S TA RB UC KS DELIVERING CUSTOMER VALUE
A Case Analysis Analysis
Aditya Nagrare (2014PGP453) | A kshay Kohade (2014PGP024) | Anantha Ranganathan (2014PGP035) | Kapil Kanungo (2011IPM038)|
Defining the Problem… • •
2002 – Starbucks enjoys its 11 th consecutive year of 5% or higher sales growth Data indicates that Starbucks isn’t always achieving customer satisfaction. Consider the fol lowing exhibit •
•
Exhibit 8 indicates that both component-wise and overall satisfaction of new customers is far below that of established customers A reasonable inference would be that customer satisfaction is on a decline, consistent with Christine Day’s observations
The Proposal … •
•
•
•
An investment of an additional $40 million annually… …..across 4500 stores….. …..an increase of 20 labour hours per store, per week
Target - to improve speed of service and customer satisfaction
The Question… •
•
Would such an investment translate into excellent customer service? What would be the impact on sales and profitability?
Calculating the Investment per Store … •
Total investment proposed Total no. of company operated stores Investment per store
•
(We neglect the 1078 licensed stores in our calculation, because the investment would not cover these)
• •
•
= = = =
$40,000,000 3496 40,000,000/3496 $11,441.65
(given) (Exhibit 2)
Reasoning: To deduce whether the investment of $11,441.65 per store would be justified, it is necessary to calculate the extra revenue that can be generated from the investment. The exhibit indicates that the average ticket Consider Exhibit 9 below: size/visit of “highly satisfied” customers exceeds that of and “satisfied” “unsatisfied” customers •
•
•
•
The case further mentions that the most loyal customers visit as frequently as 18 times a month – what we consider “Ideal” customers
Possible Customer“Conversions”… Consider the following possibilities of generating extra revenue: Case 1: Convert “Highly Satisfied” customers to “Ideal” customers Case 2: Convert “Satisfied” customers to “Highly Satisfied” customers Case 3: Convert “Unsatisfied” customers to “Satisfied” customers Case 4: A combination of the above • • • •
Thus, extra revenue could be generated by “converting” some “unsatisfied” and “satisfied” customers to “highly satisfied” customers
Contribution per Customer – Existing Scenario • •
• • • •
Using Exhibit 9, we calculate contribution earned from each type of customer Contribution earned from each customer per year = Average Ticket Size per visit x No. of visits per customer per year Contribution - “Ideal” customers = $4.42 x 18 =$954.72 Contribution - “Highly Satisfied” customers = $4.42 x 7.2 =$381.89 Contribution - “Satisfied” customers = $4.06 x 4.3 =$209.50 Contribution - “Unsatisfied” customers = $3.88 x 3.9 =$181.58
Contribution per Customer – Scenario after Investment Case 1: Converting “Highly Satisfied” customers to “Ideal” customers Extra contribution received on conversion = Contribution per “Ideal” - Contribution per “Highly Satisfied” = $954.72 - $381.89 = $572.83 Number of customers to be converted per store per year to break-even after investment = Investment per store per year / Extra contribution received = $11441.65 / $572.83 = 19.97 •
•
Case 2: Converting “Satisfied” customers to “Highly Satisfied” customers Extra contribution received on conversion = Contribution per “Highly Satisfied” - Contribution per “Satisfied” = $381.89 - $209.50 = $172.39 Number of customers to be converted per store per year to break-even after investment = Investment per store per year / Extra contribution received = $11441.65 / $172.39 = 66.37 •
•
Case 3: Converting “Unsatisfied” customers to “Satisfied” customers Extra contribution received on conversion = Contribution per “Satisfied” - Contribution per “Unatisfied” = $209.50 - $181.58 = $27.91 Number of customers to be converted per store per year to break-even after investment = Investment per store per year / Extra contribution received = $11441.65 / $27.91 = 409.92 •
•
Impact of Increasing Wage Hours •
Consider Exhibit 3 below: •
•
•
Total cost of labour per store per week = No. of labour hours per week x Wage rate per hour = 360 x $9 = $3240 Revenue generated per week per store = Average daily customer count x No. of days x Average ticket = 570 x 7 x $3.85 = $15361.50
Contribution generated per store per week = Cost of Labour – Revenue = $15361.5 - $3240 = $12121.50
Increasing labour hours per week by 20 • •
Total cost of labour per store per week = No. of labour hours per week x Wage rate per hour = 380 x $9 = $3420 To achieve the same contribution of $12121.50, the revenue that must be generated is $3420 + $12121.50 = $15541.50
Approach 1 - Expanding Customer Base Maintaining ticket size at $3.85, Required customer base to generate revenue of $15541.50 = Revenue / Ticket Size = $15541.50/$3.85 = 576.68 Required increase in the number of customers to achieve desired revenue = 576.68 – 570 = 6.68 Thus, a 1.16% increase in the customer base is required to achieve desired revenues • • •
Approach 2 – Increasing Average Ticket Maintaining customer base at 570, Required average ticket to generate a revenue of $15541.50 = Revenue / Customers = $15541.50/570 = $3.90 Thus, a 1.16% increase in the average ticket is required to achieve desired revenues • •
The case suggests that it would be easy to generate $20,000 per store, in which case the break-even revenue of $15541.50 would be quite easily achieved.
Training: •
•
With the additional training, we could provide soft skills training to baristas, which would help us improve customer satisfaction measures such as friendlier staff, providing personal touches to service, etc, which are attributes listed in Exhibits 10 and 11. We could also train them in hard skills, to improve the quality of coffee, knowledgeable staff, etc.
Quality of Coffee and Service •
•
With the investment of $40,000,000, there would be 20 additional hours of labour per week per store, with which we could relieve the “pressure” per barista, thereby leading to faster service to reduce the waiting time to below 3 minutes. The above would additionally improve the quality of coffee
…And back to the Questions •
Would such an investment translate into excellent customer service?
•
Yes. The investment would allow for training and operational efficiencies which would improve customer satisfaction measures listed in Exhibits 10 and 11
What would be the impact on sales and profitability?
“Converting” customers would increase the profitability, thereby justifying the additional investment. Training also would improve the quality of service, which would further increase sales or generate new customers.
Conclusion
CONSIDERING THE GAINS AND RETURNS INVOLVED, THE INVESTMENT OF $40,000,000 IS JUSTIFIED
“Thank You!”
