IMD_Starbucks Delivering on Service

Binus Business School,

MM Executive Batch 20

Presented by Group I

Alexander Christian

Dina Sandri Fani

Jenna Widyawati

Ridwan Martawidjaja

Case Study AnalysisStarbucks Coffee

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Table of Contents

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Starbucks History

Starbucks’ Challenges

Detailed Analysis

Starbucks Business Model

Conclusion and Recommendation

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Table of Contents

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Starbucks History


Detailed Analysis



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Starbucks HistoryTransformed a commodity into an upscale cultural phenomenon

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1st Store in Seattle’s

Pike Place Market

Joining of

Howard Schultz

Tested the

coffeehouse concept

in downtown Seattle.

1st Starbucks Caffè

Latte is served

1984

19821971

Il Giornale founded:

a genesis for a

Starbucks Co.

1985

Acquisition of

Starbucks assets.

Re-branded into

Starbucks Corp

1987

Headquarters

expansion in

Seattle

1990

1st privately

owned U.S.

company

1991

Completes IPO

1992

Open roasting

plant in Kent,

Washington

1993Began

providing

coffee to fine

restaurants &

espresso bars

Offered brewed coffee

Also offered espresso

beverages made from

Starbucks coffee beans

Offer a stock option

program

Opened 1st licensed

airport store

Starbucks HistoryTransformed a commodity into an upscale cultural phenomenon

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1st drive-thru

location

Frappuccino

blended beverages

Serving bottled

Frappuccino coffee

drink through North

American Coffee

Partnership

1995

19951994

Starbucks

Foundation

1997

Starbucks brand

extension

1998

Launched

Starbucks card

2001

Dominant

specialty-coffee

brand in North

America

2002

Began serving Frappe

blended beverages

Opened roasting

facility in York

Goes into

grocery channels

across the U.S.

Launched

Starbucks.com

Starbucks Business EvolutionRenewed Starbucks sharpens its focus

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Starbucks Business EvolutionLicensed-stores grew faster than company-operated stores

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Starbucks Business EvolutionNet Revenues Development

1,0771,375

1,7352,086

2,58426

48

89

143

209

206

263

354

419

496

1998 1999 2000 2001 2002

Starbucks Net Revenues($ in million)

Co-Owned North American Co-Owned Int'l Specialty Operations

Recorded 25.9% of 5-year CAGR for total net revenues

Co-owned International grew much faster compared to the

other revenue streams; had 68.7% of 5-year CAGR

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Starbucks Business EvolutionKey Financial Figures

Double digit CAGR in all key financial figures

Net income recorded the highest 5-year CAGR of 33.2%

compared to the other key financial figures

73

0

61

3

10

9

68

93

9

78

6

15

7

10

2

1,2

16

1,0

24

21

2

95

1,5

36

1,2

84

28

1

18

1

1,9

39

1,6

56

31

0

21

5

Gross Profit Operating Expenses Operating Profit Net Income

Starbucks Key Financial Figures($ in million)

1998 1999 2000 2001 2002

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Average hourly rate with shift supervisor

and hourly partners

Total labor hours per week, average store

Average weekly store volume

Average ticket

Average daily customer count, per store

Starbucks Business EvolutionRetail Sales Mix and Operations-related Data

77%

13%

6%

4%

Product Mix, North American Company-Operated Stores (FY 2002)

Coffee beverages Food items

Whole-bean coffees Equipment & accessories

Starbucks’ Product MixCoffee beverages accounted for 77% of Starbucks’ North American company-operated

stores in 2002

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Coffee beverages

• 77%

Food items

• 13%

Whole-bean coffees

• 6%

Accessories

• 4%

Table of Contents

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Starbucks History


Detailed Analysis



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Starbucks’s Business Model in 2002

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Customer Segments

Initial segment: affluent, well-educated, white-collar patrons, skewed to female with the ages of 25 to 44

New segment: younger, less well-educated, & lower income bracket

Customer Relationships

Customized service

Retail experience

Co-partnership, e.g. with Pepsi-Cola to distribute bottled Frappuccino

Value Proposition

“Live coffee” mantra

Customer intimacy: uplifting experience every time the customers walk through Starbucks’ door

Experiential branding


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Key Resources

High quality coffee bean

Customer satisfaction oriented employee

Large coffee recipes collection

Physical assets of coffeehouses

Starbucks brand

Key Activities

Coffee bean selling

Food and beverage selling

Product and service innovation

Training

Specialty operations

Key Partners

Partners

Coffee bean farmers and suppliers

Retail centers

Third-party partnership (e.g. Pepsi-Cola Bottling company)


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Channels

Retail stores

Starbucks.com

Starbucks card

Cost structure

Store operating cost

Labor cost

Marketing & advertising cost

R&D cost

Revenue Streams

Premium coffees

Premium teas

Whole-bean coffees

Food items

Seasonal novelty items

Accessories & equipment

Music CDs, games

Starbucks’ SWOT AnalysisLeading brand with wide opportunities in the future

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S W

T

Strengths

• Leading brand

• Good relationships with

coffee suppliers

• High reputation of value

employees

• Stores location

• Low employee turnover rate

Opportunities

• The rise of coffee

consumptions

• Distribution agreements,

such as hotels, airlines, &

office coffee suppliers

• Increasing demand for coffee

Threats

• Cost of coffee beans is

expected to rise in the near

future

• High competition with small

product differentiations

• Market saturation in the near

future

O

Weaknesses

• Not always meeting

customers’ expectations

• Market & customer-related

trends could sometimes be

overlooked

• Weak linkage between data

& decision making

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Starbucks’ Porter’s Five ForcesLeading brand with wide opportunities in the future

1. Rivalry among existing

competitors

5. Threats of new

entrants

4. Bargaining power of suppliers

3. Threat of substitutes

2. Bargaining power of buyers

Rivalry among existing

competitors is HIGH within the

industry Starbucks operates in with

major competitors like Costa,

McDonald’s, Caribou Coffee,

Dunkin Donuts, and thousands of

small local coffee shops

1

Threat of substitutes is

substantial. Tea, juices, soft

drinks, water and energy drinks

can substitute Starbucks coffee;

whereas pubs and bars can be

highlighted as substitute places for

customer to meet someone

3

Bargaining power

of buyers is HIGH.

There is no or

minimal switching

cost for customers,

and there is an

abundance of offers

available for them

2

Starbucks suppliers have HIGH

bargaining power due to the fact

that the demand for coffee is high

in global level and coffee beans

can be produced only in certain

geographical areas

4

The threat of new entrants to

industry to compete with Starbucks

is LOW, because the market has

fierce competitions and substantial

amount of financial resources

associated with buildings and

properties are required in order to

enter into the industry

5

Starbucks’ Vision, Mission, & Value Proposition

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The Starbucks Vision

“To create a chain of coffeehouses

that would become America’s ”third

place”, a place where the people could

go to relax and enjoy others, or just be

by themselves”

The Starbucks Mission

“To inspire and nurture the human spirit:

one person, one cup, and one

neighborhood at a time”

Value Proposition

“Live coffee mantra”: the importance to

keeping the national coffee culture alive

Starbucks’ Current CompetitionHad a fierce competition due to huge number of competitors

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Competed against a

variety of small-scale

specialty coffee chains

in the U.S.; most of

which were regionally

concentrated.

Differentiate itself from

Starbucks in a different

way, e.g. Caribou

Coffee offered the look

and feel of an Alaskan

lodge with knotty pine

cabinetry, fireplaces,

and soft seating

Competed against

donut and bagel

chains such as

Dunkin Donuts

Caffeinating the WorldOverall objective was to establish Starbucks as the most recognized and respected brand

in the world. Aggressive growth strategy required

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Product InnovationRetail expansion Service Innovation

Expand

aggressively

Open stores in new

markets while

geographically

clustering stores in

existing markets

Ambitious

international

expansion plans,

i.e. 15,000

international stores

New products were launched on a

regular basis

NPD process generally operated

on a 12- to 18-month cycle

Decision to launch depended on a

number of factors, i.e.

o Consumer acceptance

o Degree of fitness into the

“ergonomic flow” of operations

o The speed with which the

beverage could be handcrafted

o Partner acceptance

Starbucks’ stored-value card

(SVC) had been launched in

November 2001

Prepaid, swipeable smart card

could be used to pay for

transactions in any company-

operated store in North

America

T-Mobile HotSpot wireless

internet service, introduced in

August 2002

Starbucks’ Target MarketStarbucks’ historical customer profile had expanded

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Historical customer

profile

Evolved customer

profile

Affluent segment

Well-educated

White-collar patrons

Skewed to female

Between the ages of

25 to 44

Tended to be

younger with

average age of

customers was 36

Less well-educated

Had a lower income

bracket than

Starbucks’ more

established

customers

Lead to the changing of customer needs!!

Starbucks’ Branding StrategyImplemented experiential branding as its brand strategy

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Starbucks’

experiential brand

credo:

“Creating an

experience

around the

consumption of

coffee, an

experience that

people could

weave into the

fabric of their

everyday lives”

The Coffee

Highest-quality coffee

Tight control of the

supply chain

Key experiential brand strategic levers

The Service

Customer intimacy

Uplifting experience

Customized service

The Atmosphere

Layouts were designed

to provide an upscale

yet inviting environment

for those who wanted to

linger

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Starbucks’ Channel StrategyCreated a global hub for its customers

The ultimate

Starbucks’ channel

strategy was to

create an effective

relationships with

third parties that

share Starbucks

values and

commitment to

quality in order to

reach customers

where they work,

travel, shop, and

dine

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Starbucks’ Channel StrategySelect carefully the stores location and its product mixes

Starbucks Product Mixes Stores Location

High-traffic

High-visibility settings

such as retail centers,

office buildings, and

university campuses

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Starbucks’ Partnership StrategyPartner satisfaction leads to customer satisfaction

All Starbucks employees were called

partners (60,000 partners worldwide;

50,000 in North America). Most were

hourly-wage baristas who worked in

Starbucks retail stores

Policy of giving health insurance

and stock options

Partner satisfaction rate

consistently hovered in the 80%

to 90% range, well above the

industry norm of 50% to 60%

Had recently ranked 47th in the

Fortune magazine list of best

places to work

Had one of the lowest

employee turnover rates in the

industry: 70% compared with the

fast-food industry averages as

high as 300%

Manager stability is key: not

only decreases partner turnover

but also enables the store to do a

much better job of recognizing

regular customers and providing

personalized service

Starbucks’ Delivering on ServiceMeasuring Service Performance

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Variety of metrics, including monthly status

reports and self-reported checklists

Mystery shopper program called the

“Customer Snapshot”: every store visited

by an anonymous mystery shopper three

times a quarter

4 “Basic Service” criteria to rate the store,

i.e.:

Service – verbal greetings, eye

contact, and say thank you

Cleanliness – the store? The

counters? The tables? The

restrooms?

Product quality – was the order filled

accurately? Was the temperature of

the drink within the range? Was the

beverage properly presented?

Speed of service – how long did the

customer have to wait?

Starbucks: Delivering on ServiceMeasuring Service Performance

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Stores were also rated on “Legendary

Service”: based on secret shopper

observations of service attributes such as

partners initiating conservations with

customers, partners recognizing

customers by name or drink order, and

partners being responsive to service

problems

Customer Snapshot scores had increased

across all stores. However, recent study

revealed that Starbucks not always

meeting customer expectations

Customer Snapshot deemed

as imperfect tools as failed to

capture the real expectations

of customers

Translating Service for CustomersAimed to reach three-minute standard of serving as its “excellent service”

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Starbucks’ Service Performance MetricsIntegrated BTL Shopper Activation

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Starbucks: Delivering on ServiceEnsuring a consistent service delivery

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Two types of training for a

newly-hired

1. Hard skills training, e.g.

learning how to use the

cash register and

learning how to mix

drinks

2. Soft skills training, e.g.

teach partners to connect

with customers

Implement “Just Say Yes” policy:

empowered partners to provide the

best service possible, even it is

required beyond company rules

Continuous process improvement

1. Increasing barista efficiency

removing all non-value-added tasks

simplifying the beverage production process

tinkering with the facility design to eliminate bottleneck

2. Process automation: invested on automated espresso

machines (the Verismo machines)

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Starbucks History


Detailed Analysis



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Starbucks’ ChallengesComplexity arises due to hundreds of combinations of drinks in its portfolio

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The complexity of the barista’s job had

increased over time

Created a tension between product

quality and customer focus

Every time they customize, they slow

down the service for everyone else

Hire more baristas to share the

workload

Extremely reluctant to do this

due to economic downturn

Labor was already the

company’s largest expense in

North America

Starbucks stores tended to be

located in urban areas with

high wage rates

Starbucks’ ChallengesLacked a strategic marketing group: forced Starbucks’ marketing department worked in silo

mode

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Had no CMO

3 separate functions in marketing

department, i.e.:

Market research group:

gathered and analyzed market

data requested by the various

business units

Category group: developed a

new products and managed the

menu and margins

Marketing group: developed the

quarterly promotional plans

Forced everyone to get involved in a

collaborative marketing effort

Market- and customer-related trends

could sometimes be overlooked

Lack of data-driven decision making

process

Starbucks’ ChallengesExperienced some rough edges on its brand image

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Top Five Attributes Consumers

associate with the Starbucks brand

Known for specialty/gourmet coffee

(54% strongly agree)

Widely available (43% strongly agree)

Corporate (42% strongly agree)

Trendy (41% strongly agree)

Always feel welcome at Starbucks (39%

strongly agree)

Rough brand image primarily making money & building more stores!

Starbucks’ ChallengesHad a very little image or product differentiation to the smaller coffee chains; however,

significant differentiation with the independent specialty coffeehouses

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Independents Starbucks

Social and inclusive

Diverse and intellectual

Artsy and funky

Liberal and free-spirited

Lingering encouraged

Particularly appealing to younger

coffeehouse customers

Somewhat intimidating to older, more

mainstream coffeehouse customers

Everywhere – the trend

Good coffee on the run

Place to meet and move on

Convenience oriented; on the way to

work

Accessible and consistent

More respondents perceived Starbucks as a brand primarily cares about making

money (53% in 2000 to 61% in 2001)

More respondents perceived Starbucks as a brand primarily cares about building

more stores (from 48% to 55%)

Starbucks’ ChallengesThe Changing Customer

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Starbucks’ customer base

was evolving

47% were new customers*

Visited the stores less

frequently and had very

different perceptions of the

Starbucks brand compared to

more established customers

Starbucks’ historical customer profile – the

affluent, well-educated, white-collar female

between the ages of 24 and 44 – had expanded:

forced Starbucks to adapt the changes

With respect to customer behavior, regardless

the market, customers tended to use the stores

the same way

Lead to the changing of its behavior, perceptions, and expectations toward brand!

* 27% visited Starbucks in the past years; whilst

20% visited Starbucks in 1-2 years ago

Problem Statements & Challenges

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Problem Statements

Not always meeting customer expectations in

the area of customer satisfaction

Potential to lose loyal customer in the near

future due to the increased of number of

unsatisfied customers

Proposed wayout

To improve speed-of-service by investing an

additional of $40 million annually in the

company’s 4,500 stores; mostly used for getting

an additional of 20 hours of labor a week

Dilemma

The investment is the EPS equivalent of almost

seven cents a share

Whether our customers are telling about what

constitutes ‘excellent’ customer service

Whether it will bring a positive impact on sales

and profitability

Rough brand image of

primarily making money

and building more stores

Insignificant perceived

differentiation between

Starbucks and others

The changing customer

leads to the changing of its

behavior, perceptions, and

expectations toward brand

Complexity arises due to

hundreds of combinations

of drinks in its portfolio:

resulted to low speed-of-

service and satisfactory

service of Partners

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Starbucks History


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Recent Research FindingsStarbucks’ Customer Behavior, by Satisfaction Level

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Unsatisfied customers Satisfied customers Highly satisfied customers

3.9 visits/month

Spends $3.88 per visit

Short customer lifecycle,

i.e. 1.1 years

Lifetime Value per

customer: $199.74

4.3 visits/month


Medium customer

lifecycle, i.e. 4.4 years

Lifetime value per

customer: $921.88

7.2 visits/month


Long customer lifecycle,

i.e. 8.3 years

Lifetime value per

customer: $3,169.67

Highly satisfied customers are the most profitable customers for Starbucks!

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New Customers Established

Customers

Percent female

Average age

Percent with College Degree +

Average income

Average # cups of coffee/week

Attitudes toward Starbucks:

High-quality brand

Brand I trust

For someone like me

Worth paying more for

Known for specialty coffee

Known as the coffee expert

Best-tasting coffee


Overall opinion of Starbucks

45%

36

37%

$65,000

15

34%

30%

15%

8%

44%

31%

20%

26%

25%

49%

40

63%

$81,000

19

51%

50%

40%

32%

60%

45%

31%

41%

44%

Recent Research FindingsNew customers vs. established customers: significant gap on perceiving brand image

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415%

13%

16%

17%

17%

20%

30%

34%

37%

39%

50%

60%

60%

65%

65%

67%

72%

73%

75%

77%

83%

0% 20% 40% 60% 80% 100%

Selection of merchandise

New, innovative beverages

Selection of whole beans

Highest-quality pastry, desserts

Selection of noncoffee beverages

Highest-quality tea

Involved in the community

Best ice-blended drinks

Place to relax, meet friends

Knowledgeable staff

Pleasant atmosphere/ambience

Freshest coffee

Best espresso drinks

Fast service

Appropriate prices


Coffee taste/flavor

Friendly staff

Treated as a valuable customer

Convenient

Clean Store

Recent Research FindingsKey Attributes in Creating Customer Satisfaction

Customer Snapshot

scores indicated a

satisfactory

performance in stores’

cleanliness and

convenient

However, recent

study revealed a

declining number of

satisfied customers

due to low speed-of-

service

Recent Research FindingsImprovement to Service as a factors driving “Valued Customer” perceptions:

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How could Starbucks make you feel more like a valued customer? % responses

Improvement to Service (total)

Friendlier, more attentive staff

Faster, more efficient service

Personal treatment (remember my name, remember my order)

More knowledgeable staff

Better service

34%

19%

10%

4%

4%

2%

Offer better prices/incentive programs (total)

Free cup after x number of visits

Reduce prices

Offer promotions, specials

31%

19%

11%

3%

Other (total)

Better quality/variety of products

Improve atmosphere

Community outreach/charity

More stores/more convenient locations

21%

9%

8%

2%

2%

Don’t know/Already Satisfied 28%

Reasons of Declining Customer Satisfaction

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43“Despite the overwhelming presence and convenience, the scores declined”

Insignificant image or product

differentiation between Starbucks

and the smaller coffee chains

Expectations could have increased

It sets the standard very high

for its customers

Hard to always meet the

standard due to fast expansion

and product innovation

Customized drinks might have

had harmful effect

Increasing lead time

Satisfaction level of customers

varies as the demographics of its

customers are changing

Reasons of Declining Customer Satisfaction

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44“Despite the overwhelming presence and convenience, the scores declined”

Starbucks is measuring much on

how people view the company

Customers generally are

satisfied with the coffee;

however,

Lack of insights on customer

expectations toward brand

Ideal Starbucks Customer from a Profitability Standpoint

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Loyal customers who visits

the store 18 times per

month

Improve customer

throughput by reducing

non-value added services

in preparing the order and

delivering on service

Customer service lead time

per customer not exceeds

3 minutes

Average ticket size must be

higher than $4.42 per visit

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Starbucks History


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Moving Forward: Ensuring the Customer to be Highly Satisfied

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Cater to their needs and

match/exceed their

expectations

Add lounging areas and

more comfortable chairs

and tables so that

customers feel relaxed

Ensure service as fast as

customer wants it to be

More highly-satisfied

customers: more often they

visit us, more money to

spend, good WoM

higher profit!

Decision in $40 million investment in labor

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Recommend the Management to

make investment; however

suggest to have a pilot project

instead of massive investment in

labor

Allocate the money based on size

of store, number of customers,

location, and need for additional

labor instead of apportioning the

$40 million equally to all the stores

Apart from making the investment,

Starbucks need to look more into

their customer base and improve

their brand image and value

proposition

Other Recommendations

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Redefine their marketing strategies

starting with a proper research and

evaluation of what the customer wants

Conduct regular customer analysis

including its behavior and needs

analysis toward brand

Revamp the existing Customer

Satisfaction survey

Proper C-Sat survey in addition to

mystery shopping

Expand the respondent profile

(infrequent consumer and non-

consumer to be included)

Add more detailed questions that

can highlight customer paint points


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Establish a centralized marketing

department to steer all marketing

efforts

Reduce product mixes at store as

recent study revealed innovative

products are not as important to the

customers

Concentrate new store openings in

areas that would not cannibalize

existing sales

Advertise more to establish the

branding of Starbucks. They have

developed over time, and their

customers are different than before


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Consider to add more baristas as

quick term fix; however this should be

allocated according to an establish

need per store

Modify job allocation of baristas: the

more experienced baristas to handle

the more complicated orders

Introduce more customer operated

machines to reduce wait time

Develop an integrated customer

loyalty program, e.g. free order if

exceed the three-minutes order;

special discounts in special days

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