Case Analysis
Starbucks: Delivering Customer Service Marketing - II
Section B Group 6
Kshitij Agrawal PGP2011699 Abhishek Upadhya PGP2011510 Yangchen Bhutia PGP2011949 Ankita Aggarwal PGP2011517 Trushant Nagare PGP2011736 Abhijeet Mahajan PGP2011707 Anirudh Suresh PGP2011548
Company background Starbucks was started as a small coffee shop in Seattle’s Pike Place market specialized in
selling whole Arabica beans to a niche market of coffee purist. After Howard Schultz took over, he began opening new outlets around the country selling whole beans and premium- priced coffee beverages by the cup and served to affluent, well-educated, white-collar patrons. The main idea of creating a chain of coffeehouse is that it would become the America’s “third place” since America
had two places in their live- home and work. By 1992 the company had 140 store outlets around the northwest and Chicago. The same year, Schultz decided to make the company public raising $25 million in the process and expanded his stores. By the mid-2002, Starbucks has been established as a dominant specialty-store brand in North America. Sales were higher more than ever and now the small coffee shop serves more than 20 million unique customers in well over 5000 stores around the globe and opens on an average, three new stores a day. Today, Starbucks Corporation is the leading roaster, retailer, and marketers of specialty coffee in the world, with minimal advertising expenditure. In 1992, Schultz remained as the Chairman and Chief Global Strategist in control of the company, handing over day-to-day operation to CEO Orin Smith, joined the company in 1990.
Situational analysis Market Analysis •
Coffee consumption is rising in the United States and more than 109 million people are drinking coffee every day. Specialty coffee is having the biggest growth potential. There are still eight states to be covered in the US itself.
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It was estimated that one-third of all U.S. coffee consumption took place outside of the home, in places such as offices, restaurants, and coffee shops.
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The company believed it was far from reaching saturation levels in many existing markets. Only seven stated had more than 100 Starbucks locations.
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Starbucks owned close to one-third of America’s coffee bars, more than i ts next five biggest competitors combined.
Competitor Analysis •
Starbucks competed against the variety of small scale specialty coffee chains, most of which were regionally concentrated. Each one tried to differentiate from Starbucks in different ways.
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Minneapolis-based Caribou Coffee, which operated more than 200 stores in nine states tried to differentiate through store environment. California based Peet’s Coffee
& Tea, which operated about 70 stores in five states tried to build super premium brand by offering freshest coffee on the market. •
Starbucks also competed against the specialty coffee shops which offered wide range of food and beverages. Another competitor of Starbucks is Dunkin Donuts which operated over 3700 stores in 38 states. In recent years Dunkin started flavored coffee and tea.
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Starbucks also competed against donut and bagel chains such as Dunkin Donuts, which operated over 3700 stores in 38 states.
Changing scenario with Starbucks growth The growth of Starbucks in the subsequent years led to an increase in the customer base catered to by them, due to 1. The increase in the number of Starbucks stores which went on increasing rapidly with more than 5000 owned stores. 2. An increase in the non retail shops such as the grocery stores, supermarkets, airports etc., making the brand more accessible. 3. The retail stores also started storing non coffee products. 4. Increased product mix offered by Starbucks The above points mean that in the positioning pyramid the area catered by the Starbucks is increasing downwards. An increasing product portfolio in terms of flavored coffee by the local coffee and doughnut shops also means area catered by local shops is moving upwards resulting in slowly overlapping customer base. With increasing customer base Starbucks suffered from an Identity crisis catering to broadly two sets of customers which perceived the Starbucks value proposition differently
Established Customers
New Customers
Education
Highly educated
Comparatively lower
Average Income
More
Low
Average age
Older
Younger
Factors influencing
Premium coffee, good ambience
Regular coffee, Faster
Customer Satisfaction
(clean store), customer
service, convenience,
intimacy(friendly staff),
It can be seen that few of the parameters affecting customer satisfaction levels for both the category of customers are contradictory to each other under given the limited resources that a Starbucks store has for eg
The more customer friendly the baristas are the slower the service tends to be The more customized the coffee is the slower the service The more people socialize in the store ie linger around longer the queue and the waiting time at the store The greater the product mix complexity, affects the employee satisfaction and in-turn negatively affects friendly attitude towards the customers
All this indicates that few customers are bound to be unsatisfied. Now lets look at the customer value that is generated across different customers with different levels of satisfaction. Customer Behavior as per the Satisfaction level
Unsatisfied
Satisfied
Highly Satisfied
Customer
Customer
Customer
No. Of Starbucks visit/month
3.9
4.3
7.2
No. Of Starbucks visit/year
46.8
51.6
86.4
Average expenditure/visit ($)
3.88
4.06
4.42
181.584
209.496
381.888
Average customer Life in Years
1.1
4.4
8.3
CLV (Customer Lifetime Value)
199.7424
921.7824
3169.67
Average expenditure/year
According to the above table the annual revenue generated by a highly satisfied customer is about $172 more than the annual revenue generated by a satisfied customer and $200 more than that of an unsatisfied customer. Similarly the lifetime value of a highly satisfied customer is $2248 more than the lifetime value of a satisfied customer and $2970 more than the lifetime value of an unsatisfied customer. So we can see that the customer satisfaction levels play an important role in the value generated by the customer and its imperative that Starbucks keeps its customers highly satisfied.
Issues Starbucks realized that with increasing customer base it was facing problems of declining customer satisfaction, brand dilution and an inherent positioning dilemma. The attributes which affected customer satisfaction have perhaps changed with the changes in the customer demographics and the perception of an “excellent” customer service would differ from the self -reported survey. Reason
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Products like venti tazoberry and crème required about 10 different steps for its preparation
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Customer orders are increasingly becoming customized
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Increased strain on the Baristas
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Time consuming orders lead to delay in serving and ultimately to customer
Effect
dissatisfaction Action: In order to tackle the declining customer satisfaction Christine Day, Senior Vice
President of administration in North America came up with a plan to invest $40 million annually in the company’s 4500 stores which would improve speed of service and hence
customer satisfaction.
Impact of investment on Customer Service Starbucks In order to increase its customer service wants to invest $ 40 million to add more labor hours to the stores across 4500 stores Calculating number of unique customers in a year Average daily customer count/ store: Average annual customer count/store: Average number of visits by a customer in a month: Average number of unique customers in a year(total customers in a year /60): Conversion from a satisfied to a highly satisfied customer Total Investment ($40 million)/year Number of stores Investment/Store Difference between value generated from a Satisfied and a highly satisfied customer ($) No of customers to be converted per store from Satisfied to highly satisfied to recover the investment costs
570 208050 5 3467.5
40000000 4500 8888.889 172 51.67
Conclusion The investment of $40 million USD would have a positive impact on the sales and profitability of Starbucks if it can convert 52 people to highly satisfied category. Given that the number of customers visiting the store is more than 3500, this target looks viable. Moreover the investment may also prevent losing customers on the grounds of customer service i.e. few customers moving from being satisfied to unsatisfied due to deteriorating customer service
Suggestions 1. Opening up speedy kiosks/vending machines within the retails stores that emphasizes on speed and convenience in addition to the inner lounge for people who want to enjoy the ambience and linger around. 2. Reduction of price for regular coffees to attract and retain new customers. 3. Pruning of premium products that have a below average sales. 4. More emphasis on making the coffee brewing processes simpler.
