Starbucks: Delivering Customer Service

Starbucks: Delivering Customer Service

Starbucks: Delivering Customer Service Question 1. What factors accounted for the extraordinary success of Starbucks in the early 1990s? What was so compelling about the Starbucks value proposition? The extraordinary success of Starbucks in the early 1990s can be attributed to Schultz who conceptualized a value proposition differentiated by means of high levels of service & quality elements offered to a target audience. This converted the experience of drinking coffee into social experience, a concept new to US but which soon caught up. This led to Starbucks being able to build a brand for itself and differentiate itself from other coffee chains selling coffee at half the prices. This was achieved through following ways: Product Strategy  Quality of the Coffee: Starbucks offered highest quality coffee sourced from Asia- Pacific, Africa, Central and South America. It directly controlled the supply chain by working with coffee growers. It controlled the offering quality by owning stores and not giving franchisees.  Product Innovation: Starbucks tried to introduce something new for its customers and spent a lot of time in R&D. One such product innovation was Frappuccino beverages in 1995. It was so well conceived that it boosted the sales during non-peak hours and became one of the company’s most successful innovations. Service Strategy  Service: The service was focused on establishing good relationship with customers and improving their experience. The employees or Partners were trained on how to connect with customers by smiling, having eye contact and remembering their names and orders. Starbucks had “Just Say Yes” policy which empowered employees to provide best service to the customers beyond company rules. Starbucks’ goal was to serve a customer within 3 minutes.  Partner Satisfaction: Howard believed that satisfaction of the 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 believed in promoting its existing employees rather than hiring new ones, which clearly explains its low employee turnover (just 70% in comparison to 300%). Place Strategy  Store Ambience: People generally had only two places where they spent maximum time- work and home. But, Howard believed that they needed another place where they could sit, relax and network with others around. Hence, Starbucks provided ambience that would make them to stay. It had seating areas that would encourage lounging and layouts were designed such as to provide an inviting environment for the people.  Distribution Channels: Almost all the Starbucks stores were located in high visibility and traffic areas achieved by early expansion by means of taking the company public, through this one can achieve low rental cost etc. It sold coffee through other channels as well known as “Specialty Operations” and had international licensed stores, warehouse clubs, grocery stores, mail order and online sales. It also had a joint venture with Pepsi to distribute Frappuccino beverages and it partnered with Dreyer’s Grand Ice Cream to distribute premium ice creams. The value proposition of Starbucks is compelling because they give utmost priority to customers and to the service provided to them. They offered the customer, the highest quality coffee. Also, 1

Starbucks: Delivering Customer Service the value proposition is not only about the coffee but also the “experience” around its consumption. Question 2. Why has Starbucks’ customer satisfaction scores declined? Starbucks’ differentiated value proposition designed for its target market revolved around: service, ambience and product quality. Though latter two were consistent, service was showing signs of strains in terms of customer perceptions, as brought out by declining customer satisfaction scores. Overall rating of Starbucks was especially low among the new customers. However, Starbucks’ self-assessment scores were showing a positive upward trend. 

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Changing customer demographics & expectations: The new customers were younger, from a lesser income bracket, had different perceptions about the brand. This difference in brand perception & service expectations i.e. fast service versus customization and lounging is another reason for low satisfaction scores. While case mentions that most of the service delivery design and metrics were still keeping in mind the established customers. Service decline & measurement gap: The case mentions customer satisfaction gap could possibly be an outcome of service gap. A large number of customers (34%) believed service was an area Starbucks could improve upon. Friendlier and faster service was a higher rated attribute by customers than personal treatment which was an essential part of Starbucks measurement system. The amount of customization in drinks made serving customers within time difficult for the baristas. Brand Identity and Image: In spite of attempts to differentiate Starbucks from other specialty coffeehouses, there was little differentiation in the minds of consumers. Because of their limited presence, the specialty coffeehouses were able to deliver differentiated service to a niche crowd, which was difficult for Starbucks to achieve considering its ubiquity. Starbucks, which positioned itself as the ‘third place’, was now being perceived as a place for coffee on run. Starbucks came to be seen not as a coffee chain with a difference, but as corporate which ‘cared primarily about making money’. Losing sight of core proposition: The recent focus of the company had been product centric as well as to expand rapidly versus the customer centric approach adopted earlier. In their drive to build brand and introduce new products, they lost sight of changing consumer needs. The tenuous connection between customer satisfaction and growth seems to have been disrupted by focusing too much on brand building.

Question 3. Describe the ideal Starbucks customer from a profitability standpoint. What would it take to ensure that this customer is highly satisfied? A large portion of Starbucks’ sales came from the loyal customers. 21% of the customers contributed to around 62% of all the transactions i.e. an average of 19 transactions per customer. In addition the case gives the customer life time value per customer as shown in exhibit 1 from which it is amply clear that a highly satisfied customer is a source of a higher revenue. A new customer accounts for about 15 coffee cups/ week while an established customer accounts for 19 coffee cups/ week. As per the case, from a cost standpoint labour was Starbucks’ largest expense. Store operating expenses accounted for about 41% of the total store revenue.

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Starbucks: Delivering Customer Service The case mentions 2 important facts about the store costs. 1. The heaviest users i.e. the established customers demanded customization, increasing the labour content and slowing down service. They also lounged more. 2. Drive through accounted for 50% of sales in stores having the facility. These facts point out to the fact that the new customers, who are also loyal, would have similar revenues but significantly lower labour content in the coffee, making them more profitable customers. However, overall satisfaction of new customers was significantly less that of the established customers owing to different service expectations. To ensure satisfaction of the new customers Starbucks must have faster and attentive service, appropriate prices. This can be achieved by using more labour saving and product standardizing techniques like the verismo machines, Frappuccino like products top boost off peak sales, increased ergonomic optimization, if necessary more labour. Question 4 Should Starbucks make the $40 million investment in labour in the stores? Starbucks considers customer service as a vital element of in store experience. Starbucks has a service index called the ‘Customer Snapshot’ comprising ‘basic’ and ‘legendary’ service. Speed of service forms one of the criteria of the basic service and Starbucks has improved on the parameter. However, despite that customers want a higher speed of service this shows gap in between the company’s targets and customer expectations. In order to plug these expectations Christine Day, Sr. VP administration has proposed a $ 40 million per annum additional expenditure on increased labour hours. Company’s management, however, wants that the $40 million investment should also translate to business growth. With the current average hourly rate of $9 and average labour hours of 360 per week, the average weekly labour cost comes to $3240. Also with average ticket size of $3.85 and average daily customer count of 570, the average weekly revenue comes to $15361.50. Thus the weekly profit figure becomes $12121. Break even with the investment of $40 million can be through – 1. Increasing the customer count. 2. Increasing loyalty thereby increasing the average ticket size and life time value As shown in the Exhibit 3, we can achieve the break even by either increasing the average daily customer count to 577 or by increasing the average ticket size to $3.9. Increase in ticket size requires a migration of 84 customers from unsatisfied to satisfied category and migration of 74 customers from satisfied to highly satisfied category in each of the store to breakeven an expenditure of $40million. These numbers represent around 6% of the total customers in the respective categories and appear feasible. Therefore Starbucks can go with the proposal without straining the earning per share. Additionally, increase in the investment on the in store labour would have the following benefits1. Customer Satisfaction- Starbucks is dealing with 2 customer segments i.e. the existing customers who value customization and personal attention and new customers demanding faster service. Existing customer segment puts pressure on the service of the Starbucks store, yet are loyal customers of Starbucks to whom Starbucks owes its brand identity. Hence Starbucks will be able to serve this segments’ needs adequately with increased labour. For the new customer segment speed of service is an important service parameter. Hence increased labour would also enhance satisfaction and loyalty of this segment translating to a higher revenue. 3

Starbucks: Delivering Customer Service 2. Customer Retention- The penalty in terms of customer life time value of a customer going from a highly satisfied state to satisfied is $2248. This is a huge downside and additional labour can be used to retain the highly satisfied customers in the same state. 3. Partner Satisfaction- Investment of $40 million will also enable Starbucks to achieve a higher partner satisfaction since the workload would get distributed. This will also enable Starbucks to introduce new beverages at regular interval, another key proposition of Starbucks. Exhibit 1: Customer Life time value of satisfied and unsatisfied customers Table 1- Revenue from various customer segments

Annual Value Life Time Value

Unsatisfied customer

Satisfied customer

$181 $200

$210 $921

Highly customer $381 $3169

satisfied

Exhibit 2: Service Expectations of different customer segments

Exhibit 3: Justification for investment of $40 million per annum on increasing the labor hours in stores. Calculation of Break-even point Total Expenditure on extra labor Number of stores* Average expenditure on store ($ per annum) Average revenue per store per annum ($15,400 X 52) Average ticket size (weighted average 42% X 3.88 + 37% X 4.06 + 21% X 4.42) Average number of transactions per annum

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$40,000,000 4,500 $8,889 $800,800 $4.06

197,241

Starbucks: Delivering Customer Service Average unique customers served per 3,287 annum Highly Satisfied customers (21%) 690 Satisfied customers (42%) 1,216 Unsatisfied customers (37%) 1,381 *assuming it is increased over all the stores irrespective of the ownership, as given in the case Now, annual increase in revenue for transition of unsatisfied customer to satisfied customer category is $28 and increase in revenue of a satisfied customer to highly satisfied customer is $172. COGS is 41 % of the revenue (Source Exhibit 1: Starbucks Financials). Exhibit 11 of the case also mentions that around 34 % of customers have service as a sore point. Hence we can assume that at the most 34% of the customers in each category will migrate to the next higher category. Table below lists the average number of customer migrations required to achieve breakeven investment of $40 million. Break even number of customers $16.5 increase in contribution margin from Customer Unsatisfied to satisfied and $ transitions per store 101.5 increase in contribution per annum from margin from satisfied to highly each category satisfied category Unsatisfied to satisfied 84 Satisfied to highly satisfied 74

Break even number of customers $28 increase in revenue from Unsatisfied to satisfied and $ 172 increase in revenue from satisfied to highly satisfied category 50 44

Alternate approach for breakeven point calculation Average hourly rate (in $) Total labour hours per week, average store Labour Cost/week, average store Average Ticket Average daily customer count, per store

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Current Scenario 1 9 Average hourly rate 9 Average hourly (in $) rate (in $) 360 Total labour hours 380 Total labour hours per week, with per week, with increase of 20 hrs increase of 20 hrs 3240 Labour Cost/week, 3420 Labour Cost/week, average store average store 3.85 Average Ticket 570 Break even Customer Count

3.85 Break even Ticket Size 577 Average daily customer count, per store

Scenario 2 9 380

3420

3.90 570

Starbucks: Delivering Customer Service Average weekly 3990 Target 4037 Average weekly customer Customer/week customer count, count, per store per store Weekly 15361.5 Target 15541.5 Target Revenue Revenue/week Revenue/week Revenue-Cost, 12121.5 Target Revenue12121.5 Target Revenueper week for Cost, per week for Cost, per week for average store average store average store Note- Scenario 1- Increase in customer number. Scenario 2- Increase in ticket size.

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3990

15541.5 12121.5