IMD_Starbucks Delivering on Service
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Starbucks faced several challenges in 2002, including maintaining consistent service quality across thousands of stores due to the complexity of its large drink portfolio. It measured service performance using metrics like mystery shopper scores but still sometimes struggled to meet customer expectations. Starbucks also had to manage intense competition from smaller coffee chains and large fast food competitors. Its aggressive growth strategy required carefully selecting new store locations and product mixes to continue expanding its global brand.
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IMD_Starbucks Delivering on Service
- 1. Case Study Analysis Starbucks Coffee Binus Business School, MM Executive Batch 20 Presented by Group I Alexander Christian Dina Sandri Fani Jenna Widyawati Ridwan Martawidjaja Case Analysis – Starbucks 10/6/2014 1
- 2. Table of Contents 10/6/2014 2 Starbucks History Starbucks Business Model Starbucks’ Challenges Detailed Analysis Conclusion and Recommendation 1 2 3 4 5 Case Analysis – Starbucks
- 3. Table of Contents 10/6/2014 3 Starbucks History Starbucks Business Model Starbucks’ Challenges Detailed Analysis Conclusion and Recommendation 1 2 3 4 5 Case Analysis – Starbucks
- 4. Starbucks History Transformed a commodity into an upscale cultural phenomenon 10/6/2014 Case Analysis – Starbucks 4 1st Store in Seattle’s Pike Place Market Joining of Howard Schultz Began 1984 1993 providing coffee to fine restaurants & Tested the espresso bars coffeehouse concept in downtown Seattle. 1st Starbucks Caffè Latte is served 1982 1971 Il Giornale founded: a genesis for a Starbucks Co. 1985 1987 Headquarters expansion in Acquisition of Starbucks assets. Re-branded into Starbucks Corp Seattle 1990 1991 Completes IPO 1st privately owned U.S. company 1992 Open roasting plant in Kent, Washington Offered brewed coffee Also offered espresso beverages made from Starbucks coffee beans Offer a stock option program Opened 1st licensed airport store
- 5. Starbucks History Transformed a commodity into an upscale cultural phenomenon 10/6/2014 Case Analysis – Starbucks 5 1st drive-thru location Frappuccino blended beverages 1995 Serving bottled Frappuccino coffee drink through North American Coffee Partnership 1995 1994 Starbucks Foundation 1997 1998 Starbucks brand extension Launched Starbucks card 2001 2002 Dominant specialty-coffee brand in North America Began serving Frappe blended beverages Opened roasting facility in York Goes into grocery channels across the U.S. Launched Starbucks.com
- 6. Starbucks Business Evolution Renewed Starbucks sharpens its focus Case Analysis – Starbucks 10/6/2014 6
- 7. Case Analysis – Starbucks 10/6/2014 7 Starbucks Business Evolution Licensed-stores grew faster than company-operated stores
- 8. Case Analysis – Starbucks 10/6/2014 8 Starbucks Business Evolution Net Revenues Development 1,077 Starbucks Net Revenues 1,375 ($ in million) 1,735 2,086 2,584 26 48 89 143 209 206 263 354 419 496 1998 1999 2000 2001 2002 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
- 9. Case Analysis – Starbucks 10/6/2014 9 Starbucks Business Evolution Key Financial Figures Starbucks Key Financial Figures ($ in million) 1998 1999 2000 2001 2002 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 730 613 109 68 939 786 157 102 1,216 1,024 212 95 1,536 1,284 281 181 1,939 1,656 310 215 Gross Profit Operating Expenses Operating Profit Net Income
- 10. Case Analysis – Starbucks 10/6/2014 10 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 Evolution Retail Sales Mix and Operations-related Data Product Mix, North American Company-Operated Stores (FY 2002) 77% 13% 6% 4% Coffee beverages Food items Whole-bean coffees Equipment & accessories
- 11. Starbucks’ Product Mix Coffee beverages accounted for 77% of Starbucks’ North American company-operated stores in 2002 Case Analysis – Starbucks 10/6/2014 11 Coffee beverages • 77% Food items • 13% Whole-bean coffees • 6% Accessories • 4%
- 12. Table of Contents 10/6/2014 12 Starbucks History Starbucks Business Model Starbucks’ Challenges Detailed Analysis Conclusion and Recommendation 1 2 3 4 5 Case Analysis – Starbucks
- 13. Starbucks’s Business Model in 2002 Case Analysis – Starbucks 10/6/2014 13 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
- 14. Starbucks’s Business Model in 2002 Case Analysis – Starbucks 10/6/2014 14 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)
- 15. Starbucks’s Business Model in 2002 Case Analysis – Starbucks 10/6/2014 15 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
- 16. Starbucks’ SWOT Analysis Leading brand with wide opportunities in the future Case Analysis – Starbucks 10/6/2014 16 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
- 17. Case Analysis – Starbucks 10/6/2014 17 Starbucks’ Porter’s Five Forces Leading brand with wide opportunities in the future 5. Threats of new entrants 1. Rivalry among existing competitors 4. Bargaining power of suppliers 3. Threat of substitutes 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 2. 1 Bargaining power of buyers 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
- 18. Starbucks’ Vision, Mission, & Value Proposition Case Analysis – Starbucks 10/6/2014 18 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
- 19. Starbucks’ Current Competition Had a fierce competition due to huge number of competitors Case Analysis – Starbucks 10/6/2014 19 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
- 20. Caffeinating the World Overall objective was to establish Starbucks as the most recognized and respected brand in the world. Aggressive growth strategy required Case Analysis – Starbucks 10/6/2014 20 Retail expansion Product Innovation 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
- 21. Starbucks’ Target Market Starbucks’ historical customer profile had expanded Case Analysis – Starbucks 10/6/2014 21 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!!
- 22. Starbucks’ Branding Strategy Implemented experiential branding as its brand strategy Case Analysis – Starbucks 10/6/2014 22 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” Key experiential brand strategic levers The Coffee Highest-quality coffee Tight control of the supply chain 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
- 23. Case Analysis – Starbucks 10/6/2014 23 Starbucks’ Channel Strategy Created 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
- 24. Case Analysis – Starbucks 10/6/2014 24 Starbucks’ Channel Strategy Select 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
- 25. Case Analysis – Starbucks 10/6/2014 25 Starbucks’ Partnership Strategy Partner 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
- 26. Starbucks’ Delivering on Service Measuring Service Performance Case Analysis – Starbucks 10/6/2014 26 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?
- 27. Starbucks: Delivering on Service Measuring Service Performance Case Analysis – Starbucks 10/6/2014 27 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
- 28. Translating Service for Customers Aimed to reach three-minute standard of serving as its “excellent service” Case Analysis – Starbucks 10/6/2014 28
- 29. Starbucks’ Service Performance Metrics Integrated BTL Shopper Activation Case Analysis – Starbucks 10/6/2014 29
- 30. Starbucks: Delivering on Service Ensuring a consistent service delivery Case Analysis – Starbucks 10/6/2014 30 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)
- 31. Table of Contents 10/6/2014 31 Starbucks History Starbucks Business Model Starbucks’ Challenges Detailed Analysis Conclusion and Recommendation 1 2 3 4 5 Case Analysis – Starbucks
- 32. Starbucks’ Challenges Complexity arises due to hundreds of combinations of drinks in its portfolio Case Analysis – Starbucks 10/6/2014 32 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
- 33. Starbucks’ Challenges Lacked a strategic marketing group: forced Starbucks’ marketing department worked in silo mode Case Analysis – Starbucks 10/6/2014 33 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
- 34. Starbucks’ Challenges Experienced some rough edges on its brand image Case Analysis – Starbucks 10/6/2014 34 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!
- 35. Starbucks’ Challenges Had a very little image or product differentiation to the smaller coffee chains; however, significant differentiation with the independent specialty coffeehouses Case Analysis – Starbucks 10/6/2014 35 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%)
- 36. Starbucks’ Challenges The Changing Customer Case Analysis – Starbucks 10/6/2014 36 * 27% visited Starbucks in the past years; whilst 20% visited Starbucks in 1-2 years ago 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!
- 37. Problem Statements & Challenges Case Analysis – Starbucks 10/6/2014 37 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
- 38. Table of Contents 10/6/2014 38 Starbucks History Starbucks Business Model Starbucks’ Challenges Detailed Analysis Conclusion and Recommendation 1 2 3 4 5 Case Analysis – Starbucks
- 39. Recent Research Findings Starbucks’ Customer Behavior, by Satisfaction Level Case Analysis – Starbucks 10/6/2014 39 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 Spends $4.06 per visit Medium customer lifecycle, i.e. 4.4 years Lifetime value per customer: $921.88 7.2 visits/month Spends $4.42 per visit 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!
- 40. Case Analysis – Starbucks 10/6/2014 40 Recent Research Findings New customers vs. established customers: significant gap on perceiving brand image 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 Highest-quality 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%
- 41. Case Analysis – Starbucks 10/6/2014 41 Recent Research Findings Key Attributes in Creating Customer Satisfaction 20% 17% 17% 13% 5% 16% 39% 37% 34% 30% 77% 75% 73% 72% 67% 65% 60% 60% 50% 65% 83% 0% 20% 40% 60% 80% 100% Clean Store Convenient Treated as a valuable customer Friendly staff Coffee taste/flavor Highest-quality coffee Appropriate prices Fast service Best espresso drinks Freshest coffee Pleasant atmosphere/ambience Knowledgeable staff Place to relax, meet friends Best ice-blended drinks Involved in the community Highest-quality tea Selection of noncoffee beverages Highest-quality pastry, desserts Selection of whole beans New, innovative beverages Selection of merchandise 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
- 42. Recent Research Findings Improvement to Service as a factors driving “Valued Customer” perceptions: Case Analysis – Starbucks 10/6/2014 42 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%
- 43. Reasons of Declining Customer Satisfaction Case Analysis – Starbucks 10/6/2014 43 “Despite the overwhelming presence and convenience, the scores declined” Insignificant image or product differentiation between Starbucks and the smaller coffee chains Satisfaction level of customers varies as the demographics of its customers are changing 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
- 44. Reasons of Declining Customer Satisfaction Case Analysis – Starbucks 10/6/2014 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
- 45. Ideal Starbucks Customer from a Profitability Standpoint Case Analysis – Starbucks 10/6/2014 45 Loyal customers who visits the store 18 times per month Customer service lead time per customer not exceeds 3 minutes Improve customer throughput by reducing non-value added services in preparing the order and delivering on service Average ticket size must be higher than $4.42 per visit
- 46. Table of Contents 10/6/2014 46 Starbucks History Starbucks Business Model Starbucks’ Challenges Detailed Analysis Conclusion and Recommendation 1 2 3 4 5 Case Analysis – Starbucks
- 47. Moving Forward: Ensuring the Customer to be Highly Satisfied Case Analysis – Starbucks 10/6/2014 47 Cater to their needs and match/exceed their expectations Ensure service as fast as customer wants it to be Add lounging areas and more comfortable chairs and tables so that customers feel relaxed More highly-satisfied customers: more often they visit us, more money to spend, good WoM higher profit!
- 48. Decision in $40 million investment in labor Case Analysis – Starbucks 10/6/2014 48 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
- 49. Other Recommendations Case Analysis – Starbucks 10/6/2014 49 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
- 50. Other Recommendations Case Analysis – Starbucks 10/6/2014 50 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
- 51. Other Recommendations Case Analysis – Starbucks 10/6/2014 51 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
- 52. CFV Project - MAPI 9/22/2014 52