Starbucks
Case Analysis
Date of Submission: 2015/10/20
Group 12
HEXAHEDRON
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For partial fulfillment of Marketing Management (MKT2010A) at CUHK(SZ)
1. Background With the mission of “to inspire and nurture the human spirit – one person, one cup, and one neighborhood at a time”, Starbucks had become a successful specialty coffee brand since its foundation in 1971, and seemed to keep its popularity. However, some problems were revealed on its way to expand. This report will analyze them, and solutions and recommendations will be given.
2. Problem 2.1 Customer 2.1.1$Customer$Satisfaction$
Despite its high Customer Snapshot scores, Starbucks was having trouble concerning customer satisfaction. Starbucks' service performance was not meeting customer expectations, especially in terms of the speed. While the company set a rigorous benchmark of three-minute waiting time (Moon & Queich, 2003), the goal was never met (from case Exhibit 7). This was partly attributed to the product proliferation and customization offering, which tremendously increased the complexity of the barista’s
jobs. Starbucks must take actions to improve the service efficiency.
2.1.2$Changing$customers$
New customers were younger and not so well-educated, with lower income, but mostly chasing fashion and freshness (from case Exhibit 8). How to sell its value to them was the problem that Starbucks was facing.
2.1.3$Brand$image$
Starbucks’ brand strategy was “live coffee”. However, “corporate” was among the top five attributes consumers associate with the Starbucks brand (from case Table B). Customer perception was that Starbucks was focusing on growing its own business, rather than communicating value to customers.
2.2 Operating expenditures
According to the Starbucks annual report 2002 (Starbucks, 2002), one of the biggest problems was that the operating expenditures were large, although net revenue increased by 24.2%. The company's operating margin was 8.6%, compared to its
competitors McDonalds, Panera and Yum’s 13.72%, 12.52% and 13.28% respectively (see Figure 1). As the case mentioned, “labor was already the company’s largest expense item in North America”, with its over 60,000 partners worldwide (Starbucks, 2002). It was indicated that Starbucks was paying more salary than before. According to Annual Report 2002 (Starbucks, 2002), Starbucks payroll-related expenditures increased because of increasing average wage rates and the growing sales on labor-intensive handcraft drinks. Additionally, since Starbucks' coffee-making processes were quite complicated, the store operating efficiency was influenced.
Figure 1. Comparison of Starbucks, McDonald, YUM! And Panera Starbucks McDonald
YUM!
Operating income margin
8.60%
13.72%
13.28% 12.52%
Profit Margin
6.47%
5.80%
7.52%
Source From: SEC Filing
PANERA BREAD
7.84%
3.0 Solutions and Recommendations 3.1 Speeding the service
Obviously, speeding the service through optimizing operation managements and developing automated facility is an operable and necessary way to deliver faster service. For example, Starbucks could cancel credit-card signatures for purchases of small size, for instance, under $20, which is estimated to cut the time of processing credit cards from an average 30 seconds to 22 seconds (Gray, 2005). In addition, further generalization of use of the automated espresso machines verismo is recommended. However, Starbucks should be careful about the trade-off between the handcrafted and automated, since handcrafted coffee is also a remarkable differentiation of Starbucks. All of these recommendations are initiated to improve service efficiency and thus, meeting customer satisfaction and cutting operating cost.
3.2 Specialty operations
The non-company-operated retail channels, "specialty operations", contributed to only 15% of Starbucks' net revenues in fiscal 2002. Thus there was great potential for Starbucks to accelerate the development of its alternative distribution channels.
First, through licensing, the Starbucks Company doesn't have to struggle on rental cost and other store operating costs, instead throwing the concerns to the licensees. The franchised expenses to franchised revenue of McDonald, Yum and Panera were far below their
total operating costs to revenue (see Appendix 3), which is a strong
evidence for the cost-saving of licensing. Additionally, it is important to notice that Starbucks takes the responsibility to train the employees of the licensees to meet its standards. It is also recommended that Starbucks develop more cooperation with third parties, like the joint venture with Pepsi-Cola, a $400 million of franchise “capturing 90% of the ready-to-drink coffee category” (Moon & Queich, 2003)and its licensing agreement with Kraft Foods on the channel of grocery stores and warehouse clubs. Therefore, to grow aggressively and for cost-saving and quality-maintaining, Starbucks had better utilize these specialty operations as one of its distribution strategy.
3.3 Products innovation
Products are the carrier of Starbucks' value. More surveys are needed across different
geographical areas and age groups to design Starbucks’ products. Different stores have their own popular specialties (see Figure 2) (Ferdman & Yanofsky, 2014). Products improvement and innovation on those products are attractive for the new customers and also the established ones. Besides, original equipment and accessories also contributes to its sales, especially the mugs, which can be designed cooperating with well-known designers and become the trendsetting. Figure 2 What people order at Starbucks around the United States
Source: (Ferdman & Yanofsky, 2014)
3.4 Membership cards
In addition to the existing SVC, Starbucks is recommended to create a membership card and rewards system as part of customer loyalty program. In the first place,
membership cards encourage more visits. Second, through this system Starbucks can effectively conduct promotions like buy one get one free and a free cup after certain amount of consumption, given that prices and promotions are also a crucial factor driving “valued customer” perceptions (from case Exhibit 11). Finally, the system collects huge data for analyzing these registered customers’ behavior, largely facilitating CRM.
4.0 Conclusion To summarize, Starbucks had problems mainly concerning cost and customers. The company had better implement methods such as improving service efficiency, innovating products to customer trends, developing membership cards and utilizing the specialty operations channel. More value should be added in Starbucks, thus the store’s future would be brighter. (Word count: 931)
Appendix Appendix 1: SWOT Analysis Strengths
Weaknesses
•!
High quality coffee
•!
High cost
•!
Global coffee brand
•!
High price
•!
Product Diversification
•!
Customers’ satisfaction does not
•!
Well-trained employees and Good
meet customers’ expectation
service Opportunity •!
Expand the supplier network
•!
Strongly growing U.S. Specialty Coffee market
•!
•!
The rising prices of raw materials (coffee beans, milk)
•!
An increasing number of potential competitors appearing constantly.
Cooperation partners to help retailing products through various
•!
Threats
•!
Increasingly cost of training skilled
channels
baristas due to the increasing types
It was far from reaching saturation
of coffee
levels in many geographical markets and different retail channels
•!
Negative publicity: its high speed expansion brought some negative influences
Appendix 2: 4Ps analysis Product Price
Various product portfolios Medium high-end price Starbucks is always located in neighborhood where there is a
Place
perceived high traffic and some other places with large population like downtown and business quarter. Membership cards; takeout service; supply tea and some other
Promotion types of coffee to suit some areas’ taste style
Appendix 3: Partial Income Statement of Starbucks, McDonald, YUM! and Panera Bread
Source: SEC Filing
References Ferdman, R. A., & Yanofsky, D. (2014, 4 4). What people order at Starbucks around the United States. Retrieved from QUARTZ: http://qz.com/195631/what-peopleorder-at-starbucks-around-the-united-states/ Gray, S. (2005, 04 12). Coffee on the Double. Retrieved from THE WALL STREET JOURNAL: http://www.wsj.com/articles/SB11325107832003816 Moon, Y., & Queich, J. (2003). Starbucks: Delivering Customer Service. Boston,MA02163: Harvard Business School. Starbucks. (2002, 9 28). 2002 Annual Report. Retrieved 10 17, 2015, from Starbucks Investor Relations: http://library.corporateir.net/library/99/995/99518/items/178279/ar02_financials.pdf U.S. Securities and Exchange Commision. (2015, 10 19). SEC. Retrieved 10 19, 2015, from SEC: http://www.sec.gov/