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,

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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.

 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.
The case mentions 2 important facts about the store costs.
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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 benefits-
1. 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.

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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
Unsatisfied customer Satisfied customer Highly satisfied
customer
Annual Value $181 $210 $381
Life Time Value $200 $921 $3169

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 $40,000,000

Number of stores* 4,500
Average expenditure on store $8,889
($ per annum)
Average revenue per store per annum $800,800
($15,400 X 52)
Average ticket size $4.06
(weighted average 42% X 3.88 + 37% X
4.06 + 21% X 4.42)
Average number of transactions per annum 197,241

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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 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
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

Current Scenario 1 Scenario 2

Average hourly 9 Average hourly 9 Average hourly 9
rate (in $) rate (in $) rate (in $)
Total labour 360 Total labour hours 380 Total labour hours 380
hours per per week, with per week, with
week, average increase of 20 hrs increase of 20 hrs
store
Labour 3240 Labour Cost/week, 3420 Labour Cost/week, 3420
Cost/week, average store average store
average store
Average Ticket 3.85 Average Ticket 3.85 Break even Ticket 3.90
Size
Average daily 570 Break even 577 Average daily 570
customer Customer Count customer count,
count, per per store
store
Average weekly 3990 Target 4037 Average weekly 3990
customer Customer/week customer count,

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count, per store per store

Weekly 15361.5 Target 15541.5 Target 15541.5

Revenue Revenue/week Revenue/week
Revenue-Cost, 12121.5 Target Revenue- 12121.5 Target Revenue- 12121.5
per 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.