Starbucks

Date of Submission:
2015/10/20

Case Analysis Group 12 HEXAHEDRON

Group Members:
114020226

114020107

114020229

114020069

114020289

114020168

For partial fulfillment of Marketing Management (MKT2010A) at CUHK(SZ)

1. Background

With the mission of “to inspire and nurture the human spirit – one person, one cup,

and one neighborhood at a time”, Starbucks had become a successful specialty coffee

brand since its foundation in 1971, and seemed to keep its popularity. However, some

problems were revealed on its way to expand. This report will analyze them, and

solutions and recommendations will be given.

2. Problem

2.1 Customer

2.1.1$Customer$Satisfaction$

Despite its high Customer Snapshot scores, Starbucks was having trouble concerning

customer satisfaction. Starbucks' service performance was not meeting customer

expectations, especially in terms of the speed. While the company set a rigorous

benchmark of three-minute waiting time (Moon & Queich, 2003), the goal was never

met (from case Exhibit 7). This was partly attributed to the product proliferation and

customization offering, which tremendously increased the complexity of the barista’s

jobs. Starbucks must take actions to improve the service efficiency.

2.1.2$Changing$customers$

New customers were younger and not so well-educated, with lower income, but

mostly chasing fashion and freshness (from case Exhibit 8). How to sell its value to

them was the problem that Starbucks was facing.

2.1.3$Brand$image$

Starbucks’ brand strategy was “live coffee”. However, “corporate” was among the top

five attributes consumers associate with the Starbucks brand (from case Table B).

Customer perception was that Starbucks was focusing on growing its own business,

rather than communicating value to customers.

2.2 Operating expenditures

According to the Starbucks annual report 2002 (Starbucks, 2002), one of the biggest

problems was that the operating expenditures were large, although net revenue

increased by 24.2%. The company's operating margin was 8.6%, compared to its
competitors McDonalds, Panera and Yum’s 13.72%, 12.52% and 13.28% respectively

(see Figure 1).

As the case mentioned, “labor was already the company’s largest expense item in

North America”, with its over 60,000 partners worldwide (Starbucks, 2002). It was

indicated that Starbucks was paying more salary than before. According to Annual

Report 2002 (Starbucks, 2002), Starbucks payroll-related expenditures increased

because of increasing average wage rates and the growing sales on labor-intensive

handcraft drinks. Additionally, since Starbucks' coffee-making processes were quite

complicated, the store operating efficiency was influenced.

Figure 1. Comparison of Starbucks, McDonald, YUM! And Panera

Starbucks McDonald YUM! PANERA BREAD

Operating income margin 8.60% 13.72% 13.28% 12.52%

Profit Margin 6.47% 5.80% 7.52% 7.84%

Source From: SEC Filing

3.0 Solutions and Recommendations

3.1 Speeding the service

Obviously, speeding the service through optimizing operation managements and

developing automated facility is an operable and necessary way to deliver faster

service. For example, Starbucks could cancel credit-card signatures for purchases of

small size, for instance, under $20, which is estimated to cut the time of processing

credit cards from an average 30 seconds to 22 seconds (Gray, 2005). In addition,

further generalization of use of the automated espresso machines verismo is

recommended. However, Starbucks should be careful about the trade-off between the

handcrafted and automated, since handcrafted coffee is also a remarkable

differentiation of Starbucks. All of these recommendations are initiated to improve

service efficiency and thus, meeting customer satisfaction and cutting operating cost.

3.2 Specialty operations

The non-company-operated retail channels, "specialty operations", contributed to only

15% of Starbucks' net revenues in fiscal 2002. Thus there was great potential for

Starbucks to accelerate the development of its alternative distribution channels.

First, through licensing, the Starbucks Company doesn't have to struggle on rental

cost and other store operating costs, instead throwing the concerns to the licensees.

The franchised expenses to franchised revenue of McDonald, Yum and Panera were

far below their total operating costs to revenue (see Appendix 3), which is a strong

evidence for the cost-saving of licensing. Additionally, it is important to notice that

Starbucks takes the responsibility to train the employees of the licensees to meet its

standards.

It is also recommended that Starbucks develop more cooperation with third parties,

like the joint venture with Pepsi-Cola, a $400 million of franchise “capturing 90% of

the ready-to-drink coffee category” (Moon & Queich, 2003)and its licensing

agreement with Kraft Foods on the channel of grocery stores and warehouse clubs.

Therefore, to grow aggressively and for cost-saving and quality-maintaining,

Starbucks had better utilize these specialty operations as one of its distribution

strategy.

3.3 Products innovation

Products are the carrier of Starbucks' value. More surveys are needed across different
geographical areas and age groups to design Starbucks’ products. Different stores

have their own popular specialties (see Figure 2) (Ferdman & Yanofsky, 2014).

Products improvement and innovation on those products are attractive for the new

customers and also the established ones. Besides, original equipment and accessories

also contributes to its sales, especially the mugs, which can be designed cooperating

with well-known designers and become the trendsetting.

Figure 2 What people order at Starbucks around the United States

Source: (Ferdman & Yanofsky, 2014)

3.4 Membership cards

In addition to the existing SVC, Starbucks is recommended to create a membership

card and rewards system as part of customer loyalty program. In the first place,
membership cards encourage more visits. Second, through this system Starbucks can

effectively conduct promotions like buy one get one free and a free cup after certain

amount of consumption, given that prices and promotions are also a crucial factor

driving “valued customer” perceptions (from case Exhibit 11). Finally, the system

collects huge data for analyzing these registered customers’ behavior, largely

facilitating CRM.

4.0 Conclusion
To summarize, Starbucks had problems mainly concerning cost and customers. The

company had better implement methods such as improving service efficiency,

innovating products to customer trends, developing membership cards and utilizing

the specialty operations channel. More value should be added in Starbucks, thus the

store’s future would be brighter.

(Word count: 931)

Appendix

Appendix 1: SWOT Analysis

Strengths Weaknesses

•! High quality coffee •! High cost

•! Global coffee brand •! High price

•! Product Diversification •! Customers’ satisfaction does not

•! Well-trained employees and Good meet customers’ expectation

service

Opportunity Threats

•! Expand the supplier network •! The rising prices of raw materials

•! Strongly growing U.S. Specialty (coffee beans, milk)

Coffee market •! An increasing number of potential

•! Cooperation partners to help competitors appearing constantly.

retailing products through various •! Increasingly cost of training skilled

channels baristas due to the increasing types

•! It was far from reaching saturation of coffee

levels in many geographical •! Negative publicity: its high speed

markets and different retail channels expansion brought some negative

influences
Appendix 2: 4Ps analysis

Product Various product portfolios

Price Medium high-end price

Starbucks is always located in neighborhood where there is a

Place perceived high traffic and some other places with large

population like downtown and business quarter.

Membership cards; takeout service; supply tea and some other

Promotion
types of coffee to suit some areas’ taste style
Appendix 3: Partial Income Statement of Starbucks, McDonald, YUM!
and Panera Bread

Source: SEC Filing

References
Ferdman, R. A., & Yanofsky, D. (2014, 4 4). What people order at Starbucks around
the United States. Retrieved from QUARTZ: http://qz.com/195631/what-people-
order-at-starbucks-around-the-united-states/
Gray, S. (2005, 04 12). Coffee on the Double. Retrieved from THE WALL STREET
JOURNAL: http://www.wsj.com/articles/SB11325107832003816
Moon, Y., & Queich, J. (2003). Starbucks: Delivering Customer Service.
Boston,MA02163: Harvard Business School.
Starbucks. (2002, 9 28). 2002 Annual Report. Retrieved 10 17, 2015, from Starbucks
Investor Relations: http://library.corporate-
ir.net/library/99/995/99518/items/178279/ar02_financials.pdf
U.S. Securities and Exchange Commision. (2015, 10 19). SEC. Retrieved 10 19,
2015, from SEC: http://www.sec.gov/