Professional Documents
Culture Documents
Group 6, Section C
Name Aman Srivastava Jashanjot Singh Sekhon Kashyap Suruchi Brhamprakash Punit Moris Ekka Saindani Pranit S. Senthooran K A Shivendra Raizada
PGP 2011-13
Page 1
Group 6, Section C
Introduction
Starbucks was established by Gerald Baldwin, Gordon Bowker and Ziev Siegl in 1971, as a specialized arabica beans coffee shop in Seattles Pike Place Market. Later in 1982, the company was sold by the owners to Howard Schultz, a member of the marketing team of the company. The company was taken to its greatest heights by Howard Schultz who opened several new stores and later went on to list the company as a public company in 1992. By 1992, the company had 140 stores and had raised a capital of over $25 million. The company has witnessed strong growth as compared to the industry, exhibiting above 5% year on year growth even in recessionary periods. During 2002, Net Revenues stood at $3,288.9 million having witnessed an increase at CAGR of 40% as compared to 1992 revenues. Net profits in the same duration had grown at a CAGR of 50%. In addition, total number of stores had increased at a CAGR of 25.5% to reach 5,886 in 2002 from 1,886 in 1998.
Group 6, Section C
Atmosphere: Schultzs idea was to make Starbucks Americas third place. By recreating the Italian coffee culture he met in Milan, he managed to make Starbucks a place where people can enjoy their social interactions, relax, or just spent some time by themselves. In essence, the Starbucks idea changed the norm from buying coffee as a drink to the experience of enjoying coffee. People viewed Starbucks as a place they wanted to be at and they spent as much time as they could in the stores. It was an uplifting experience that was complemented with the layout designed to provide an inviting environment
Apart from these components of branding strategy there were several other factors that compelled customers to pay such a premium for the coffee consumed at Starbucks. y Product Variety and Customization: Starbucks offered a wide range of beverages to choose from and also allowed to customers to tailor-make their own drinks. This provided customers with greater freedom of choice and enhanced customer retention as the customer did not get bored of the beverages. y Reach: Starbucks had over 4500 stores in North America itself and in some of the most accessible locations (high-traffic, high-visibility setting) facilitating greater product reach. Also, Starbucks provides selected product y Other In-Store Products: Apart from the usual Coffee line, Starbucks offers products such as Food items, equipment and accessories, T-Shirts and other sources of entertainment (Music CDs, etc.) Other reasons for success were: y Partner Satisfaction: Schultzs belief was that if the Starbucks employees were happy, then this would lead to higher customer satisfaction. For this reason, Starbucks partners were among the highest paid hourly workers, they enjoyed health benefits and they had stock options. This resulted in one of the lowest employee turnover rates in the industry and a consistently high employee satisfaction rate. Furthermore, the majority of promotions for Starbucks were within its own ranks. Even though there is no evidence that the satisfaction of partners led to customer satisfaction, it would be safe to assume that the low employee turnover meant that partners stayed at their positions for longer time, were more experienced in treating the customer and could provide a faster service.
PGP 2011-13
Page 3
Group 6, Section C
Specific target audience: Starbucks coffee in the 1990s was targeted primarily towards the affluent, well educated, white collar people. These customers were essentially connoisseurs of coffee who can differentiate between origin of coffee bean, roasting process and production process, just by the look and aroma of the serving. Such kind of customers eventually established a consumption pattern of high quality and variety rich coffee. Being able to attract such an affluent demographic and serving them by providing superior service, helped in being able to provide the service at a consistent level and keep the customers satisfied
Attractive market: The concept of Starbucks was new and the notion of turning the coffee drinking into a social experience was almost unexploited in the U.S. In the early 1990s Starbucks did not face fierce competition. The presence of other coffeehouses such as Peets Coffee and Caribou Coffee and donut and bagel chains such as Dunkin Donuts was insignificant and hence helped Starbucks succeed
With these factors Starbucks offered both tangible benefits that coffee offers such as taste, aroma, alertness, concentration etc. and intangible benefits such as experience.
Problem Definition
The primary problem faced by Starbucks was the declining customer satisfaction scores. In addition, market research revealed that there was very little image or product differentiation between Starbucks and other smaller coffee chains in the minds of Specialty Coffeehouse customers Analyzing, the graphs given in Exhibit 7, it is evident that though company has steadily increased its Customer Snapshot scores in parameters such as Services and Cleanliness, it has failed in improving its product quality and Average Waiting time score which has been constantly declining. Even after such a dismal performance, the company has been increasingly given higher ratings in Legendary Service scores. This indicates that a larger time is being spent in striking up a conversation with the customer and being responsive at the expense of increasing average waiting time for all the customers. In addition, the companies rating in attitude towards Starbucks has fallen in all respects such as High-quality brand, brand I trust, worth paying for, best tasting coffee etc.
PGP 2011-13
Page 4
Group 6, Section C
Rationale
The reason for this decline of sales could be attributed to the change in consumer profile witnessed by the company. The new consumers visiting the coffeehouse are on an average 36 years old, having a lesser average income of $65,000 and reduced average cups of coffee per week of 15. These new customers have apparently higher expectations from the store as compared to customers who have been visiting the shop for more than 5 years. This is evident from the fact that they have given lower score to Starbucks in various parameters as discussed above. This indicates that it is not necessary that service quality of Starbucks has fallen. Moreover, since the number of consumers and coffeehouses has increased many folds over the years, this may have led to dilution of value proposition of quality, service and atmosphere. The expansion of menu items and customization of beverages may have also put additional pressure on baristas and hence increased average waiting time and reduced quality. Also, with increase in customers per shop, customer intimacy element was lost. In addition, competition from other chains has increased over the years and hence satisfaction levels from Starbucks store may have fallen as customers have other options to explore. Correct calculations of satisfaction of customers are of extreme importance because of the opportunity cost associated with an unsatisfied customer. An unsatisfied customer provides sales of $15.13 per month as compared to more than double sales of $31.82 per month provided by a highly satisfied customer. Also, a satisfied customer tends to remain associated with Starbucks for a larger amount of time.
PGP 2011-13
Page 5
Group 6, Section C
Group 6, Section C
Customer Behavior by Satisfaction Level Number of Visits per Month Avg. Ticket Size per Visit Avg. Customer Life (yrs) Total Revenue from Customer per Year Total Revenue over Customer Life Variation from Unsatisfied Customer Variation from Satisfied Customer
Satisfied Highly Satisfied Customer Customer 4.3 7.2 $4.06 $4.42 4.4 8.3
$181.58 $199.74
$209.50 $921.78
$381.89 $3,169.67
$954.72 $7,924.18
$722.04
$2,969.93 $2,247.89
$7,724.43 $7,002.39
Also, it can be seen that satisfaction level is directly linked to revenues, which will eventually lead to higher profits, therefore Starbucks should work on raising the satisfaction level of its current customer base and make them visit its stores more frequently. Starbucks should concentrate on reducing the gap between the score of key attributes and customer expectation. Based on the rankings of the key attributes that create customer satisfaction, Starbucks should ensure that its stores are kept clean all the time. Starbucks should also place more emphasis in its partners utilizing their soft skills to treat the customers as valuable. Starbucks can also try to promote its stored-value card (SCV) further and utilize the data collected to speed up the service. The SVC will reduced transaction times, and the data present can help the partner customized the order faster.
Group 6, Section C
However, the assumption is that speed of service is the number one driver for satisfaction and that the additional labor will provide the increase of speed of service. As we can see from the rankings of the key attributes by Starbucks customers, fast service come sixth in importance. There are other factors such as cleanliness and customer value that holder higher importance. Based on the companys research, only 10% of the Starbucks customers have asked for a faster, more efficient service. Even if the $40 million investment is made and customers get a faster service, there is a big risk in losing value in some of the other perceptions. For example, having more partners in the store might lead to loss of the personal treatment of customers. Also, not all stores are equal in size, number of people they serve and location therefore it would make sense to allocate the money on the basis of the amount of resources actually needed. There would be no need to invest in a store where all customers are highly satisfied and there would be higher need to invest in a store where there is a high percentage of less satisfied customers.
Recommendations
y Starbucks should develop an internal strategic marketing group that would coordinate actions of the market research group, the category group and the marketing group. This would give the opportunity for Starbucks to get faster feedback from customers and be proactive. y They should focus on improving efficiency of existing partners by removing non value added task, simplifying the preparation methods and investing in new machines like the versimo. y The proposed investment of $40 million should be carried out in phases. First Starbucks should test idea by monitoring the results of proportional investment in some stores. Also, the investment should be made as per each stores requirement and not uniformly across all stores. y Starbucks must also work on other parameters that are important to customers, like cleanliness, value to customer, customer perceptions and image or product differentiation.
PGP 2011-13
Page 8