Starbucks: Delivering Customer Service

M512 MARKETING STRATEGY

Starbucks: Delivering Customer Service

Alkis Marangos

I have neither given nor received unauthorized aid on this assignment

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

The success of Starbucks in the early 1990's can be attributed to Howard Schultz's vision of the Starbucks brand. Schultz inspired of a company which would make the customer the centre of its success and would change the coffee drinking experience in the U.S. In order to achieve this, Schultz successfully utilized his human resources by establishing benefits that would force those resources to create value in the process of the coffee drinking experience. Starbucks was successful because it placed value to the customers first in its value proposition. Following is a number of factors that accounted to Starbucks success in the early 1990's:

a. Atmosphere: Schultz's idea was to make Starbucks America's "third place". By recreating the Italian coffee culture he met in Milan, he managed to make Starbucks a place where people can enjoy their social interactions, relax, or just spent some time by themselves. In essence, the Starbucks idea changed the norm from "buying coffee as a drink" to "the experience of enjoying coffee". People viewed Starbucks as a place they wanted to be at and they spent as much time as they could in the stores. It was an uplifting experience that was complemented with the layout designed to provide an inviting environment.

b. Coffee quality: Starbucks strategy was to open only company-owned stores and avoid franchising. This enabled the company to keep full control of quality of its products and services. At the same, Starbucks tried to control as much of the supply chain as possible in order to keep the quality of coffee at high and consistent levels by working with growers and enforcing coffee standards. These two strategies enabled Starbucks to deliver on the first component of its value proposition; quality.

c. Service: Partners were trained on both "hard skills" and "soft skills" when hired to work for a Starbucks retail store. This equal emphasis on the "hard" and "soft" skills further highlighted Starbucks strategy to make the experience pleasant for the customer. The "soft skills" were a way to teach the partners on how to connect with the customer, by establishing eye contact, smiling and greeting them with their names when the customers were regulars. In addition to that there was also the "Just Say Yes" policy for which the partners went beyond company rules in order to satisfy the customers. These again created a friendly environment for customers who felt special and in combination with the two points mentioned above increased their customer satisfaction.

d. Partner satisfaction: Schultz's belief was that if the Starbucks employees were happy, then this would lead to higher customer satisfaction. For this reason, Starbucks partners were among the highest paid hourly workers, they enjoyed health benefits and they had stock options. This resulted in one of the lowest employee turnover rates in the industry and a consistently high employee satisfaction rate. Furthermore, the majority of promotions for Starbucks were within its own ranks. Even though there is no evidence that the satisfaction of partners led to customer satisfaction, it

would be safe to assume that the low employee turnover meant that partners stayed at their positions for longer time, were more experienced in treating the customer and could provide a faster service.

e. Specific target audience: Starbucks coffee in the 1990's was targeted primarily towards the affluent, well-educated, white-collar people. Being able to attract such an affluent demographic and serving them by providing superior service, helped in being able to provide the service at a consistent level and keep the customers satisfied.

f. Attractive market: The concept of Starbucks was new and the notion of turning the coffee drinking into a social experience was almost unexploited in the U.S. In the early 1990's Starbucks did not face fierce competition. The absence of the above concept helped Starbucks succeed.

Starbucks value proposition is compelling because it places the customer and the service delivered to the customer above everything else. Even though Starbucks is a retail-coffee store, the value proposition is not about the coffee exclusively but about the coffee culture and the experience of drinking coffee. With its value proposition, Starbucks moves away from the tangible benefits that the coffee offers, such as taste, stimulation, alertness and concentrates on the quality of its coffee and the intangible benefits of the experience of drinking Starbucks coffee. Starbucks value proposition is not about coffee, it is about the experience of drinking coffee in a Starbucks store integrating the product with the emotional benefits.

Service

Coffee

Starbucks

Atmosphere

2. How does the Starbucks of 2002 differ from the Starbucks of 1992?

The Starbucks of 1992 marked the beginning of the establishment of the brand. In 1992, right when the company became public, Starbucks had 140 stores located in the Northwest and Chicago. Ten years later, in 2002, Starbucks had over 4500 stores scattered throughout the U.S and internationally. During those ten years, Starbucks established itself as the "number one" coffee store in the U.S by following an expansion strategy. Starbucks had locations in 42 of the 50 states and was continuing this expansion strategy in order to capture new markets and cluster existing markets. Starbucks retail expansion strategy consisted of the company selecting locations based on whether the demographics of an area matched the profile of a typical Starbucks drinker, the level of coffee consumption and the nature and intensity of competition. An important component of this strategy was that Starbucks did not mind cannibalizing the sales of its stores as long as the incremental sales

resulting from the opening of a new store were higher than before. The retail expansion has led the Starbucks customers to view it as more corporate and caring about making money. The establishment of smaller coffee stores without lounging areas had also taken away the "atmosphere" component of the value proposition that the Starbucks of 1992 had built on.

The Starbucks of 2002 was also more complex than the Starbucks of 1992. In 1992, about half of the company's sales came from sales of whole-bean coffees whereas in 2002 about 77% of the sales came from beverages. The company had added new products such as food items and new beverages in its menu and also sold equipment and accessories. The beverage menu expansion along with the drink customization led to partners spending more time than before to prepare a handcrafted customized beverage. In addition to that, the "product innovation" strategy through which the company introduced at least a new beverage every holiday season meant further menu expansion, additional training times for partners and possibly additional service times until a partner mastered the making of the new beverage. The drink combinations that could be prepared at a Starbucks in 2002 were many more than the ones that could be prepared at a Starbucks coffee store in 1992, making the whole process more complex and the delivery service slower.

Another big difference between the Starbucks of 2002 and the Starbucks of 1992 was the demographic profile of the customer base. In 1992, the customer base of Starbucks consisted of affluent, mid to upper class professionals who went to Starbucks to enjoy their coffee and the culture of it. The retail expansion of Starbucks resulted in changing the norm from "customers going to the Starbucks" to "Starbucks going to the customers". The customer base of Starbucks in 2002 was changing to a younger, less-educated and with a lower income demographic profile.

Finally, the Starbucks image to the public started changing. The image of 1992 consisted of a place which you can call "third place", where you can get the best quality coffee and where you can relax. In 2002, the image had changed to a convenient place, where you can meet people and move on and the coffee was just good.

3. Why has Starbucks customer satisfaction scores declined? Has the company's service declined, or is it simply measuring customer satisfaction the wrong way?

Unfortunately, with the data available it is extremely hard to say whether the company's service has declined or if there is something wrong with the way that customer satisfaction is measured. Even though the evidence shows that customers are not as satisfied as before, this does not necessarily mean that the service has declined. It might as well mean that the expectations of the customers have been raised due to competition or marketing or any other external forces. In order to make a fair assessment of the situation however, I will try to examine all possibilities starting from the way the customer satisfaction is measured.

The Customer Snapshot mystery shopper program is a subjective measure to record results. If there is a more than one mystery shopper visiting a coffee store, then there might be inconsistency between the different mystery shoppers regarding the definition of the criteria. For example, it appears that there is not enough explanation as to what exactly is

defined as clean. Is a store considered to be clean when it appears tidy and smells nice but there are two empty beverages on one table? For Mystery Shopper X, this can be considered clean, but for Mystery Shopper Y this can be considered dirty. This inconsistency could also be visible within different stores. A lot of times, a mystery shopper goes to the store with the predisposition to examine different things during his stay in the store. In order to be able to see more consistent results and be able to compare, I would like to see how customers would respond to certain criteria right after their Starbucks experience (survey outside store).

One other thing that I would like to see in the research is the breakdown of customers by number of visits per month. Even though the research breaks down the sample by new and established customers, it would make sense to see what percentage of the new customers are regulars and what their attitude towards Starbucks is. Instead what we see is all the new customers clustered together and taking the average of them to determine the overall opinion of Starbucks. Both of these are just assumptions as to what could have been wrong with the way Starbucks is measuring its customer satisfaction. Again, these assumptions are based on the evidence available in the case. Let's now see why the customer satisfaction scores have declined.

A very possible explanation to this could be because of the growing customer base. As it is suggested in Exhibit 8 of the case, the less satisfied customers are the new customers that have visited Starbucks for the first time within the past year. On the other hand, the established customers (first visited Starbucks 5+ years ago) appear to have a better overall opinion about Starbucks. This does not necessarily mean that the service of Starbucks has changed. It rather more closely leads to the conclusion that the new customers have higher expectations which could have been a result of more information available, getting used to the coffee experience culture, more competitors available. To make myself clearer I will provide an explanation of this with an example. Starbucks coffee store on Indiana Avenue in Bloomington IN. has been offering the same consistent level of service to its customers since its opening in 1994. All the customers are greeted with their first name, and all the customers are served within 3 minutes after they arrive in the store. Mr. John has been a regular visitor of this Starbucks location since its opening and is extremely satisfied with the service. Mr. Steve, decided to visit Starbucks for the first time a few months ago, towards the end of 2001. Mr. Steve was a regular of Dunkin Donuts where he would be greeted every day with his first and last name, the barista knew exactly what beverage he wanted, and he was always served within two minute. Mr. Steve is not satisfied with the Starbucks service even though the service at Starbucks has been the same for the last 8 years. This example shows that even though Starbucks could have been consistent in its service, it has added a new customer (Mr. Steve) to its customer base who is not as satisfied because the service does not meet the expectations Mr. Steve had acquired from using a competitor.

Let's also examine now, possible reasons that could have resulted in actual declining customer service of Starbucks. When Starbucks evolved as a business it set the standards very high for its customers through its value proposition. Even though the company initially managed to meet these standards, the retail expansion and the product innovation strategy that the company followed along with the customization of the drinks had a harmful effect

on all three components (coffee quality, service, and atmosphere) of the value proposition which had led to the declining effects of customer satisfaction. The image of the brand changed. The store which used to be known as the "third place", a place where you could relax and enjoy your coffee, was now appealing to a much larger target market. It was the store for everybody. In the past customers were paying a premium for the Starbucks experience, but now Starbucks was not anything special. In the mind of the consumer, Starbucks became the norm, a place which was everywhere, with good coffee and consistent service. The loyal customers lost the touch they had with the brand; there was no reason anymore to pay a premium for a good coffee when they could get it anywhere else for a lower price.

Starbucks had about 150% increase in retail stores from 1998 to 2002. By geographically clustering markets, Starbucks was compromising the "atmosphere" aspect of its value proposition. Many stores built were small and did not have seating or lounging place. Therefore, the upscale yet inviting environment that the company promised with its value proposition and which brought a lot of the loyal customers to the business did not exist any more.

The beverage customization, the addition of new items on the menus and the rapid retail store expansion had an adverse effect on the other two important aspects of the value proposition. Even though, there is no specific evidence cited in the case regarding the quality of the coffee, I find it almost impossible for a company to experience a more than 3000% expansion in its stores within 10 years and not deteriorating at least some of its product quality. As I do not have enough data to support this, I will make the assumption that the addition of the new items had an effect in sacrificing at least some of the quality that the Starbucks brand gave to the consumer. As Starbucks was "caffeinating' the world, it meant that product sales increased throughout the company. Statistically speaking, the probability of a product being sold lacking the necessary quality was highest. In the mind of a Starbucks consumer or any consumer a bad experience sticks out.

The other component of the value proposition, the service was also hurt. The customer intimacy that helped build the loyal customer base of Starbucks did not exist any more. Starbucks proudly stated that they delivered on service and that they only hired partners that had the ability to balance hard and soft skills and deliver on that service. As the customer base was growing and the complexity of the drinks increased it seemed almost impossible for the partners to deliver on those soft skills. The customized drinks slowed down the process of delivering the beverage to a consumer and added tension to the partners, making them lose on their soft skills. A lot of the service value was also lost on the inconsistency. The saturation of markets with retail stores meant that customers might purchase their coffee from different Starbucks stores that were convenient at the time of purchase. If that was true, then it is possible that customers could see an inconsistent level of service in stores that did not have the right personnel.

At the same time, competition from small, specialty stores increased. As the Starbucks market research revealed, a lot of small, independent coffee stores were perceived by customers to be what Starbucks was and to deliver what Starbucks did in the previous years.

In fact, the Starbucks model as described through Starbucks value proposition was very easy to imitate. Starbucks was facing fierce competition not from another chain, but from any small, independent, specialty store that was located to a close proximity to Starbucks. These competitors were more likely to offer the extraordinary service and the atmosphere that Starbucks had promised. In addition to that, the image of Starbucks had changed in the mind of the consumers who saw the fast expansion of Starbucks with the addition of stores everywhere, as a way for the company to make more money.

Looking at the three factors which could have resulted to declining customer satisfaction levels (a. bad research methods, b. consistent level of service but changing needs of customers, c. actual service decline), I am more inclined to believe that the lower scores are a combination of changing expectations of new customer base and actual service decline (Exhibit 1). Even though there might be some flaws in the research methods, I do not think that they are that inconsistent to disprove that the customer satisfaction levels were declining.

4. Describe the ideal Starbucks customer from a profitability perspective. How valuable is a highly satisfied customer to Starbucks? What would it take to ensure that this customer is highly satisfied?

The ideal Starbucks customer from a profitability perspective is the loyal customer who visits the store on an average of 18 times per month. If we accept that there is a high probability of correlation between number of visits and satisfaction level, then it is safe to assume that this ideal customer who visits 18 times per month is also a highly satisfied one. Using company data, obtained from customer satisfaction data, this customer spends $4.42 on average on every visit and its average customer life is 8.3 years. Taking this into consideration, then the ideal Starbucks customer brings an average revenue of about $954 per year or $7924 over its lifetime (see Exhibit 2). Using the same customer satisfaction data and assuming that a highly satisfied customer visits a Starbucks coffee store 7.2 times a month, then the average revenue that this customer brings to Starbucks is about $381 per year or $3169 over its lifetime. Ideally, this customer purchases either ready-made products or easy to make beverages so that it does not take much time for partners to get him out of the service line. Since there is a direct link between customer satisfaction and loyalty which eventually leads to higher profits, then Starbucks should work on raising the satisfaction levels of its current customer base or making them visit its stores more frequently. Based on the rankings of the key attributes that create customer satisfaction, Starbucks should ensure that its stores are kept clean all the time. This can be done by engaging partners into cleaning the stores and even helping clean the table of a customer when they have available time. Starbucks should also place more emphasis in its partners utilizing their soft skills to treat the customers as valuable.

Starbucks can also try to promote its stored-value card (SCV) more. The SVC not only will help its cardholders to experience reduced transaction times which translates to faster service and therefore higher satisfaction, but it also motivates the customer to visit

Starbucks more often. At the same time, Starbucks can gather and use the customer- transaction data to improve the experience.

Another thing that Starbucks can do to ensure that the customer is highly satisfied is to try to deliver on its value proposition. It should make sure that the service is as fast as the customer wants it to be, the partners will remember to greet regulars with their first name and the quality of its products will be of the highest level. This might require an investment from the company, whether that translates to more labor or better training or even withdrawing products from its menu. At the same time, adding lounging areas and more comfortable chairs can encourage customers to feel more relaxed while in the store. Larger tables and power plugs to accommodate laptop use will also not only lead to higher satisfaction but also to higher revenues through use of the T-Mobile Hotspot wireless internet service.

5. Should Starbucks make the $40 million investment in labor in the stores?

First let's examine what needs to be done for Starbucks to get a positive return if they decide to proceed with the $40 million investment.

If Starbucks makes the $40 million investment in labor for its 4574 stores, the investment comes to be about $8,750 for each store. Since the goal of this investment is to increase satisfaction let's see how this translates into number of customers that need to go from being satisfied to being highly satisfied. From Exhibit 3 we can observe that the difference in revenue per year from a highly satisfied to a satisfied customer is about $172. That means that in order for Starbucks to break even for this investment, it needs to turn 50 customers (8750/172) from being satisfied to be highly satisfied in each of its stores. From Exhibit 3 in the case we know that the average daily customer count, per store is 570. This means that Starbucks needs to turn 50 of 570 or 9% of its customers from satisfied to highly satisfied in order to break even. There are however some major assumptions that are being made in this case. First, the assumption is that speed of service is the number one driver for satisfaction and that the additional labor will provide the increase of speed of service. This is not true however. As we can see from the rankings of the key attributes by Starbucks customers, fast service ranks #6 in importance. A second assumption is that all stores are equal in size, number of people they serve, location and prices and that all the stores need this additional investment. A final assumption is that satisfaction is correlated with loyalty and that if a satisfied customer becomes highly satisfied then the number of visits per month to the store will increase along with his ticket size.

If customer satisfaction does not increase, an alternative break-even venue for Starbucks would be to acquire new customers. In this case, an additional 7 customers should come to each store every day as a result of this investment. This translates to an additional 32,000 customers per year for all stores. Alternatively, if the number of customers remains the same, $0.05 additional should be spent by each customer in each visit in order to break even (see Exhibit 4).

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