shift from coffee to other beverages Technological Influences Use of technology can improve operational efficiencies

8. Company Overview

9. Starbucks Corporate Strategy Maximize market penetration Provide a relaxing, attractive social atmosphere Offer high-quality products Create a great working environment Achieve profitability

10. Starbucks SWOT Analysis Strengths Largest market share in industry Differentiated atmosphere Weaknesses Aggressive expansion could lead to managerial / financial problems Opportunities Whole bean sales in supermarkets Threats Lack of ownership of coffee farms can lead to price fluctuations

11. Company Financial Performance (1998 FY) Revenues $1,308.7 million (% of Sales) Gross Margin 195.7 million 15% Pre-tax Profit Margin 116.4 million 8.9% Net Income 68.4 million 5.2% Return-on-Assets 8.7% Return-on-Equity 11.0% Debt-to-Equity 0.04 12 mo. Revenue Growth 28.4%

12. Company Financial Performance (1998 FY)

13. Site Analysis

14. Site Characteristics Leased store located on Central Street in Wellesley Store has over 1,000 square feet of retail space and 1,000 square feet of office and storage space in the basement Second most profitable store in the fourteen store region Located one block away from Commuter Rail train station and in busy retail shopping area Only one direct competitor (Au Bon Pain) in the area

15. Site’s Operational Results (1998 FYTD – 11 Months) Financial Operations 1998 1997 %  Total Sales $760,576 $796,688 (4.5%) COGS 242,593 262, 945 (7.7%) C/M 517,983 533,743 (3.0%) Fixed Exp. 367,746 431,923 (14.9%) EBIT $150,237 $101,820 47.6% No money spent on independent advertisement Local entertainment budget underutilized

17. Site 7-S Analysis

18. Site 7-S Analysis Strategy Store’s strategy is to create a comfortable Third Place environment Serve customer a customized high-quality product Achieve high level of profitability by focusing on high-margin items while generating add-on sales Minimize overall expenses by focusing on controllable expenses

19. Site 7-S Analysis Corporate organization is tall with four levels of management above store management Structure Functional in structure and relatively flat

20. Site 7-S Analysis Staffing Location has one manager, an assistant manager and 16 partners Benefits package includes health, dental, and vision care, stock options, free shift drinks, and a free pound of coffee each week Raises are based on semi-annual performance evaluations with raises ranging from 0-5% Bonuses are not utilized, but the location has given away non monetary rewards

21. Site 7-S Analysis Systems Corporate headquarters exercises controls over individual sites Total Quality Management is specifically built into their processes Utilizes a large amount of information technology (IT) Internal controls for the store are determined by the manager based in part on information provided by the IT system

22. The use of IT at Starbucks Corporate IT System Individual Stores Individual Stores Sales, Inventory, Staffing Sales, Inventory, Staffing Individual Stores Inventory, Orders, Transfers Vendors, Distributors, Mgmt., Channel Members Orders, Budgets, Future Sales

23. Site 7-S Analysis Skills Most important skills include “people skills” and drink preparation ability Partners receive training to learn about products, brewing methods, and sales techniques Retraining mainly occurs during new product roll-outs, although this site does not use regular meetings, but instead one-to-one discourse

24. Order Cycle Times Bottleneck Capacity 114 / Hr Take Customer’s Order Bottleneck Order? Pastry? .53 Min .53 Min Yes Yes No Pastry? .40 Min .27 Min Yes No No

25. Site 7-S Analysis Style Basic management style is Laissez Faire Management motivates through reviews and raises Work duties are assigned by shift supervisors Employees are allowed to use initiative and empowered to make decisions

26. Site 7-S Analysis Shared Values (from Mission Statement) Provide a great work environment Treat each other with respect and dignity Embrace diversity Apply the highest quality standards for products Develop enthusiastically satisfied customers Contribute to the community and environment Recognize that profitability is essential to future success

27. Alignment of Store with Corporate Strategy Contrary to the mission statement focus, the reduction of staffing levels appears to be more important than developing satisfied customers The relevance of the benefits package is misaligned considering the average age of employees The high turnover rate of partners and managers is detrimental to customer environment

28. Recommendations

29. Recommendations For Improvement 1. Revamp the employee reward system 2. Tighten focus on creating the “Third Place” environment 3. Focus profitability measures on profitable sales, not just reduction in staffing

30. Revamp Employee Reward System Large percentage of the staff are under the age of twenty Benefits package focuses on medical, dental, and vision care, as well as the employee stock options Outside of hourly wage, and semiannual raises, there are few monetary rewards

31. Improve “Third Place” Environment Site has a very high employee turnover rate Manager “promoted” to a another store in hopes of improving their poor performance Site has very poor handicapped accessibility Condition of restroom in each of our visits was poor and had no baby changing area

32. Focus Profitability Measures on More Than Just Staffing Store is underperforming on some high margin product segments Too high a focus on minimizing direct labor as a key to achieve profitability Focus on high-margin items and profitable add-on sales By increasing pastry sales by 33%, store would realize a $16K increase in contribution

33. Focused Recommendation Improve “Third Place” Environment

34. Pros and Cons of Discounted Opportunities Revamp the Employee Reward System Pros Employees are motivated with more incentive to perform Lower employee turnover rates Positive reinforcement which leads to higher feelings of job satisfaction Cons Pay and benefit structures dictated by corporate HQ Cost of benefits would additional benefits lower site profitability New reward system requires additional management

35. Pros and Cons of Discounted Opportunities (Cont.) Focus Profitability Measures on More Than Just Staffing Pros Higher staffing levels benefit other employees Better customer service Improved customer focus could lead to higher sales Cons Staffing is a cost that will decrease profitability Upper-level management perception of low employee productivity Employees may get in each other’s way

36. Three-Step Action Plan For Improvement Decrease employee turnover rate Focus on hiring older employees where benefits package is more appropriate Base raises on performance rather than maximizing raises for economic reasons Develop and actively maintain a reward system for employees (i.e. employee of the month) Develop a system of regular employee communications / meetings

37. Action Plan (cont.) Improve site accessibility and cleanliness Upgrade front door and restrooms for handicapped accessibility Add a baby changing station Redesign restroom to separate cleaning supplies from bathroom or move cleaning supplies to another location Focus employee attention on restroom cleanliness

38. Action Plan (cont.) Enhance Starbuck’s differentiated atmosphere Utilize entertainment budget to hire outside entertainers, have book / poetry readings, etc. Display the store’s collection of games and activities more prominently Make the location more of a “scene”

39. Impact Analysis - Benefits By focusing on the initial recruitment and hiring stage, and by rewarding employees based on merit current turnover rates will be reduced. By focusing on site accessibility and cleanliness, the physical facility will not detract from atmosphere. By improving Starbucks’ atmosphere, it will become a more attractive place to go.

40. Potential Risks Customers may not react positively to the changes being made Not enough available employees to meet re-aligned hiring needs Claims of age discrimination and negative affect on sales in youth demographic Costs associated with planned change

41. Wrap-Up Starbucks is the market leader in a growing market segment Starbucks is known world-wide for its high-quality food products and differentiated “Third Place” atmosphere The Wellesley location embodies the ideals of the corporate mission and has been very profitable, but there are still opportunities for improvement

42. Conclusion / Questions