Group 10 Questions for Discussion

MARK247

Case: Starbucks

1. What factors accounted or the extraordinary success of Starbucks in the early 1990s? What was so compelling about the Starbucks value proposition? What brand image did Starbucks develop during this period? (team 9, 10 & 11) Factors: It is own value, creating an uplifting experience every time customers walk through the door; located in high traffic, high visibility, retail centre. Innovation e.g. set up an espresso bar in their downtown Seattle shop. Specialty coffee, premium, 50% sales of beans. Relax consumer intimacy baristas, knowing customers name and drink hard skills & soft skill; atmosphere furnishing, music, aroma. Value proposition: 1) coffee offering highest quality, lots of control over supply chain; 2) service customer intimacy, loyalty of customers, customizing drink in their way; 3) atmosphere providing an upscale yet inviting environment. Tight value proposition for well defined market: customer patterns stay for a while (linger/ hangout), rituals: read magazine/ do puzzle, chat; established customers coffee fanatics, 24-44, white collar, well educated, affluent, female; brand perceptions/ image escape: a 3rd place, premium coffee, affordable luxury. Brand image: sense of community, everywhere the brand, good coffee on the run, place to meeting and move on, convenience oriented - on the way to work, accessible and consistent. 2. Why have Starbucks customer satisfaction scores declined? Has the companys service declined, or is it simply measuring satisfaction the wrong way? (team 1, 2 & 3) Decline: change of customers from affluent, well-educated, white collar female between the age of 24 to 44 to people who are younger, less well educated and in a lower income bracket. Expectations are higher. Services declined: more crowded, time needed to serve customers longer, cant build up friendship. Measuring satisfaction the wrong way: didnt differentiate frequent buyer and non- frequent buyer Metrics for judging stores: speed 3 mins goal; clean; friendly/ service oriented (great service); product quality/ complexity. speed and great service/ speed and product quality/ complexity:: not consistent. Inexperience managers + new customers + product complexity = long lines grumpy employees grumpy customers lower satisfaction. New customers: younger, less well educated, lower income, 1st experience with Starbucks not in Starbucks coffee shop. Consumption pattern: less frequent, dont linger, coffee on the run, established customers might also be new customers. Brand perceptions/ image: less positive image of company. 3. How does the Starbucks of 2002 differ from the Starbucks of 1992? (team 4, 5 & 6) 1992: 140 stores in North West and Chicago; selling whole bean and premium prices beverage; target customer group affluent, well-educated, white collar female between the age of 24 to 44; before 1992, company not yet public. 2002: customer base, younger, less well educated and in a lower income bracket; 5000 stores around the globe, average 3 new stores a day; these stores sold rich brewed coffees, Italian-style espresso drinks, cold blended beverages, and premium teas; provided different product mix such as pastries and coffee related accessories and equipment, depending on the store size. 4. Describe the ideal Starbucks customer from a profitability standpoint. What would it take to ensure that this customer is highly satisfied customer to Starbucks? (team 7 & 8) Ideal Starbucks customer: affluent, well-educated, white collar female between the age of 24 to 44. Actions to be taken: Meet the customer expectations by closing the service gap between Starbucks scores on key attributes and customer expectations. E.g. Improvement in Speed of

service which is what customers want Starbucks to improve. Unsatisfied revenue per year $182, CLV: $200; satisfied revenue per year $210, CLV: $923; highly satisfied revenue per year $382, CLV: 3170 (look in Exhibit 9, differences between each category). Essence: to get satisfied customers to be highly satisfied. 5. Should Starbucks make the $40 million investment in labor in the stores? Whats the goal of this investment? Is it possible for a mega-brand to deliver customer intimacy? (team 9, 10, 11) Yes, since: 1. the investment could lower the service time, which in turn enhances customer satisfactions; 2. build stronger long term relationships with the customers; 3. improve the customer throughput All in all, saving $40 million is cost control. But investing $40 million could help Starbucks generate larger profit. 40 million/ 3496 stores = 11.4k per store investment 11.4/ $172 = 67 customers would have to go from satisfied to highly satisfied. break even point. Gaol: move each store closer to the $20,000 level in terms of weekly sales Yes, it is possible if the mega brand could make best use of the advanced technology. For instance, to Starbucks, if she could take the advantage of her stored value card (SVC) which collects all kinds of customer-transaction data, then the customers still are able to get customized services from the Starbucks. She still can deliver customer intimacy. Take aways:1) As firms customer base grows value proposition not evolve. 2) In retail footprint, segmentation is very challenging. 3) Employee satisfaction key driver of customer satisfaction.

Starbucks Options 1. Investment of $40 million annually to increase speed of service (impact = 2. Alter the product mix Determine change depending on store size and location 3. Process of Measuring Service performance Categories: Service, Cleanliness, Product Quality, Speed of Service 4. Retail Expansion New stores in new markets Geographically cluster stores in existing markets 5. Product innovation Priority of Mgmt given that the prices were stable in recent years 6. Service Innovation Starbucks store Value Card 7. Effort to identify and demonstrate in very concrete terms on how to determine Market Research Data Solutions Starbucks should pursue all of these alternatives Starbucks appears to consider competition as minimal, and that they are somewhat insulated. Probably, entertaining either idea is a strategic mistake. Plan of Action Plan based Starbucks strengths relative to the presented issues : 1. Proceed with investing the $40 million annually in the 4,500 stores to increase service efficiency (impacting customer satisfaction. Goal ~ customer retention in the competitive coffee house market)

2. While the investment enables additional labor hours, research efforts to increase efficiency through set-up and equipment (e.g. automated espresso machine, specialized work stations) 3. Use secondary market research data to identify, analyze, and alter product differentiation strategies, with respect to smaller chains and Starbucks obliquities 4. Alter the product mix depending on the store size and location of the outlet (demographics) i. Sample to find out what customers mainly look for ii. Sample data results would narrow the customization and train baristas with those special concoctions 5. Marketing Research showing that existing markets are far from saturation i. Analyze this particular area with specific concrete terms targeting a particular objective 6. Continue with Product and Service innovation, proactively conduct an environmental scan to launch new products 7. Validate Market Research metrics and methods of sampling, data analysis ii. Service Performance categories iii. Does the data translate in to measurable metrics that can impact sales and profitability? What we Can Learn from Starbucks Focus on the experience. Starbucks is masterful at wrapping its product in a deeply-textured gestalt. The choice of furniture and fixtures, the names of its drinks, the messages on the cups, the graphics, it's all been studiously crafted. My local Starbucks in New York City even has a little tray at the register with the business cards of the manager and the assistant manager. Very clever. Makes them feel good, and it lets customers know that someone is in charge and accountable no less -- an increasingly rare commodity in today's retail environment. In short, there are no throwaways at Starbucks, and there shouldn't be at your company, either. Indeed, every business -- no matter how narrow the niche -- creates one experience or another around its customer interaction, its unique ecosystem. Think of your business in those terms, because attention to the small things sends a big message. It says that you really value your customers, that you credit them with the sensitivity to recognize the proliferation of quality and discipline. And -importantly -- that you don't take them for granted. Pay attention to your "brand consciousness." F. Scott Fitzgerald -- on the first page of The Great Gatsby -- defined personality as an "unbroken string of successful gestures." Starbucks has got this down to a science; it's what's behind the experience I talk about earlier. The brand has a distinct and recognizable voice, and through that syntax it radiates a clear and alluring identity, as well as a smart understanding of its customers--their values, their lifestyles, their needs. Why else, in heaven's name, would someone care what music "we're listening to" -- as they put it? Would you value the musical tastes of GM? Of Hewlett-Packard? Or of Dunkin' Donuts, for that matter? I don't think so. But we respect Starbucks' opinion because when it says "we," it means something to us. Starbucks has earned it, through a shared sensibility. Is that true of your business? What would it take to make it true? Imagine if you could become a valued partner outside the narrow niche you compete in, because your judgment and taste and continued ability to surprise and please were trusted implicitly. That's marketing power. Don't try to squeeze every last cent out of a customer. Imagine the radical illogic: you can sit for five hours with a single cup of coffee. An MBA culture would never allow this -- it would be busy calculating the pathetic ROI on this customer loitering, analyzing the time value of the real estate, dividing it by the marginal cost of the coffee, and soon recommending that Starbucks charge by the hour, like a parking garage. The truth is, though, that the comfortable chairs and couches have turned out to be a counterintuitive economic asset. They create loyalty. They drive business that might otherwise go elsewhere. They contribute to multiple customers gathering -- and spending. Are you too wrapped up in "monetizing" your customers, instead of creating a business environment where they don't feel like a spending gun is always being held to their heads? Remarkable things will happen when you demonstrate some patience and confidence; confidence that if treated well, your customers will come back even if you're not the cheapest cup of coffee in town. Don't accept conventional price ceilings. Industry experts (and consumer research) would have killed the idea before it started. I can hear the objections now: No one would ever pay $1.75 for a cup of coffee they can buy for 85 cents -- not to mention a $3 specialty drink. The concept is too sophisticated for

Americans. People are in too much of a hurry to stay and linger. They'll try it once and never come back. In today's hyper price-sensitive world, where all of us are faced with driving down costs every day, it's easy to forget that markets -- if developed properly -- have more upward elasticity than many give them credit for. Of course, commanding this higher price demands relentless attention to the brand delivery system I've been talking about. Pastiche is powerful. Starbucks is a master at recombinant cultural marketing. There's a bit of America: The name, for one, is out of Moby Dick, a quintessentially American novel. The multiplicity of beverage choices -- and endless customization potential -- is also an acknowledgement of our uniquely empowered (and opinionated) consumer. Of course, there's a savvy bit of Italy: the barista, the faux Italian drink names, the entire caf gestalt. Finally, there's a global, New Age-y feel to the entire experience: the environmental sensibility, the focus on "fair trade," the conscious availability of soy milk, even the way Starbucks markets the company as a progressive employer (health insurance for part-timers).But if you're not in the coffee shop business, how relevant is this to you? Very. We're an increasingly diverse culture -- consumer and business -so you need to make sure your company is sending the right signals. This can be from every level: conceptually, product-wise, graphically, from a personnel perspective. The other thing, of course, is that Starbucks venerates its product. And that's contagious. So next time you're facing a business dilemma, leave your desk, get in your car -- or take a walk -- to the nearest Starbucks. You could learn