SUMMARY

An American coffee chain, Starbucks, was founded in the Pike Place Market in Seattle in 1971. The company
began as a small coffee shop specializing in the selling of whole beans from Arabica. Mr. Howard Schultz joined the
marketing team in 1982 and eventually became the company's chairman. Soon the company started expanding,
and by 1992 there were 140 shops. In 1992, the company was made public, and by 2002, Schultz established
Starbucks as a coffee brand in North America and made 20 million customers in over 5000 stores. Advertising
expenditure was almost nothing for the company, but the company was not able to meet customer expectations.
In terms of speed, customers were dissatisfied with the company's service, although the company had a three-
minute delivery policy. Christine Day, senior vice president of administration, developed a strategy to spend an
extra $40 million annually in 4,500 stores to help add 20 hours of work a week. The proposed plan can solve the
problem of slow service delivery and increase customer satisfaction. There was an internal resistance by the CFO,
and Day has two days to finally recommend the strategy mentioned above to the Howard Schultz and Orin Smith,
thus reducing the overall EPS. Day was in a dilemma whether he should believe on the customer review on slow
service, and what will be the after-effects of the proposed plan on the sales and profit of the company?

Q1. What factors accounted for the extraordinary success of Starbucks in the early 1990s? What was
so compelling about its value proposition?

Ans. The credit for the extraordinary success of Starbucks in the early 1990s can be given to Schultz, who design a
value proposition through high service and quality to target audience. He enhanced the experience of drinking
coffee into a social experience, which led to the brand recognition of Starbucks and differentiated itself from its
competitors. This was achieved through the following ways:

• Premium quality of coffee: Starbucks offered the highest quality coffee in the world sourced from Africa,
Central and South America and the Asia Pacific regions. They controlled as much of the supply chain as
possible and controlled distribution to retail stores around the world.

• Product Innovation: Starbucks innovated Frappuccino in 1995. It was designed so well that it drastically
boosted sales and became one of the company's most successful innovations.

• Service: Starbucks emphasized on creating a good relationship with their customers. The employees or
partners were trained to greet the customers by smiling, making eye contact, remembering their names
and customizing their orders. Starbucks had "Just Say Yes" policy, which provided customers services
beyond company rules. Starbuck's goal was to serve a customer within 3 minutes.

• Employees or Partners Satisfaction: Satisfaction of partner leads to customer satisfaction. The company
provided many incentives to their partners including health insurance and stock options, to even entry-
level partners. The company also promoted its existing employees instead of recruiting new ones. This
also explains its employee turnover, which was just 70% in comparison to 300% in the same industry.

• Ambiance: People had two places they spent maximum time in- home and work. However, Schultz
believed that people needed a place where they can relax and network with others or be by themselves.
Hence Starbucks had sitting areas to encourage lounging and layouts were designed to provide an
inviting environment for the people.

• Distribution Channel: Almost all Starbucks stores were located in high visibility and traffic areas such as
 Retail centers, office buildings, University campuses, etc. They sold coffee through other channels and
had international license stores, warehouse clubs, grocery stores, mail order, and online sales. Starbucks
entered into a joint venture with Pepsi-Cola to distribute Frappuccino and partnered with Dreyer's ice
cream to distribute premium ice cream.

Starbucks's value proposition is compelling because it valued and gave utmost priority to their customers and the
services provided to them. The coffee they offered to their customers was of high quality and custom-roasted.
They focused not only on the quality of coffee offered but also on enhancing the experience of coffee.

Q2. Why have Starbucks customer satisfaction scores declined? Has the company’s services declined or is it
simply measuring satisfaction the wrong way?

Ans. The customer satisfaction scores declined mainly due to following reasons –

• Customers perceived very little difference between the Starbucks and the smaller coffee chains.
• Rough image of the brand that Starbucks is only concerned with expansion.
• While Starbucks set a three-minute waiting time benchmark, Exhibit 11 shows that customers were not
happy with the Starbucks service particularly in terms of speed. The reason for slow service was mainly
because of the varieties of the product offered by Starbucks.
• Newer Starbucks customer's expectations were different from the established customers, and they
perceive brand different from them.
• While Starbucks scored high Customer Snapshot ratings, customers were not happy and Starbucks could
not meet the expectations of the customer. Exhibit 9 clearly shows that there was a significant number of
unsatisfied customers out of a total number of customers visiting Starbucks.

Overall the company’s services have not necessarily declined, and customers are pleased with the services.
However, the wait time is steadily increasing. Most of them go to Starbucks for the experience, and many
people get their coffee and are out the door. Therefore, the wait time is crucial. Another aspect is the
satisfaction level of the customers, ones which visit more, spend more time are loyal and highly satisfied.
Starbucks is measuring much on how people view the company, as trying to expand and make more money,
rather than how people view the coffee.

Q3. How does the Starbucks customer of 2002 differ from Starbucks customer of 1992?
Ans. The difference as described in below points

• Around 1992, customers were only served whole beans and premium-priced coffee beverages. Whereas
by 2002, beverages accounted for the largest percentage of sales in stores, covering 77% of the total
revenue.
• Around 1992 Starbucks primarily catered to affluent, well-educated, white-collar patrons between ages
25 and 44 Whereas by 2002 Starbucks’ customers tended to be younger, less-educated, white-collar
females between the age of 24 to 44 had expanded.
• The customers who visited the store were coffee connoisseurs and were quickly engaged in 1992, unlike
in 2002 when most customers preferred handcrafted beverages.
• In 2002 about 40% of new coffeehouse customer was introduced to Starbucks brand through retail
outlets, unlike in 1992.
 • Unlike the customers of 1992, the customers of 2002 had very different perceptions of the Starbucks
brand and visited the stores less frequently compared to established customers.
• Starbucks also introduced many new options of beverage in the menu for customers through product
innovation by 2002, which wasn’t available for customers in 1992.

Q4. Should Starbucks make the $40 million in investment in labor across the stores? What’s the goal of the
investment?
Ans. The main objective of Starbucks investing in labor in its stores is to maximize profits while increasing
customer satisfaction. The financial goal of the investment is to move each store closer to $20,000 level in terms
of weekly sales. Whereas, the marketing objective is to minimize the service time down to the three-minute level
in all Starbucks stores regardless of the time of the day. This will gradually improve the speed-of-service to cater
an individual customer and thereby will not just increase customer satisfaction but also help in building a stronger
long-term relationship with the customers. We can see the same from the following calculations

Total amount to be invested = $40,000,000

No. of company operated stores = 3496
Amount invested per store => $40,000,000/3496 => $11,441.64 => $11,442 (approx.)
From exhibit 9,
Difference between satisfied and highly satisfied customers per year (in terms of revenue):
7.2 * 4.2 * 12 – 4.3 * 4.06 * 12 => $172
Required no. of highly satisfied customers to recover investment per store =>
11,442/172 => 67 customers
No. of customers each day at store => 570
We need 67 highly satisfied customers from 570 satisfied customers to break even.
We believe Starbucks should go ahead in investing $40 Million on labor employed in stores operated by them. One
way to recover the investment back is to either increase the customer base or to enhance the satisfaction of the
current customer base and retain them for more visits. To achieve either of the strategies, each store must
maintain a high level of customer satisfaction and it can only be possible with an investment into labor. Attributes
such as convenience, fast service, knowledgeable and friendly staff are linked to high customer satisfaction
[Exhibit 10] and are heavily dependent on the quality of staff of the store. By investing in labor, Starbucks can
increase and maintain a high level of service through either investing in more labor force or training them to
provide faster service while treating every customer as valuable as the next.