Starbucks: Delivering Customer Service - Case Analysis

Section C - Group 2
Roll Number Name Email ID
2019PGP141 DOOLA TASNEEM SAIFUDDIN p19doolas@iimidr.ac.in
2019PGP492 NANDINI TYAGI p19nandinit@iimidr.ac.in
2019PGPH030 PALAK GUPTA ph19palakg@iimidr.ac.in
2016IPM078 PRATYUSH DUBEY i16pratyushd@iimidr.ac.in
2019PGP510 RAJI DHANKHER p19rajid@iimidr.ac.in
2019PGP379 SHARATH KAMATH SHEVGUR p19sharaths@iimidr.ac.in
2019PGP418 SREE SANKAR M p19sreem@iimidr.ac.in
2019PGP423 SUDARSHAN G KIDIYOOR p19sudarshank@iimidr.ac.in
INTRODUCTION
Starbucks is an American coffee company that owns a chain of coffee shops all throughout the
world. It was founded in the year 1971 as a small coffee shop but later under the ambitious
vision of Howard Schultz, it grew as a chain of coffee shops providing a “third place” for the
people . As of 2002, Starbucks operated about 5886 stores around the globe and was known for
its quality, customer service and the pleasant environment of their stores. Starbucks had an
ambitious goal of setting up over 15000 stores around the world.

7P ANALYSIS
● Product
Starbucks is a chain of coffeehouses that deals with serving "live" and customised coffee
to its customers. It is known for its good quality coffee which it maintains by keeping
control on most of its supply chain. It sells whole - bean coffees,rich brewed coffees,
Italian - style espresso drinks, cold-blended beverages, premium teas along with pastries,
sofas juices etc. The product mix depends on size and location of the Starbucks store.

● Price
The price of any product in Starbucks depends on the size of serving and the product
bought. The price of drinks range between $1.40 to $4.15 while the price of beans range
between $5.20 to $12.45.

● Promotion
Starbucks did not indulge in any sort of marketing or advertising campaign. But still it
has seen increasing growth for the past 11 years. It is so because it believes in creating
value for its customers and focused on 'customer intimacy' ie providing services and
interacting with people on a personal level.

● Place
Starbucks has 3496 company owned stores in North America and 1078 licensed stores as
of 2002. It operates over 300 company owned stores in the UK, Australia and Thailand
along with 900 licensed stores in Asia, Europe,Africa,Middle East etc. It aims to open
15000 international stores.

● Process
Starbucks daily wage employees (called baristas) are responsible for preparing
customised and personalised coffee for customers as well as interacting with them. This
makes the customers feel valued and satisfied. The goal of Starbucks according to Jim
Alling ,senior vice president of North America retail is to “create an uplifting experience
everytime you walk through our door”. Hence it trains its workers in both hard and soft
skills so that they are competent and provide the best service.
 ● People
Starbucks employs 60,000 people worldwide and they are called ‘partners’. Most are
hourly wage workers called baristas who work in the retail stores. Starbucks believes that
partner satisfaction leads to customer satisfaction.Hence it gives generous stock options
and health insurance options to even entry level partners.Starbucks has been ranked 45th
in the Fortune magazine list of best places to work.It has one of the lowest employee
turnover rates in the industry.

● Physical evidence
All Starbucks store aimed to be seen as the “third” place after home and office by the
customers. The ambience in the stores was such that makes the customer want to stay.The
service orientation and personalised attention by the baristas makes the customer feel
valued. Regular innovations in coffee along with retail expansion has increased the
customer base of Starbucks.

PROBLEM STATEMENT
“ What should Starbucks do to meet the customers’ expectations regarding their satisfaction?”

Starbucks’ main agenda was to meet the customer expectations under all situations but the recent
research has suggested that the customers’ satisfaction is reducing because of variety of reasons
chief among them is speed of service. Customer satisfaction is critical because satisfaction leads
to customer loyalty and Starbucks’ is mulling on the options to solve the problem and increase
customer satisfaction

CAUSES FOR THE PROBLEM

1. Highly customized Products:
Starbucks’ regular established customers needed highly personalised products that are
customized according to their liking. Each customized product served for the customer
slowed down the service for every other customer which eventually led to increasing
queue size which attributed to fall in customer satisfaction as they tend to spend more
time waiting for the order to be served.

2. Changing Customer base:

Most of the Starbucks’ established customers were affluent, well-educated female
between the ages of 25-44 who preferred personalized products. In the recent times,
Starbucks customer base is changing to younger, less well-educated individuals who
value speed of service as an important criterion for satisfaction. This difference in
perceived value between the Starbucks’ established customer base and new customer
base had driven down the customer satisfaction as a whole.
 3. Perceived image about Starbucks:
Market research team has found out that the percentage of respondents who think
Starbucks priority is to make money has increased significantly. It indicates that the
customer’s perceived image about the company has changed and they feel that Starbucks’
does not care to satisfy its customers rather it focuses on rapid expansion and making
profits.

DECISION CRITERIA
The solution that should be taken to solve the problem should be promptly evaluated on the basis
of following criteria for effective implementation and to achieve the desired results

1. Customer Centric
2. Partner satisfaction should not be affected
3. Economically viable
4. Ease of implementation
5. Analogous to company’s rapid growth rate
6. Caters to the new customer base without affecting the established customer base
7. Should be effective in the short run as well as in the long run

EVALUATION OF SOLUTIONS
1. Hire more baristas and increase the speed of service:
Hiring more baristas increase the speed of service as it increases the number of service
centres for customers of Starbucks. It will lead to an increase in customer satisfaction but
the long term viability of the solution is put into question. In wake of the recession, it will
be harder to find the number of employees that Starbucks’ desire at its scale. It might be
able to find skilled labour at some places but some of the other Strabucks’ stores may
struggle to find suitable labour. Besides, there are also training costs involved and most
of the Starbucks stores are in urban posh locations where the employee costs might be
significantly higher. It will also take a toll on the company’s balance sheet as already the
largest part of the company’s expenses goes to employee benefits.

2. Increase the baristas’ working hours:

Increasing the baristas working hours such that they cater to customers’ needs in a quick
way such that the customers’ satisfaction will increase without compromising between
customization and speed of service. It is also the preferred solution of the company’s
executives and for which the additional investment of 40 million is required. The
feasibility largely depends on the financial returns of the Starbucks and its efficiency in
increasing the satisfaction of the customers who are somewhat satisfied and making the
highly satisfied. If it proves to be financially viable , then it will solve as a fix for the
problem not only in the short term but also in the long term. It should be noted that the
 baristas should be provided with additional benefits as they are working more and their
satisfaction also should be maintained for effective operation.

3. Increase the number of stores in a given locality:

Increasing the number of stores in a given locality such that the customers presently
visiting a particular store can be diverted to the new store where there will be speed of
service as well as customized service. However, this requires a humongous capital
expenditure from Starbucks’ side as most of the Starbucks stores are in prime locations in
metro cities and urban posh localities. It would turn out to be financially unviable but it is
the best solution to increase the customer satisfaction by a great level. There is also a risk
of cannibalisation and risking the wrath of customers as more people feel that Starbucks’
prime aim is to make money.

4. Cease customized production of coffee products:

As the customised products the established customers are fond of slows down the service
for everyone else, it might be a sound decision to remove the customization from the
service line itself. But doing so, Starbucks risk the wrath of its established a loyal
customer base. Fiddling with their choice might turn out to be a disaster as already people
judge Starbucks as a company which prioritises profits and doing away with their
preferred choices might drive them away from Starbucks and will have a catastrophic
effect for the chain of coffee shops.Besides removing customization sends a signal to the
market that Starbucks does not value customer sentiments.

FEASIBILITY ANALYSIS OF THE RECOMMENDED SOLUTION

The recommended solution involves investing 40 million annually in the company's 4500 stores
in order to allow each store to add 20 hours of labour a week. Starbucks has customers who are
dissatisfied,somewhat satisfied or highly satisfied with its services.To check feasibility of
recommended solution we check if we can convert dissatisfied or somewhat satisfied customers
to highly satisfied customers.This will help us know if our investment of 40 million will be
recovered or not. We use Exhibits 1,2 and 3 from the appendix to do the calculations.

Particulars Dissatisfied Somewhat satisfied Highly satisfied

customer (D) customer (SS) customer (HS)

Total sales/month 15.132 17.456 31.824

(= No. of Starbucks
Visits/month*Average
ticket size/visit)

Total sales/year 181.584 209.496 381.88

Difference in total sales 27.912 - 17.239

for each customer type (as
compared to SS customer)

Average customer life 1.1 4.4 8.3

Lifetime revenue 199.7424 921.7824 3169.67

Difference in revenue (as 722.04 - 2248.1

compared to SS customer)

Hence we focus on converting somewhat satisfied to highly satisfied as it yields more revenue
and is easier as compared to converting the dissatisfied customer.

How many customers to convert?

Total investment = $4,00,00,000
Total number of company owned stores in North America = 3496
Total investment per store = $11441.6476
Number of customers to be converted = 11441.6476/ 172.392= 67
Hence 67 somewhat satisfied customers per store need to be converted into highly satisfied
annually in order to break even.

Do we have the required customer base?

Revenue from company owned store in North America = 2583800000
Number os stores = 3496
Revenue per store = 73963.2265 ……(i)
Average ticket size = 3.85……………(ii)
Transaction per store per year = (i)/(ii) = 182037405
Average customer unit per year = 5*12=60
Customer base per store per year = 3033956
Self satisfied customers per store per year = 0.37*3033956 = 1122564
Hence we do have the required customer base to break even and upgrade the satisfaction level of
customers.

IMPLEMENTATION
Exhibits 4 and 5 show that a customer feels valued when there are improvements in service at
Starbucks.These improvements include friendly and knowledgeable staff and more personalised
treatment of visitors. Hence the newly recruited baristas will be made to undergo soft skills
training and “hard skills” training which includes knowing how to maintain cash register and
mix drinks.. Moreover, the existing baristas will use their experience and knowledge to interact
with customers. It is so because they can easily differentiate the customers according to their
satisfaction levels. Once they recognise the self satisfied customers, the old baristas will make
sure to treat them extra specially so that over time they are able to make them highly satisfied
customers.

Over time, Starbucks will be able to improve its image and prove to be a customer friendly
company.

APPENDIX
Exhibit 1:Starbucks’ Store Growth

Exhibit 2: Starbucks ’Customer Behaviour, by Satisfaction Level

Exhibit 3: Additional Dara, North American Company-Operated Stores (FY2002)

 Exhibit 4: Importance Rankings of Key Attributes in Creating Customer Satisfaction

Exhibit 5: Factors Driving ‘Valued Customer’ Perceptions

REFERENCES
Starbucks: Delivering Customer Service,2006,HBS,9-504-016