Starbucks case study

1. Assignment
3
INDIAN INSTITUTE OF TECHNOLOGY, KANPUR
Department of Industrial & Management Engineering
Anchit Walia
13125007
Om shri Krishna Sharnaye
gachhami
Starbucks
D E L I V E R I N G C U S T O M E R
S E R V I C E

2. S T A R B U C K S : D E S I G N I N G C U S T O M E R S E R V I C E
1
Factors for Starbucks’ success in
early 1990s
tarbucks, the dominant specialty-coffee brand in North America, was a hit
among the coffee purists in its early days. The story changed when Howard
Schultz first introduced an espresso bar in the corner of its only Seattle shop.
From there with an idea of creating a ‘third place’ for American people, Schultz took over and laid the
stones for the growth of the company. There are many factors which led to the growth of Starbucks.
Segmentation – The store catered primarily to affluent, well-educated,
white collar patrons between the ages of 25-44. This kind of target
marketing helped Starbucks to create an atmosphere more appropriately
for its select customer base. It helped them to focus easily on the needs
of their customer base and meet the expectation level every time.
Availability / Location – By 1992, the company had 140 stores and
they were growing with the pace of 1 store per day. It’s evaluation
criteria for selecting a retail site makes sure that the demographics of the
area match the profile of its typical customer as well as the level of coffee
consumption in that area. The company believed in expanding its retail presence in order to attract
more and more customers.
Supply Chain Management – Starbucks tried to control the supply chain as much as possible in
order to manage the quality of the coffee (the core product) at high level. It allowed Starbucks to
maintain product quality.
Customer Intimacy – Service is the key. The goal was to create an uplifting experience by doing
simple things like recognizing customers and their orders. It was also complemented by the company
policy of “Just say YES” for which the partners could go well beyond company rules in order to satisfy
the customers. All these created a friendly atmosphere.
Atmosphere – The ambience of the Starbucks made people loyal and made them want to stay there.
Starbucks encouraged lounging and had a universal appeal. The sense of community and the need for
people to come together led to the growth of Starbucks.
Question
1
S
K E Y S U C C E S S
F A C T O R S
Segmentation
Availability / Location
Supply Chain Management
Customer Intimacy
Atmosphere

3. S T A R B U C K S : D E S I G N I N G C U S T O M E R S E R V I C E
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Starbucks was successful because it placed value to the customer first in its value proposition.
It also enjoyed the first mover advantage as it was different from others.
Value Proposition
At Starbucks, everyone believed in creating an “experience” around the consumption of coffee. The
value proposition is not about coffee but about the coffee culture and the experience of drinking
coffee. With such a compelling proposition, Starbucks was able to differentiate itself from its
competitors as the most important factors for the typical Starbucks drinker was the experience of
drinking Starbucks coffee.
By 1992, Starbucks was able to create the brand image of being the “third place” for the American
consumers, where they can get the best quality coffee and relax as well.
Figure A: Success Factors of
Starbucks

4. S T A R B U C K S : D E S I G N I N G C U S T O M E R S E R V I C E
3
Declining Customer Satisfaction
Score
Starbucks was not meeting customer expectations in terms of satisfaction. Few reasons for this could
be the exponential growth Starbucks is experiencing both in terms of number of retail stores and the
number of customers in each store. The changing focus of the company with time may also be
responsible for declining focus on customer satisfaction.
By introducing new products at a rapid pace and allowing customers to customize their drink,
Starbucks was creating difficulty for its partners and also in a way allowing tinkering of the standard
coffee taste which was offered BEST by the Starbucks. The customization is also responsible to
increase in time to serve. It was affecting the value proposition of Starbucks in the worst way.
The changing customer base may also be the reason for the declining customer satisfaction as the
company was following its assumption that its customer remain unchanged.
The statements made in the case indicate that the expectation level of the customers was increasing as
well due to the increasing competition as indicated from exhibit 8 in the case that the new customers
are less happy as compared to the loyal customers. It is also evident from the exhibit 11 of the case
where the customers have suggested introducing an incentive program in order to build the perception
of valued customer.
Starbucks was not able to differentiate itself from others and its value proposition was easy to imitate, in
fact, its customers did not see it different from its competitors. The changing image of Starbucks due to
its rapid growth was also affecting its reputation and hence affecting the customer expectations as well
as satisfaction levels.
Though with the introduction of new products every holiday and changing focus of the company, one
may say that the time to serve customers was exceeding 3 minutes and the connection between growth
& customer satisfaction was missing, one still cannot say that the customer service was also declining.
The Mystery shopper and the customer snapshot program are very subjective way of recording the
results and have major chances of being biased or full of errors due to the inconsistency, lateness.
Starbucks should ask their regular & loyal customers about the satisfaction level and the kind of
experience they are having at the Starbucks. Starbucks should try to study the attitude of the loyal
customers towards the company.
Question
2

5. S T A R B U C K S : D E S I G N I N G C U S T O M E R S E R V I C E
4
Starbucks 1992 v/s 2002
Criteria 1992 2002
Stores 140 5000
Location Northwest America +
Chicago
Global Presence
Revenue
Generation
50% from sale of whole-
bean coffees
77% from sale of
beverages
Focus 1. Retail store
expansion
2. Customer
Intimacy
3. Experience
4. Standardized
coffee
1. Product
Innovation
2. Service
Innovation
3. Experience
4. customization
Customer base Affluent, well-educated,
white collar
professionals aged 25-44
Younger, less well-
educated, lower income
bracket
Attitude Customer going to
Starbucks
Starbucks coming to
customers
Image Third place & best
coffee
Convenient place to meet
people with good coffee
Money Making Company
Question
3

6. S T A R B U C K S : D E S I G N I N G C U S T O M E R S E R V I C E
5
Ideal Starbucks Customer
Ideal / Loyal Customer
• Visits Starbucks 18 times every month
• Spends $4.42 per visit
• Customer Life = 8.3 years
• Is a highly satisfied Customer
• Lesser on number but higher in value (Figure A of case)
• Highly educated
• High Income group
• Trusts Starbucks
Highly Satisfied Customer
• Visits Starbucks 7.2 times a month
• Spends $4.42 per visit
• Life = 8.3 years
• Customer value = 7.2X4.42X12X8.3 = $3,170
• Donot like to spend more time in the coffee shop
• Easy to retain and hence has more scope of getting new business
Steps to increase customer satisfaction(exhibit 11)
•Ensuring that the customers receive the basic services properly -
•Greeting the customer with their first name
•Keeping the store & the tables clean
•Maintaing the accuracy of the order as well as the quality of coffee will help
•Increase the speed of Service - Maintain 3 minute Std.
•Spending some time in improvinglegenary services -
•Improvingthe soft skills of the partners
•Introducing new ready to drink coffee products
•Offering a web of new services -
•Building upon the new loyalty program (SVC)
•Offer the wireless internet service for free
•Starbucks has raised the expectations of the customers very high so it should
try to bring it down by adding buffer time in their time of delivery and hence be
able to meet the customer expectation level.
•Invest in order to improve the speed of service/delivery.
Question
4

7. S T A R B U C K S : D E S I G N I N G C U S T O M E R S E R V I C E
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The Decision
As mentioned in the above section, Starbucks can increase its sales by converting the satisfied
customers into loyal customers. This can be achieved (1) by reducing the service time as well as (2)
improving the soft skills of the partners. (3) The company should also try to set up a separate
marketing department whose role will be to understand the needs of the customer and hence come
up with timely insights which will help improve customer satisfaction.
To do all of these, Christine Day is considering if she should present the $40 million plan in front
of Schultz or not. I think the plan is good and the goal of the investment is to take each of the 5000
stores closer to $20,000 sales each week.
The investment plan asks an annual investment of $40 million dollars distributed proportionately in
all its stores to bring down the service time. The returns expected will take the annual sales to $5.2
billion annually as compared to existing $2.79 billion. The investment is not huge and the number
of customers visiting Starbucks is so big that it would be a very easy task to achieve the breakeven
for such an investment.
With this investment, the company aims to convert some satisfied customers to highly satisfied
customers. As mentioned in the case there is a direct link between customer satisfaction and
customer loyalty; and loyal customers tend to be the most valuable customers in terms of sales, the
investment would also generate more revenue and it will be a self-sustaining model. Hence the
investment should be made.
Value of a satisfied customer in a year $209.5
Value of a highly satisfied customer in a year $381.91
Difference $172.41
Investment per store ($40mn/5000) $8000
Number of customers per store 570
Number of satisfied customers per store (37%) Figure A;
Exhibit 8
210
Number of customers required to breakeven/store
(8000/172.41)
46 ~ 22% of satisfied customers
~ 8% of daily customers
Moreover Starbucks is a service organization and hence they should continue to evolve and
improve upon the enhancing elements of its flower with coffee being the core element. The speed
of service, ambience and the partner friendliness are the enhancing elements. The surveys have also
shown that the customers see Starbucks no different from the competitors. In order to prevent its
existing customers to go somewhere else they should improve as they say “Prevention is better
than cure”.
Question
5