Starbucks: Delivering Customer Service

Case Study, BEP 430 Marketing

20030059 Dong-ock Kim1, 20030071 Min-geuk Kim2, 20040054 Keehyung Kim3, 20040535 Yohan Jo4, 20076006 Huang Qiuling5, 20076035 Dorjsuren Bayarmaa6 Marketing Team A1 2 3 4 5 6

erst_licht99@hotmail.com1, kmg0702@hanmail.net2, keehyoung@gmail.com3, zukjimote@gmail.com4, sharlin_huangqiuling@hotmail.com5, gordok_88@yahoo.com6

Professor: Wonjoon Kim Date submitted: May 7, 2007

TO: Day, vice president of administration in North America, Starbucks FROM: Dong-ock Kim, Min-geuk Kim, Keehyung Kim, Yohan Jo, Huang, Qiuling, Dorjsuren Bayarmaa RE: Starbucks: Delivering Customer Service DATE: May 7, 2007

Market Analysis Starbucks provides the highest-quality coffee what it believes in the world. It has hundreds of product lines and the sales of beverage take the largest percent. Despite of Starbucks overwhelming presence and convenience, customers think there was just a little of image and product differentiation between Starbucks and the smaller coffee chains. However, Starbucks has an uncomplicated distribution strategy, and it tries to make customers get entrance to Starbucks products easier and provide more convenience to customers. Moreover, it has company-operated stores located in hightraffic and high-visibility and non-company retail channels. In addition, Starbucks has four major competitors. Minneapolis-based Caribou Coffee which provides the look and feel of an Alaskan lodge has more than 200 stores in nine states. California-based Peets Coffe&Tea - the freshest coffee is its strategy - has about 70 stores in five states. Others are Independent specialty coffee shops which offer beer, wine, liquor, satellite television, and internet-connected computers and, Donut and bagel chains like Dunkin Donuts offering flavored coffee and non-coffee alternatives.
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For product innovation, new products were launched on a regular basis. For service innovation, Starbucks has launched Stored-Value Card (SVC) and T-Mobile HotSpot wireless Internet service. In addition, the expanding strategy was to open stores in new markets while geographically clustering stores in existing market. Furthermore, the cost of cannibalization covered by total incremental sales associated with concentration.

Evaluate Starbucks Plan It is a good idea to make customers feel like valued customers with faster service with more labor. As you said, it just makes about 7 penny loss a share. However, it is a minor loss of share, and there are some problems in the $40 million plan. First of all, it is too large amount of money to spend for small factor. Secondly, there is another way to satisfy customers. Every $40 million per year is quite a huge amount of money. The net income of Starbucks was $151.4 million in 2001 and $215.1 million last year, so it will have risks about no growth in net income next year. Moreover, it is unsure if it would be successful. Starbucks is trying to reduce consumers' waiting time continuously. However, there has no successful reduction. Furthermore, in 2002, waiting time of

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Starbucks was just 3.10 minutes, so we cannot assure every customer will be satisfied with 3 minutes. Finally, we suggest another plan which is more efficient. There are 19% of customers who responded that they would feel like valued customers when they could get free coffee after every x visits. Through the calculation [Appendix 1], free cup after every 10 times-visit can make more efficient results. Furthermore, friendlier staff can make 19% of customer satisfaction, so education of staff can be a better idea.

3Fs Recommendation We have made 3Fs recommendation for Starbucks: Friendly staffs, Free drink service, Friendly environment. For the Friendly staffs, we can use methods of evaluation and education. From the survey of customers satisfaction, friendlier staff is the most important part that can make customers feel like valued customers. Therefore, evaluation and education would be a good solution. Evaluation can be done by both staffs and customers. There are some standards like Appendix 2. After evaluation, Starbucks can educate poor partners and award the

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best partners. Because it just needs some papers with pens and money for educators, customers satisfaction rate would be higher with low cost.

There are two types for free cup service. One of them is a free cup after x number of visits. In "Valued Customer" perceptions 19% of customers would feel more like a valued customer, if Starbucks offers a free cup after x number of visits. 19% of customer is not so small number, so if Starbucks fulfill customers wishes, Starbucks can make "excellent" customer service and more customer intimacy. Hence, through the increase in number of customers visit-time, it will encourage customers who like to drink Starbucks brand beverages and it will attract more new customers. Another type is sample coffee which means serving a small amount of coffee before customers choose coffees. Because there are so many kinds of beverages in Starbucks, so it is difficult to make a choice of loved one. This service will help customer to make their loved choice and to know Starbucks' brand "live coffee" mantra. It will reduce the number of customers who have a difficulty when they started visiting Starbucks for the first time. In addition, some loyal customers do not know all Starbucks' tastes of all beverages, so it will become a good chance to customers to choose their wishful tastes from all of the beverages.

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In conclusion, through these 2 types of service, Starbucks can increase number of satisfied customers and can get more profit than before. Also it will help to attract sight of customer again.

Nowadays, people are getting concerned about environmental issues. Starbucks also needs to be environmentally friendly. We suggest using recycled cups and tissues and it will make customers feel intimate with Starbucks. In addition, how about sponsoring environmental groups? I believe it can change the image of Starbucks positively, because customers would think that your company shares the same concerns with them. We also recommend you to decorate the stores environmentally. For instances, using wood tables or planting small trees to make an atmosphere environmentally friendly are also matched up with Starbucks green logo. Many people use their camera today. Hence, if you installed a wireless LAN at stores, making a small space in stores where customers can take some pictures would attract them.

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Exhibit 1. SWOT Analysis

Favorable Internal Strength - High-quality coffee for Starbucks controlled as much supply chain from various countries as possible - Established brand name. - Great ability of measuring things by collecting market data Weakness

Unfavorable

- Indiscipline at using data to drive decision making

External

Opportunities - Many stores all over the U.S. and some other countries - Rising coffee consumption

Threats - Rising competitive coffee bars - Bad image of a company caring primarily about making money

- Eight states in the U.S. without a - Very little image or product single company-operated differentiation between Starbucks and the smaller coffee chains Starbucks - Being far from reaching saturation levels of Starbucks stores in many existing markets

Exhibit 2. Porters Five Forces

Threat of New Entrants

Factors/Suppliers (Bargaining power )

The Industry (Rivalry Existing Firms)

Buyers (Bargaining Power)

Threat of Substitutes

Industry Rivalry There were some competitors of Starbucks. Those included the U.S.s secondlargest player Diedrich Coffee, Minneapolis-based Caribou Coffee and California-based Peets Coffee & Tea, etc. Diedrich Coffee operated fewer than 400 stores. Caribou Coffee operated more than 200 stores in nine states and simulated the look and feel of an Alaskan lodge with Knottypine cabinetry, fireplaces, and soft seating. Californiabased Peets Coffee & Tea operated about 70 stores in five states. Starbucks had already owned close to one-third of Americas coffee bars, and it is more than its next five biggest competitors combined. It operated over 300 company-owned stores in the United Kingdom, Australia, and Thailand, in addition to about 900 licensed stores in various countries in Asia, Europe, the Middle East, Africa, and Latin America. Thus, Starbucks was holding almost unique position.

Threat of New Entrants Starbucks was already standing in a unique position among coffee bars. It is an overwhelming store for many competitors. As a pioneer in this industry in the U.S., it played a role of a front runner. Therefore, a new company was very hard to catch up with Starbucks name recognition.

Threat of Substitutes Various types of food and beverage stores pose the threat of substitutes to Starbucks, for example, Dunkin Donuts. Dunkin Donuts operated over 3700 stores in 38 states and attributed half of its sales to coffee. Such stores can be a substitute.

Buyers Power Starbucks began to meet a crisis with appearing competitors. Specialty coffeehouse customers thought that they rarely found the differentiation between

Starbucks and the smaller coffee chains in the minds. If the customers confirmed no differentiation, they were able to turn to other coffee bars. Therefore, the customers power is strong.

Suppliers Power Starbucks were supplied its coffee bean from various countries by many farmers. For this reason, it is hard to think that suppliers had great influence upon the price or policy of Starbucks.

Appendix 1. Calculation for Starbucks Let's assume that if Starbucks provide coffee within 3 minutes, half of customers would satisfy. (Because, in 2002, Starbucks already provided in 3.10 minutes) 5% of customers feel more value from that with $40 million/annual. For 1%, $8 million/annual is needed Net revenue of 2002: $3,288.9 million Cost of Goods Sold of 2002: $1,350.0 million Gross Profit of 2002: $1,938.9 million Free cup after x number of visit More cost from free cup: (1 / x) X Cost of Goods Sold People who will feel like a valued customer with free cup: 19% For 1%, (1 / x) X Cost of Goods Sold / 19 = $(71.05 / x) / annual is needed If x is 10, free cup after x number of visit service is more efficient. Furthermore, in this case, there would be positive marketing effect like more revenue by law of demand.

Appendix 2. Evaluation Sheet Sheet #. 172

Evaluation Sheet Date : a Mystery Shopper : as ( 2dasda123sdsada 2a3sda121sdasda Signature )

Information of targeted store : gadgadgadfff2fffffffffffffffffffagdddddddagd Managers name : asdfasd1fasdfsda Item Cleanness Average wait time Average resetting time Number of issued SVC (Stored-value card) Average spending time1 Legendary service scores Partners satisfaction scores Total score 1 ~ 10 (worst ~ best) Partners name : asdfasdfas2dfsd Item Complaints a month Average wait time Number of served cups Number of lateness and absent without notice Knowledge test score2 Consistency product quality Number of missing(or incorrect) orders Total score Final Score3 = asdas1d 1 ~ 10 (worst ~ best)

Average spending time means how long customers stay at the store to drink or talk. We can measure comfortableness of customers by using this value. 2 Knowledge test is to measure how much partner knows Starbucks system or products, once a quarter. 3 Partners final score = Stores total score + Partners total score