Introduction: This case is about the “Starbucks”, who succeed to introduce “Italian Coffee” culture in states. The case revolves around how Starbucks changed the coffee consumption in states into the commodity. The philosophy of the company is much stronger than the culture of America. Customers are loyal towards the “Starbucks” brand; it is more than a brand because Starbucks provides experience. The scenario starts when company is celebrating its 11th consecutive growth of 5% even in recession. recession. One of the senior senior management management of the Starbucks believes believes that they are in “Recession “Recession Proof” business. But the senior vice president, Day looks weird about the continuous expansion before according to the marketing research report “with the expansion they are facing the tradeoff of customer satisfaction”. She had a plan with $ 40 Million investment per annum, now we have to look does do es this 40 Million solve the problems of “Starbucks” or not. Key Terms: 1. Baristas: A barista (from the Italian for "bartender") is a person, usually a coffee-house
employee, who prepares and serves espresso espresso-based -based coffee drinks. 2. Valu Valuee Prop Propos osit itio ion: n: A value proposition is a promise a promise of value of value to be delivered and a belief from the customer customer that that value will be experienced. A value proposition can apply to an entire organization, or parts thereof, or customer accounts, or o r products or services. 3. Brand Mantra Mantra:: Mantra Mantra is the the brand brand slogan; slogan; mostly mostly it is is 2-5 words. words. 4. Bottleneck: A bottleneck is a phenomenon where the performance or capacity of an
entire system is limited by a single or limited number of compon ents or resources. 5. Cannibalization: Cannibalization refers to a reduction in sales volume, sales revenue,
or market or market share of one product as a result of the introduction of a new product new product by the same producer.
Quantitative Data: 1. Inve Invest stme ment nt Anal Analys ysis is Investment Analysis Assumption
Each store is equally important
Investment Per Annum
$40,000,000
Total # of Stores Stores
4500
Investment in one store
8888.888889
1 year
52 weeks
1 week investment
170.9401709
1 week.
20 hour addition plan
1 hour
8.547008547
This analysis clearly shows that addition of 40 Million will add only 1-2 more barista’s in the Starbucks. If the hourly wage rate is $9 than 1 baristas will be hired.(Exhibit # 3) But there is a big question that the barista’s will solve the problem of customer’s satisfaction. Are they sure about the capacity utilization of the machinery? 2. EPS EPS Ana Anallysi ysis: EPS Analysis 40,000,000
0.07
Earnings
571428571.4
It is clearly mentioned in the case that the $40 Million is the 7 cent of the EPS. Giving 7 cent annually in the customer satisfaction means you are giving the shareholders wealth. But this analysis is incremental only if the 7 cent will generate multiple effects for the shareholder.
3. Exhibi Exhibitt # 1: Financ Financial ial Highli Highlight ghts: s:
Financial Highlights 2000
2001
2002
55.8
58.0
59.0
Net Profit Margin 4.3
6.8
6.5
Expense Ratio
51.5
51.2
52.4
Operating Ratio
32.4
33.1
34.1
7 cent versus NPM
7
7
7
Difference
-2.7
-0.2
-0.5
Gross Margin
Net profit margin of the company is only 6.5% but the investment cost 7% which clearly shows the negative or loss in the financial statement. Financial Highlights also shows that about half sales of the company is covered by expenses. 4. Exhibi Exhibitt # 2: Starbu Starbucks cks Store Store Grow Growth: th: 2000
2001
2002
85
80
78
Company Operated
70
63
59
Licensed Stores
15
17
18
15
20
22
Company Operated
5
6
7
Licensed Stores
10
13
16
Total North America America
Total International International
5. Exhibi Exhibitt # 3: Increm Increment ental al Analy Analysis sis:: Exhibit # 3: Add-on Analysis Average Hourly Wage Total labor hr./ week
9 360
Total Labor cost cost per Week 3240
Average weekly 15400 store volume Increment After
20
12160
hour
addition Average Hourly Wage 9 Total labor hr./ week 380 Total Labor cost cost per Week 3420 Aver verage weekl eekly y stor tore 15400 volume
Incremental
11980
Benefit
Satisfaction
180
Cost/ Store Incremental Analysis:
This analysis shows that satisfaction cost per week is around 180$ per store. Because if we add 20 hours to the operations of the store for the satisfaction than it cost 180. Here we have to analyze that this 180 will satisfy the customers properly or not? The assumption in this analysis is that this cost only satisfies the customers not add volume of profits to the store because b ecause store is operated on its full capacity despite of the cannibalization they failed to handle all of their customers properly. The incremental cost currently is 12160 but after addition of 20 labor hours it will decrease to 11980. 6. Exhibi Exhibitt # 9: 9: Brea Break-E k-Even ven Analys Analysis: is: Breakeven Analysis
Unsatisfie d
Satisfied
Highly Satisfied
Number of Visits/Month
3.9
4.3
7.2
Average ticket size
$3.88
$4.06
$4.42
Average customer life
1.1
4.4
8.3
Customer life time Value
$200
$922
$3,170
Incr Increm emen enta tall
Bene Benefi fitt
from from
Unsa Unsati tisf sfie ied d
to
$722
Satisfied Incremental Benefit from satisfied to Highly
$2,24
Satisfied
8 Investment Per Year
$40,000,0 00
Break-Even
5539 1779 9
4
Analysis: This analysis clearly shows that $40,000,000 breakeven points from unsatisfied to satisfied and satisfied to highly satisfied customers. The main purpose of the 40 Million is to satisfy the customers. If through this investment unsatisfied customers will satisfied than breakeven point is 55399 55399,, this this show showss that that 55399 55399 unsa unsati tisf sfie ied d cust custom omer erss mu must st be sati satisf sfie ied d to brea break k even even the the investment if the customer will not satisfied than all the investment is in vain. On the other hand side 17794 customers must be satisfied so that investment will be breakeven.
7. After the IPO, IPO, annual sales growt growth h was 40% and Net Earnin Earnings gs growth growth was 50%. 50%. 8. Starbucks Starbucks is serving serving 20 Millio Million n customers customers in 5000 stores. stores. 9. Averag Averagee store store openin opening g is 3 per per day. day. 10. Starbucks has 60,000 employees employees out of which 50,000 are in North America. 11. Total Market Market of the coffee in US was 161 Million Million out of which 109 million million drink coffee regular and 52 million occasionally. 12. The goal of the the Starbucks is to have 15,000 international international stores. 13. Satisfacti Satisfaction on Rate: 80-90%. 80-90%. 14. Fortune Fortune Magazine: Magazine: 47th best place to work. 15. Internal Internal Hiring: Hiring: About 70% of the company store managers managers were ex-baristas ex-baristas and about 60% of its district managers were ex-store managers. 16. Turnover: Starbucks has only 70% turnover turnover rate where in industry is 300% Qualitative Data: 1. Starbu Starbucks cks is not always always meeting meeting the customer customers’ s’ expectat expectation ionss in the area of custome customer’s r’s satisfaction. 2. Starbucks Starbucks converte converted d simple simple coffee coffee into into the America America culture. culture. 3. Positioning : Third place for American’s life after home and work. 4. Ideology: A place where people can relax, enjoy and it is separate from work and home. 5. Target Audience: Customers’ from the age of 25-44, white collar patrons, well educated and affluent class. 6. Brand Mantra: “Live Coffee”.
7. Brand Character: An exper experie ienc ncee that that peop people le coul could d weav weavee into into the the fabr fabric ic of thei their r everyday lives. 8. Locational Strategy: All of the stores are located in highly dense areas. 9. All the Starbucks Starbucks employees employees were were called called “Partners “Partners”. ”. 10. HR Policies: The Company has a generous policy of giving health insurance and stock options to even the most entry level partners.
11. Experiential Experiential Branding Branding Components: Components:
12. Distribut Distribution ion Channel: Channel:
Issue: 1. Starbu Starbucks cks spends spends “NOTHIN “NOTHING” G” on the marketi marketing ng where in industry industry 3-6% 3-6% was spendi spending ng on marketing budget. 2. Gap between between the customer customers’ s’ expectations expectations and and customer’s customer’s satisf satisfactio action. n. 3. Minimal Minimal Product Differen Differentiat tiation: ion: There is very very less product product differentia differentiation tion in the minds of consumers compared to small coffee houses. 4. Prod Product uct Prol Prolif ifer erat atio ion: n: Star Starbu buck ckss adde added d many many flavo flavors rs unde underr coff coffee ee um umbr brel ella la,, whic which h becomes harder to handle in the terms of time. 5.
Role Role Confli Conflict ct in Barist Barista’ a’ss duty duty:: Eith Either er to provi provide de 3 minu minute te serv servic icee to the regul regular ar customers or to go for the customers’ intimacy.
6. They should should focus focus on consoli consolidatio dation n rather rather than aggress aggressive ive expansion expansion.. 7. For Starbuck’s Starbuck’s Canniba Cannibalizat lization ion is the opportu opportunity nity to attract attract more more customers customers.. 8. Custom Customers ers think think that they are focusi focusing ng on the “MONEY “MONEY”” rather rather than customer customerss due to aggressive expansion. 9. At the star startt of the busi busine ness ss “Custo “Custome mers rs go to Starbu Starbucks cks”” but but now now “Star “Starbu buck ckss go to Customers”.
Core Problem: Dramat Dramatical ically ly change change in “Demog “Demograph raphics” ics” and aggressi aggressive ve retail retail expansi expansion on of Starbuck Starbuckss resulted in changing the norms of “So called Starbucks Culture”.
Justification: Now you will find the Starbucks at every corner of your neighborhood. This aggressive strategy of retail expansion kills the true ideology of “Third place”. Now Starbucks is the convenience coffee shop where you can grasp a cup of coffee and go to the office. Secondly the change in the demographics and primary target customers of the Starbucks also changed. At start, Starbucks only targets the affluent class but now the large number of lower end consumers is also a part of Starbucks audience. Barista’s are now confused between the primary/regular customers and customers’ intimacy of the the Star Starbuc bucks ks.. To whom whom they they gave gave mo more re pref prefer eren ence, ce, and due due to whic which h the the custo custome mer’ r’ss dissatisfaction is also increasing. At the start of the business “customers go to the Starbucks” but now it seems like “Starbucks go to customers”. Starbucks culture of relax and refreshment is changing into the business and normal life of the customers. Now customers are habitual to the coffee and they grasp the coffee and leave the Starbucks. Now the Starbucks has to mold itself with the demographic change take place in the American society. The main problem arises when the “Customer Base” in the Starbucks increased and they don’t have any plan how to cater with that problem. Customers are the king. So now customers are at the door of Starbucks, they want their coffee in 3 minutes but Barista’s don’t have time to respond all of the customers. In many cases problem arise when there is “NO” customer but in that case there are so many customer.
Decision Alternatives 1. Make Make the $ 40 milli million on invest investmen mentt in Labor Labor.. 2. Invest Invest more more money money in “Capa “Capacit city” y” enhancem enhancement ent.. 3. Devel Develop op an inte intern rnal al stra strate tegy gy wher wheree they they can can trai train n thei theirr “Par “Partn tner ers” s” about about custo custome mers rs handling. 4. Introduce Introduce a “Takeaway” “Takeaway” service service for for time time conscious conscious customers. customers. 5. Focus Focus on the the large large “Mass “Mass Custo Customiz mizati ation” on”.. Decision Criteria: 1. Decision Decision must must integrat integratee with the the corporate corporate strateg strategy y of the Starbu Starbucks. cks. 2. Decision Decision must must cover all aspect aspectss of Starbucks Starbucks ideology ideology.. 3. Decisi Decision on must must be fina financi ncial al viabl viable. e. 4. Through Through the decision decision the problem problem of custome customer’s r’s dissatis dissatisfacti faction on must be solved. solved. 5. Decision Decision must must cover the “Demograp “Demographics” hics” aspect aspectss of changing changing environm environment. ent.
Alternative # 1: Make the $ 40 Million investment in Labor. Analysis: It is very easy to say about the investment of $40 million per year for customer cu stomer satisfaction but in the financial term this amount is the 7 cent of the EPS. How can you invest 7 cent of the EPS per year when your earnings are less than 7% of the sales. Furthermore in the breakeven analysis it is clearl clearly y sho shows ws that that if the 55000 55000 uns unsati atisfi sfied ed custom customers ers are satis satisfie fied d they they can breake breakeven ven the investment or 17700 satisfied customers converted into the highly satisfied customers. Alternative # 2: Invest more money in “Capacity” Enhancement. Analysis: This alternative is based on the assumption that customers are coming to Starbucks but they are operating in the full capacity. So Starbucks has to place more machinery and espresso in the outlets so that they can easily satisfy their customers. Alternative # 3: Develop Internal Strategy: Analysis: Starbucks has to develop internal strategy to address the problem of dissatisfaction. They should train their employees according to the customer’s satisfaction and how to handle more customers in the rush hours. They have to build the “Cycle time” time” customers system system where they can now in how much time the table will be free. So in that way they can easily address the problem.
Alternative # 4: Introduce “Takeaway” Service: Analysis: Through the takeaway service, they will easily handle the customer rush but it contains a total new positioning of the brand. Takeaway will solve the problem but it will require more money, machinery, and labor to implement in the Starbucks. Also image of the Starbucks will distort throug through h this this becaus becausee “Third “Third Place” Place” cultur culturee will will fully fully elimin eliminate ated d into into the ideolo ideology gy of the Starbucks. Alternative # 5: Mass Customization Analysis: This Th is prob proble lem m is aris arisin ing g due to the the high high mix mix of produ product ct varie variety ty in the the Star Starbuc bucks ks.. Mass Mass customization will easily fasten up the processes and customer’s service will easily be achieved. But how to achieve mass customization is the point? I think through postponement technique it will be more appropriate because when the customers come in, Starbucks has the product mix of the the enti entire re ingr ingredi edien entt whic which h will will fast fasten en the the oper operat atio ion n of the the Star Starbu buck cks. s. Th Thro roug ugh h mass mass customization, customers will make their coffees by themselves it can easily solve the problem of dissatisfaction of the customers.
Recommendation: 1. We select select the mix strategy, strategy, which which covers “intern “internal al strategy” strategy” and “mass “mass customizatio customization”. n”. 2. For internal internal Strateg Strategies, ies, they they have to to build build cycle time time of each customers customers::
3. Build takeaway takeaway stores stores near the office officess and schools. schools. 4. Focus on the the mass customi customization zation through through postponem postponement ent so that that they can easily easily handle handle the product mix. 5. Focus Focus on consoli consolidat dation ion rathe ratherr than expans expansion ion..