IMD_Starbucks Delivering on Service

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

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

Table of Contents
10/6/2014
3
Starbucks History
Detailed Analysis
1
2
3
4
5

Starbucks History
Transformed a commodity into an upscale cultural phenomenon
10/6/2014
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

Starbucks History
Transformed a commodity into an upscale cultural phenomenon
10/6/2014
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

Starbucks Business Evolution
Renewed Starbucks sharpens its focus
6

7
Licensed-stores grew faster than company-operated stores

8
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
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
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
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

Starbucks’ Product Mix
Coffee beverages accounted for 77% of Starbucks’ North American company-operated
stores in 2002
11
Coffee
beverages
• 77%
Food items
• 13%
Whole-bean
coffees
• 6%
Accessories
• 4%

Table of Contents
10/6/2014
12
Starbucks History
Detailed Analysis
1
2
3
4
5

Starbucks’s Business Model in 2002
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
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
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 Analysis
Leading brand with wide opportunities in the future
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
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

Starbucks’ Vision, Mission, & Value Proposition
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

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

Caffeinating the World
Overall objective was to establish Starbucks as the most recognized and respected brand
in the world. Aggressive growth strategy required
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

Starbucks’ Target Market
Starbucks’ historical customer profile had expanded
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!!

Starbucks’ Branding Strategy
Implemented experiential branding as its brand strategy
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
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
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
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

Starbucks’ Delivering on Service
Measuring Service Performance
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?

Starbucks: Delivering on Service
Measuring Service Performance
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

Translating Service for Customers
Aimed to reach three-minute standard of serving as its “excellent service”
28

Starbucks’ Service Performance Metrics
Integrated BTL Shopper Activation
29

Starbucks: Delivering on Service
Ensuring a consistent service delivery
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)

Table of Contents
10/6/2014
31
Starbucks History
Detailed Analysis
1
2
3
4
5

Complexity arises due to hundreds of combinations of drinks in its portfolio
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

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

Experienced some rough edges on its brand image
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!

Had a very little image or product differentiation to the smaller coffee chains; however,
significant differentiation with the independent specialty coffeehouses
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%)

The Changing Customer
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!

Problem Statements & Challenges
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

Table of Contents
10/6/2014
38
Starbucks History
Detailed Analysis
1
2
3
4
5

Recent Research Findings
Starbucks’ Customer Behavior, by Satisfaction Level
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
 Medium customer
lifecycle, i.e. 4.4 years
 Lifetime value per
customer: $921.88
 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
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
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

Improvement to Service as a factors driving “Valued Customer” perceptions:
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%

Reasons of Declining Customer Satisfaction
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

Reasons of Declining Customer Satisfaction
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
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

Table of Contents
10/6/2014
46
Starbucks History
Detailed Analysis
1
2
3
4
5

Moving Forward: Ensuring the Customer to be Highly Satisfied
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!

Decision in $40 million investment in labor
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

Other Recommendations
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


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


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

CFV Project - MAPI 9/22/2014
52

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