M512MARKETINGSTRATEGY

Starbucks:Delivering CustomerService
AlkisMarangos

Ihaveneithergivennorreceivedunauthorizedaidonthisassignment

1. WhatfactorsaccountedforthesuccessofStarbucksintheearly1990s?Whatwasso compellingabouttheStarbucksvalueproposition? ThesuccessofStarbucksintheearly1990scanbeattributedtoHowardSchultzsvisionof the Starbucks brand. Schultz inspired of a company which would make the customer the centreofitssuccessandwouldchangethecoffeedrinkingexperienceintheU.S.Inorderto achievethis, Schultzsuccessfullyutilizedhishuman resourcesbyestablishingbenefitsthat wouldforcethoseresourcestocreatevalueintheprocessofthecoffeedrinkingexperience. 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 early1990s: a. Atmosphere: Schultzs idea was to make Starbucks Americas third place. By recreatingtheItaliancoffeeculturehemetinMilan,hemanagedtomakeStarbucks a place where people can enjoy their social interactions, relax, or just spent some timebythemselves.Inessence,theStarbucksideachangedthenormfrombuying coffeeasadrinktotheexperienceofenjoyingcoffee.PeopleviewedStarbucksas aplacetheywantedtobeatandtheyspentasmuchtimeastheycouldinthestores. It was an uplifting experience that was complemented with the layout designed to provideaninvitingenvironment. b. Coffee quality: Starbucks strategy was to open only companyowned stores and avoid franchising. This enabled the company to keep full control of quality of its productsandservices.Atthesame,Starbuckstriedtocontrolasmuchofthesupply chainaspossibleinordertokeepthequalityofcoffeeathighandconsistentlevels by working with growers and enforcing coffee standards. These two strategies enabledStarbuckstodeliveronthefirstcomponentofitsvalueproposition;quality. c. Service: Partners were trained on both hard skills and soft skills when hired to workforaStarbucksretailstore.Thisequalemphasisonthehardandsoftskills further highlighted Starbucks strategy to make the experience pleasant for the customer.Thesoftskillswereawaytoteachthepartnersonhowtoconnectwith the customer, by establishing eye contact, smiling and greeting them with their nameswhenthecustomerswereregulars.InadditiontothattherewasalsotheJust SayYespolicyforwhichthepartnerswentbeyondcompanyrulesinordertosatisfy the customers. These again created a friendly environment for customers who felt special and in combination with the two points mentioned above increased their customersatisfaction. d. Partnersatisfaction:SchultzsbeliefwasthatiftheStarbucksemployeeswerehappy, then this would lead to higher customer satisfaction. For this reason, Starbucks partnerswereamongthehighestpaidhourlyworkers,theyenjoyedhealthbenefits and they had stock options. This resulted in one of the lowest employee turnover ratesintheindustryandaconsistentlyhighemployeesatisfactionrate.Furthermore, the majority of promotions for Starbucks were within its own ranks. Even though thereisnoevidencethatthesatisfactionofpartnersledtocustomersatisfaction,it

wouldbesafetoassumethatthelowemployeeturnovermeantthatpartnersstayed at their positions for longer time, were more experienced in treating the customer andcouldprovideafasterservice. e. Specific target audience: Starbucks coffee in the 1990s was targeted primarily towards the affluent, welleducated, whitecollar 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. Attractivemarket:TheconceptofStarbuckswasnewandthenotionofturningthe coffee drinking into a social experience was almost unexploited in the U.S. In the early 1990s Starbucks did not face fierce competition. The absence of the above concepthelpedStarbuckssucceed. 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 retailcoffee store,thevaluepropositionisnotaboutthecoffeeexclusivelybutaboutthecoffeeculture 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 experienceofdrinkingcoffeeinaStarbucksstoreintegratingtheproductwiththeemotional benefits.
Service

Coffee

Starbucks
Atmosphere

2. HowdoestheStarbucksof2002differfromtheStarbucksof1992? The Starbucks of 1992 marked the beginning of the establishment of the brand. In 1992, rightwhenthecompanybecamepublic,Starbuckshad140storeslocatedintheNorthwest andChicago.Tenyearslater,in2002,Starbuckshadover4500storesscatteredthroughout 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 consistedofthecompanyselectinglocationsbasedonwhetherthedemographicsofanarea matchedtheprofileofatypicalStarbucksdrinker,thelevelofcoffeeconsumptionandthe nature and intensity of competition. An important component of this strategy was that Starbucksdidnotmindcannibalizingthesalesofitsstoresaslongastheincrementalsales

resultingfromtheopeningofanewstorewerehigherthanbefore.Theretailexpansionhas ledtheStarbuckscustomerstoviewitasmorecorporateandcaringaboutmakingmoney. Theestablishmentofsmallercoffeestoreswithoutloungingareashadalsotakenawaythe atmospherecomponentofthevaluepropositionthattheStarbucksof1992hadbuilton. TheStarbucksof 2002wasalsomore complexthantheStarbucks of 1992. In 1992, about halfofthecompanyssalescamefromsalesofwholebeancoffeeswhereasin2002about 77%ofthesalescamefrombeverages.Thecompanyhadaddednewproductssuchasfood items and new beverages in its menu and also sold equipment and accessories. The beveragemenuexpansionalongwiththedrinkcustomizationledtopartnersspendingmore 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 beverageeveryholidayseasonmeantfurthermenuexpansion,additionaltrainingtimesfor partners and possibly additional service times until a partner mastered the making of the newbeverage.ThedrinkcombinationsthatcouldbepreparedataStarbucksin2002were many more than the ones that could be prepared at a Starbucks coffee store in 1992, makingthewholeprocessmorecomplexandthedeliveryserviceslower. 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 consistedofaffluent,midtoupperclassprofessionalswhowenttoStarbuckstoenjoytheir coffeeandthecultureofit.TheretailexpansionofStarbucksresultedinchangingthenorm from customers going to the Starbucks to Starbucks going to the customers. The customer base of Starbucks in 2002 was changing to a younger, lesseducated and with a lowerincomedemographicprofile. Finally,theStarbucksimagetothepublicstartedchanging.Theimageof1992consistedofa placewhichyoucancallthirdplace,whereyoucangetthebestqualitycoffeeandwhere youcanrelax.In2002,theimagehadchangedtoaconvenientplace,whereyoucanmeet peopleandmoveonandthecoffeewasjustgood. 3. WhyhasStarbuckscustomersatisfactionscoresdeclined?Hasthecompanysservice declined,orisitsimplymeasuringcustomersatisfactionthewrongway? Unfortunately, with the data available it is extremely hard to say whether the companys servicehasdeclinedorifthereissomethingwrongwiththewaythatcustomersatisfaction ismeasured.Eventhoughtheevidenceshowsthatcustomersarenotassatisfiedasbefore, thisdoesnotnecessarilymeanthattheservicehasdeclined.Itmightaswellmeanthatthe expectations of the customers have been raised due to competition or marketing or any otherexternalforces.Inordertomakeafairassessmentofthesituationhowever,Iwilltry toexamineallpossibilitiesstartingfromthewaythecustomersatisfactionismeasured. TheCustomerSnapshotmysteryshopperprogramisasubjectivemeasuretorecordresults. 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.Forexample,itappearsthatthereisnotenoughexplanationastowhatexactlyis

definedasclean.Isastoreconsideredtobecleanwhenitappearstidyandsmellsnicebut therearetwoemptybeveragesononetable?ForMysteryShopperX,thiscanbeconsidered clean,butforMysteryShopperYthiscanbeconsidereddirty.Thisinconsistencycouldalso bevisiblewithindifferentstores.Alotoftimes,amysteryshoppergoestothestorewith thepredispositiontoexaminedifferentthingsduringhisstayinthestore.Inordertobeable toseemoreconsistentresultsandbeabletocompare,Iwouldliketoseehowcustomers would respond to certain criteria right after their Starbucks experience (survey outside store). OneotherthingthatIwouldliketoseeintheresearchisthebreakdownofcustomersby numberofvisitspermonth.Eventhoughtheresearchbreaksdownthesamplebynewand establishedcustomers,itwouldmakesensetoseewhatpercentageofthenewcustomers areregularsandwhattheirattitudetowardsStarbucksis.Insteadwhatweseeisallthenew customers clustered together and taking the average of them to determine the overall opinionofStarbucks.Bothofthesearejustassumptionsastowhatcouldhavebeenwrong withthewayStarbucksismeasuringitscustomersatisfaction.Again,theseassumptionsare based on the evidence available in the case. Lets now see why the customer satisfaction scoreshavedeclined. Averypossibleexplanationtothiscouldbebecauseofthegrowingcustomerbase.Asitis suggestedinExhibit8ofthecase,thelesssatisfiedcustomersarethenewcustomersthat have visited Starbucks for the first time within the past year. On the other hand, the establishedcustomers(firstvisitedStarbucks5+yearsago)appeartohaveabetteroverall opinion about Starbucks. This does not necessarily mean that the service of Starbucks has changed.Itrathermorecloselyleadstotheconclusionthatthenewcustomershavehigher expectationswhichcouldhavebeenaresultofmoreinformationavailable,gettingusedto the coffee experience culture, more competitors available. To make myself clearer I will provideanexplanationofthiswithanexample.StarbuckscoffeestoreonIndianaAvenuein BloomingtonIN.hasbeenofferingthesameconsistentlevelofservicetoitscustomerssince itsopeningin1994.Allthecustomersaregreetedwiththeirfirstname,andallthecustomers areservedwithin3minutesaftertheyarriveinthestore.Mr.Johnhasbeenaregularvisitor 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.StevewasaregularofDunkinDonutswherehewouldbegreetedeverydaywith his first and last name, the barista knew exactly what beverage he wanted, and he was alwaysservedwithintwominute.Mr.SteveisnotsatisfiedwiththeStarbucksserviceeven thoughtheserviceatStarbuckshasbeenthesameforthelast8years.Thisexampleshows that even though Starbucks could have been consistent in its service, it has added a new customer(Mr.Steve)toitscustomerbasewhoisnotassatisfiedbecausetheservicedoes notmeettheexpectationsMr.Stevehadacquiredfromusingacompetitor. Lets 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 veryhighforitscustomersthroughitsvalueproposition.Eventhoughthecompanyinitially managedtomeetthesestandards,theretailexpansionandtheproductinnovationstrategy thatthecompanyfollowedalongwiththecustomizationofthedrinkshadaharmfuleffect

onallthreecomponents(coffeequality,service,andatmosphere)ofthevalueproposition which had led to the declining effects of customer satisfaction. The image of the brand changed.Thestorewhichusedtobeknownasthethirdplace,aplacewhereyoucould relaxandenjoyyourcoffee,wasnowappealingtoamuchlargertargetmarket.Itwasthe 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, Starbucksbecamethenorm,aplacewhichwaseverywhere,withgoodcoffeeandconsistent 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 lowerprice. 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 upscaleyet inviting environment thatthe company promised with itsvalue propositionandwhichbroughtalotoftheloyalcustomerstothebusinessdidnotexistany 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.Eventhough,thereisnospecificevidencecitedinthecaseregardingthequality of thecoffee,I find it almostimpossiblefor acompanytoexperienceamore than 3000% expansion in its stores within 10 years and not deteriorating at least some of its product quality.AsIdonothaveenoughdata tosupportthis,Iwill maketheassumptionthatthe additionof thenewitemshad aneffectinsacrificingat leastsome ofthe qualitythatthe Starbucksbrandgavetotheconsumer.AsStarbuckswascaffeinatingtheworld,itmeant thatproductsalesincreasedthroughoutthecompany.Statisticallyspeaking,theprobability ofaproductbeingsoldlackingthenecessaryqualitywashighest.InthemindofaStarbucks consumeroranyconsumerabadexperiencesticksout. 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,makingthemloseontheirsoftskills.Alotoftheservicevaluewasalsolostonthe 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.Ifthatwastrue,thenitispossiblethatcustomerscouldseeaninconsistentlevel ofserviceinstoresthatdidnothavetherightpersonnel. 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 customerstobewhatStarbuckswasandtodeliverwhatStarbucksdidinthepreviousyears.

Infact,theStarbucksmodelasdescribedthroughStarbucksvaluepropositionwasveryeasy to imitate. Starbucks was facing fierce competition not from another chain, but from any small,independent,specialtystorethatwaslocatedtoacloseproximitytoStarbucks.These competitors were more likely to offer the extraordinary service and the atmosphere that Starbuckshadpromised.Inadditiontothat,theimageofStarbuckshadchangedinthemind of the consumers who saw the fast expansion of Starbucks with the addition of stores everywhere,asawayforthecompanytomakemoremoney. 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.actualservicedecline),Iammoreinclinedtobelievethatthelowerscoresare a combination of changing expectations of new customer base and actual service decline (Exhibit1).Eventhoughtheremightbesomeflawsintheresearchmethods,Idonotthink that they are that inconsistent to disprove that the customer satisfaction levels were declining. 4. DescribetheidealStarbuckscustomerfromaprofitabilityperspective.Howvaluableis ahighlysatisfiedcustomertoStarbucks?Whatwouldittaketoensurethatthis customerishighlysatisfied? TheidealStarbuckscustomerfromaprofitabilityperspectiveistheloyalcustomerwhovisits thestoreonanaverageof18timespermonth.Ifweacceptthatthereisahighprobability ofcorrelationbetweennumberofvisitsandsatisfactionlevel,thenitissafetoassumethat 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,thentheidealStarbuckscustomerbringsanaveragerevenueofabout$954 peryearor$7924overitslifetime(seeExhibit2).Usingthesamecustomersatisfactiondata and assuming that a highly satisfied customer visits a Starbucks coffee store 7.2 times a month,thentheaveragerevenuethatthiscustomerbringstoStarbucksisabout$381per yearor$3169overitslifetime.Ideally,thiscustomerpurchaseseitherreadymadeproducts oreasytomakebeveragessothatitdoesnottakemuchtimeforpartnerstogethimoutof theserviceline.Sincethereisadirectlinkbetweencustomersatisfactionandloyaltywhich eventually leads to higher profits, then Starbucks should work on raising the satisfaction levelsofitscurrentcustomerbaseormakingthemvisititsstoresmorefrequently.Basedon therankingsofthekeyattributesthatcreatecustomersatisfaction,Starbucksshouldensure that its stores are kept clean all the time. This can be done by engaging partners into cleaningthestoresandevenhelpingcleanthetableofacustomerwhentheyhaveavailable time. Starbucks should alsoplacemoreemphasis in itspartners utilizingtheir softskillsto treatthecustomersasvaluable. Starbucks can also try to promote its storedvalue 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 transactiondatatoimprovetheexperience. AnotherthingthatStarbuckscandotoensurethatthecustomerishighlysatisfiedistotry to deliver on its value proposition. It should make sure that the service is as fast as the customerwantsittobe,thepartnerswillremembertogreetregularswiththeirfirstname andthequalityofitsproductswillbeofthehighestlevel.Thismightrequireaninvestment 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 comfortablechairscanencouragecustomerstofeelmorerelaxedwhileinthestore.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 TMobile Hotspot wireless internetservice. 5. ShouldStarbucksmakethe$40millioninvestmentinlaborinthestores? First lets examine what needs to be done for Starbucks to get a positive return if they decidetoproceedwiththe$40millioninvestment. 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 lets see how this translates into number of customers that need to go from beingsatisfiedtobeinghighlysatisfied.FromExhibit3wecanobservethatthedifferencein revenueperyearfromahighlysatisfiedtoasatisfiedcustomerisabout$172.Thatmeans thatinorderforStarbuckstobreakevenforthisinvestment,itneedstoturn50customers (8750/172)frombeingsatisfiedtobehighlysatisfiedineachofitsstores.FromExhibit3in thecaseweknowthattheaveragedailycustomercount,perstoreis570.Thismeansthat Starbucksneedstoturn50of570or9%ofitscustomersfromsatisfiedtohighlysatisfiedin 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 satisfactionandthattheadditionallaborwillprovidetheincreaseofspeedofservice.Thisis 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 equalinsize,numberofpeopletheyserve,locationandpricesandthatallthestoresneed thisadditionalinvestment.Afinalassumptionisthatsatisfactioniscorrelatedwithloyalty andthatifasatisfiedcustomerbecomeshighlysatisfiedthenthenumberofvisitspermonth tothestorewillincreasealongwithhisticketsize. If customer satisfaction does not increase, an alternative breakeven venue for Starbucks wouldbetoacquirenewcustomers.Inthiscase,anadditional7customersshouldcometo eachstoreeverydayas aresultofthisinvestment.Thistranslatestoan additional 32,000 customers per year for all stores. Alternatively, if the number of customers remains the same,$0.05additionalshouldbespentbyeachcustomerineachvisitinordertobreakeven (seeExhibit4).

Since there is a link between customer satisfaction, loyalty and average ticket size, then if the investment will increase the customer satisfaction it would make sense. There is no questionthatincreasedcustomersatisfactionwilltranslatetomoresales.Thebigquestion howeveriswilltheinvestmentleadtoincreasedcustomersatisfaction? Based on the companys research, it is evident that only 10% of the Starbucks customers have asked fora faster, moreefficientservice. Even ifthe $40 million investment is made and customers get a faster service, there is a big risk in losing value in some of the other perceptions. Having more partners in a specified work area might lead to the risk of less friendlier,lessattentivestaffandmightalsoriskthelossofthepersonaltreatment.Iteven appears impractical and inefficient to allocate the $40 million investment equally to the 4574stores.Itwouldmakesensetoallocatethemoneybasedonsizeofstore,numberof customers, location and need for additional labor. There would be no need to invest in a storewhereallcustomersarehighlysatisfiedandtherewouldbehigherneedtoinvestina storewherethereisahighpercentageoflesssatisfiedcustomers. Basedontheaboveassumptions,IbelievethatStarbucksshouldonlyinvestthemoneyin laborwhereverneededandinwhatamountneeded.Agoodwaytodothatwouldbetodo a more thorough analysis of its customer base and identify areas where people are less satisfiedbecauseofthespeedofserviceandtheninvestinthoselocationsonly.Hopefully theadditionofextralaborinthoselocationswouldeliminateproblemsassociatedwithfast serviceandtreatingthecustomerasvaluable. At the same time however, I believe that there are far more important investments that needtobemadeandpartofthat$40millioncouldbeusedforthoseinvestments.Asafirst step,itwouldbeagoodideatoestablishaninternalstrategicmarketinggroupthatwould coordinate actions of the market research group, the category group and the marketing group.ThiswouldgivetheopportunityforStarbuckstogetfasterfeedbackfromcustomers, and be proactive instead of reactive. As 77% of the companys revenues came from beverages which were handcrafted and since there was a problem with service times, the company could find other ways of increasing its productivity at the point of making the drink,suchasinvestinginnewmachinesorremovingunpopularbeveragesfromthemenu. Themoneycouldalsobespentonbettertrainingofpartnerssoftskillsinordertoensure thatthecustomersaretreatedthewaytheStarbuckshaspromisedthemthattheywould. Concluding,Iwouldliketoaddthataninvestmentinaddingmorelabortostoresmighthelp thecompanyincreasesomeofitssatisfactionlevelsandmaybeevengetagoodreturnout of it, but from the data available in the case it appears that Starbucks has a lot of other problems that needs to tackle. They need to reevaluate their value proposition, examine howtheirexpansionstrategyhasledtothedeteriorationoftheirbrandimageandfindnew waystosatisfythecustomer.

Exhibit1 ChangeofCustomerExpectationsandCustomerServiceforStarbucksfrom1992to2002 CustomerExpectations 1992 Exhibit2 NumberofStarbucksvisits/month Averageticketsize/Visit Totalrevenue/month Totalrevenue/year Averagecustomerlife/years Totalrevenueovercustomerlifetime HighlySatisfied Customer 7.2 $4.42 $31.82 $381.84 8.3 $3169.27 IdealCustomer 18 $4.42 $79.56 $954.72 8.3 $7924.18 2002 CustomerService

Exhibit3 NumberofStarbucksvisits/month Averageticketsize/Visit Totalrevenue/month Totalrevenue/year Differencebetweenrevenueof SatisfiedCustomervs.HighlySatisfied customer SatisfiedCustomer 4.3 $4.06 $17.46 $209.50 $172.39 HighlySatisfied Customer 7.2 $4.42 $31.82 $381.89

Exhibit4 Averagehourlyrate Totallaborhoursperday, averagestore Laborcost/day,averagestore Averageticket Averagedailycustomercount Revenue RevenueLaborCost Currentsituation $9.00 51.4 $462.6 $3.85 570 $2194.5 $1731.90 Breakeven customercount $9.00 54.3 $488.70 $3.85 577 $1731.90 Breakeven ticketsize $9.00 54.3 $488.70 $3.90 570 $1731.90