STARBUCKS: DELIVERING CUSTOMER SERVICE A Case Study INTRODUCTION Starbucks is a dominant brand name in North America as the provider

of gourmet coffee beans, coffee-based drinks, and non-caffeinated beverages. It is also becoming a well known brand in many countries around the globe. Starbucks' value proposition is to create an "experience" around the consumption of coffee that its consumers could weave into the fabric of their everyday lives. The company currently serves over 20 million customers in over 5000 company-operated and licensed stores throughout the world. Another interesting fact is that Starbucks has achieved this level of success without much advertising. Recent market research has shown that Starbucks is not meeting its customers' expectations in terms of customer satisfaction. KEY DECISION ISSUE The main issue is whether the company should invest $40 million to add an equivalent of 20 labour-hours per week to its 4500 company-operated stores. The proposal is based on the assumption that increasing labour hours at stores will result in faster service, which will improve customer satisfaction. Since studies have shown that there is a direct relationship between customer satisfaction and customer behavior, this increase in customer satisfaction is expected to result in higher sales growth and profitability. Exhibit 1 illustrates this relationship, showing that greater customer satisfaction directly results in higher potential sales. STRATEGIC ISSUE Given that there is a strong, positive relationship between customer satisfaction and future potential sales, achieving high customer satisfaction is a key factor to Starbucks' sales growth. In fact, it can be shown that by transforming dissatisfied customers to satisfied and highly satisfied, revenues can be increased by 361% and 1478%, respectively. Exhibit 2 shows how these results were obtained. Once it has been established that customer satisfaction is the key underlying issue in question, a quick glance at Starbucks' recent customer satisfaction reveals that customers did in fact express dissatisfaction with the efficiency and speed of service. Then the question is to what extend will improving the speed of service impact customer satisfaction. Additionally, other alternatives must be developed and evaluated against the key decision issue. OTHER ISSUES Although customer satisfaction is the key underlying strategic issue, other issues must also be considered when evaluating various alternatives. While the importance of these issues may vary, we must ensure that recommendations do not conflict with the core values, long term goals, and the image of Starbucks. Some important issues include: Overall Strategy: We must ascertain that Starbucks' long term marketing strategy in terms of Poerter's Generic Strategies is not compromised. Pricing Objective: Starbucks' pricing objective is based on a Premium Pricing Strategy (high quality and high cost) and recommendations should not undermine this objective. Creating Synergies: Recommendations should leverage the core strengths of Starbucks in order to create synergies. ANALYSIS SWOT analysis was used as the primary driver in developing and evaluating alternatives, a summary of which is shown below: STRENGTHS Facts about Starbucks as well as the information obtained from its 2002 survey of 'Top Five Attributes Consumers Associate with the Starbucks' Brand' and 'Qualitative Brand Meaning' help identify the following key strengths: Large market share Well known brand name and generally trusted Reasonably well accepted for having a good quality Good coffee on the run - associated with speed of service Accessible and convenient Consistency WEAKNESSES Starbucks' "valued Customer" Perceptions Survey is key in determining what areas customers are most unsatisfied with or where they feel Starbucks can improve the most. This survey essentially identifies that gaps that exist between customers' expectations and the extent by which Starbucks meets them. The results of this survey are shown in a Parato chart in Exhibit 3. According to the survey 19% of customers would like Starbucks' staff to be friendlier and more attentive while another 19% would like to receive a free beverage after purchasing a certain number of cups. 11% of respondents indicated that they would like to pay lower prices at Starbucks. 10% of respondents indicated that they would like to receive faster, more efficient service. The "importance ranking of key attributes in creating customer satisfaction" is another important survey, which indicates

what customers consider most important in creating satisfaction. As shown below, Starbucks weaknesses and their importance can be highlighted by finding the gaps between what customers consider key attributes in creating satisfaction and where they express dissatisfaction. Justifications of these calculations are shown in Exhibit 4. Areas customers expressed dissatisfaction (% of respondents)% of customers indicated this category as a key attribute to winning satisfactionGAPRanking of GAP (1=most significant) 19% Friendlier, more attentive staff75% Friendly staff14.25%1 19% Free cup after x number of visits75% Treated as a valuable customer14.25%1 11% Reduce prices65% Appropriate prices7.15%2 10% Faster, more efficient service65% Fast service6.5%3 9% Better quality/variety of products5% Selection of merchandise3.16%4 The categories in the list shown above, with the exception of general price reduction, comprise the alternatives that were subsequently considered. Price reduction was eliminated as an alternative since it conflicts with Starbucks' pricing and generic marketing strategies. That is, Starbucks has a Premium Pricing Strategy and does not compete within Porter's overall cost leadership. THREATS Threats to Starbucks include competitors operating within the same industry. While this threat does not seem to be serious since Starbucks has a large share of the current market, it must be wary of more aggressive competitors that could take advantage of Starbucks' weaknesses or degrading strengths. Another threat to Starbucks is competition by substitute products. However, with the exception of alcoholic drinks, this risk is low since Starbucks offers a wide variety of caffeinated and non-caffeinated beverages. In this light then, bars and pubs can also be considered distant competitors of Starbucks. Some of Starbucks' threats and their relative importance are shown below. OPPORTUNITIES Starbucks is very well positioned for global expansion, given its success thus far in the markets outside of North America. There are also many opportunities in the regional markets throughout North America where it can continue to expand. The most relevant and important opportunity however, is in achieving customer satisfaction since this will directly result in increased revenues and profit. ALTERNATIVES Quantitative and qualitative evaluations of the alternatives that emerged from the SWOT analysis are shown below. These calculations are based on cost and benefit analysis, details of which are shown in Exhibit 5. RECOMMENDATION Based on evaluation of the alternatives shown above, we recommend that Starbucks proceeds with the plans to increase the speed and efficiency of service across its stores and launch a program to improve the friendliness and attentiveness of its partners. As shown under Alternatives, this recommendations leverage the strengths of two alternatives to generate net benefits that exceed those of other alternatives. Moreover, the results that can be achieved from these recommendations are in-line with Starbucks' core strengths, values, pricing and marketing strategies. IMPLEMENTATION Starbucks will need to proceed with the implementations of each recommendation cautiously and in a stepwise manner. In terms of improving the efficiency and speed of operations, Starbucks has already succeeded in reducing customers' waiting time to just over 3 minutes, using a combination of process and equipment improvements. However, based on Starbucks' research, improving efficiency by reducing the waiting time to 3 minutes is key in obtaining customers' satisfaction. The proposed investments to increase labour hours at stores should then help Starbucks achieve this goal. In order to implement this program, Starbucks should first select a few locations to test this proposal. Starbucks should then implement careful controls to accurately measure the improvements in the speed of service. More importantly, customer satisfaction levels must be monitored to ensure that improvements in efficiency of service do in fact generate higher customer satisfaction. Once the desired results have been observed, the program can then be expanded to cover more stores and regions. While improving the friendliness and attentiveness of staff can be achieved virtually without incurring additional costs, this task can be quite challenging. In order to be successful in instilling a sustainable impact, friendliness and attentiveness must be infused with Starbuck's culture and core values. Moreover, this effort must be initiated right at the source, which is in the selection process and training of Starbucks' Partners. Employees must then be screened carefully to ensure that they are the right fit for Starbucks' core values. Changing customers' perceptions towards staff's friendliness however, is the key in achieving higher customer satisfaction. To help achieve both of these goals, it is recommended that Starbucks recreates its

image to communicate this value. By launching an advertising campaign that emphasizes Starbucks' cafes as friendly and warm places where customers are cared for, Starbucks' can communicate its dedication to attentiveness towards its customers as well as attract the type of employees that understand and respect Starbucks' values. For example, Starbucks can launch an advertising campaign with a slogan: We Take Care of You RISKS AND CONTINGENCIES Even with diligent analysis and planning it is possible that the implementing the recommendations will not generate the anticipated results. For this reason, it is specially important that the recommendations be implemented gradually and through pilot programs. This will ensure that the programs are adjusted before a widespread implementation. Exogenous factors such as the ones listed under Threats in the SWOT analysis may also affect the market and business. Therefore, it is important that Starbucks remain flexible and adaptive to new environments. It should also be remembered that Starbucks has an additional alternative in its arsenal. That is, to reward customer loyalty by offering a free beverage after several visits. EXHIBIT 1 Starbucks' Customer Behavior by Satisfaction Level These results illustrate and establish the importance of meeting customers' satisfaction with respect to revenue growth. Number of Store Visits/MonthAverage Ticket Size/VisitAverage Customer Life (years) Unsatisfied Customer3.9$3.881.1 Satisfied Customer4.3$4.064.4 Highly Satisfied Customer7.2$4.408.3

EXHIBIT 2 Future Potential Sales Impact of Increasing Customers' Satisfaction Level Potential Future Sales = Monthly Sales Visits x 12 x Avg. Customer Life x Avg. Ticket Size/VisitMarginal % Increase in Sales Unsatisfied Customer$199.74100% Satisfied Customer$921.78361% Highly Satisfied Customer$3,155.33242%

EXHIBIT 3 Factors Driving "Valued Customer" Perceptions % Response Friendlier, more attentive staff19.00% Free cup after a number of visits19.00% Reduce prices11.00% Faster, more efficient service10.00% Better quality/variety of products9.00% Improve atmosphere8.00% personal treatment4.00% more knowledgeable staff4.00% Offer promotions3.00%

EXHIBIT 4 Estimating Starbucks' Customer Satisfaction Gaps This value represents the percentage of the customers that indicated that the chief reason for their dissatisfaction is associated with the corresponding category. The same customers then would be more satisfied if the expectations in that particular category were met. For example, according to the first category, 14.25% of all the customers are dissatisfied due to staff's lack of friendliness and attentiveness. These values are estimated in the following way:

1.When surveyed, 19% of customers indicated that they were dissatisfied with staff's friendliness and attentiveness. 2.Another survey showed that 75% of Starbucks' customers indicated that to them, staff's friendliness was a key attribute in creating customer satisfaction. 3.Then the probability that the customers who perceived staff friendliness to be a key attribute in creating satisfaction and who expressed dissatisfied with Starbucks' staff for the same reason, is the product of the two percentages. That is: 19% x 75% = 14.25%

EXHIBIT 5 Evaluation of Alternatives The percentage of customers that were dissatisfied due to a key attribute were calculated in and shown in Exhibit 3. In this exhibit the value and cost associated with each the four alternatives being considered is estimated. These estimates will then help in the evaluation and ranking of alternatives and making the final recommendation. Assumptions: It is assumed that 1/3 of Starbucks' customers belong to each satisfaction-level category. That is, groups of 6,666,667 (=20 million/3) customers are 'dissatisfied', 'satisfied', and 'highly satisfied'. It is also assumed that customers who are dissatisfied with each key attribute are spread evenly among the 'dissatisfied' and 'satisfied' categories. For example, of the 14.25% of the customers who indicated dissatisfaction with staff's friendliness, 7.125% are considered 'dissatisfied' customers and 7.125% are 'satisfied' customers. (That is, none of the customers in question is 'highly satisfied'.) Finally, if the expectations of these customers are met, the customers' satisfaction would increase by one level. That is, 'dissatisfied' customers will become 'satisfied' and 'satisfied' customers will become 'highly satisfied'. This is shown graphically in the figure below. The framework established above was used to estimate the benefits that would result from meeting the customers' expectations of key attributes in terms of increase in revenues. The assumptions made above are reasonably accurate since as shown below, they can predict the current revenues to within 8% accuracy of actual reported values. The following shows the projected increase in revenues that could result from meeting customers' expectations of 'friendlier and more attentive staff'. The table below shows the potential value of different alternatives, which were estimated similar to the calculations shown above. AlternativePercentage of customers impacted**Estimated increase in revenues from improvement ($mil) Improve staff's friendliness and offer a free coffee after a certain number of visits28.5%234.8 Improve staff's friendliness14.25%117.4 Offer a free coffee after a certain number of visits14.25%117.4 Improve the speed and efficiency of service6.5%93.9 To complete the comparison of different alternatives, the cost associated with offering a free coffee beverage after purchasing a number of beverages must also be considered. This cost is estimated as follows:

REFERENCE: Starbucks: Delivering Customer Service Philip Kotler and Peggy Cunningham, "Marketing Management", 2004