Introduction – A coffee shop has always been more than a place to have a beverage. It is a place to socialize, ideate, have fun and meet new people. As….
1. What factors accounted for Starbucks’ extraordinary success in the early 1990’s? What was so compelling about the Starbucks’ value proposition? What brand image did Starbucks develop during this period? Is the value proposition still valid in 2002? The extraordinary success Starbucks experienced during the early 1990s resulted from Howard Schultz’s passion and vision to create a coffee culture in the United States similar to the coffee culture he experienced while traveling to Italy. Schultz’s vision of the Starbucks brand evolved around providing a quality product while delivering exceptional customer service in an inviting atmosphere.
Starbucks’ success can be attributable to the following factors: * Quality Coffee: Starbucks was able to provide the highest quality product by controlling as much of its supply and distribution channels as it could. The company enforced exacting coffee standards and worked directly with the various growers. This allowed them to purchase the green coffee beans and roast them based on the Starbucks’ specifications. * Customer Service: According to Jim Alling, Starbucks’ senior vice president of North America retail, Starbucks’ goal was to create an uplifting experience every time a customer walked through their door.
To accomplish this the company encouraged its partners to develop customer intimacy which included making eye contact with the customer while smiling and engaging the customer in conversation, learning the customer’s name especially regular customers and adhering to the company’s “Just Say Yes” policy which required partners to go beyond company rules to satisfy customers. * Atmosphere: Starbucks created an atmosphere that changed the perception of a coffeehouse as a place to just buy coffee. Instead Starbucks strived to create a coffee culture in the US that became a part of everyday life.
Starbuck created an ambience in each store that was inviting and encourage customers to linger and socialize. Schultz’s vision was to make Starbucks that “third place” for Americans outside of home and work where they were free to relax and interact with others. * Partners Satisfaction: Employee happiness was a major component of Starbucks’ strategy because upper management truly believed that happy employees resulted in higher customer satisfaction. As a result of this philosophy, Starbucks’ employees were paid above industry standard wages and received health insurance benefits and stock options via the company.
Additionally Starbucks encouraged promoting from within the company. Starbucks’ value proposition was compelling because it placed a lot of emphasis on customer satisfaction and delivering exceptional customer service about everything else. This is noted by the company’s “Just Say Yes” policy which encourages employees or partners to ensure customers have an unforgettable experience every time they frequent the stores. Starbucks’ value proposition does not focus on the coffee but rather on the experience of drinking coffee.
During this period Starbucks developed its name as a brand associated with delivering superior customer service and creating an inviting environment which focused on the experience of drinking coffee. No the Starbucks original value proposition is not valid in 2002. According to the case, Starbucks focus shifted to building the brand and introducing new products instead of focusing on the customer. 2. Day states, “according to the data, we’re not always meeting our customers’ expectations in the area of customer satisfaction. ” Why have Starbucks satisfaction measures declined?
Has the company’s service declined or are they measuring satisfaction the wrong way? Starbucks satisfaction measures have declined because management was not utilizing the data collected to drive decision making. Between 1998 and 2002 Starbucks experienced significant growth as shown in Exhibit 2 of the case. With this growth Starbucks lost sight of its changing customer base. Starbucks customer profile was changing. Its customer base no longer just comprised of well-educated, affluent white-collar customers but now included younger, lower income and less well-educated customers.
This new customer base had a different perception of the Starbucks brand and visited the stores less frequently than the original customer base. Additionally with its growth strategy Starbucks seemed to have lost the ability to communicate its values to its customers. Note that Starbucks research team discovered that between 2000 and 2001 there was an increase in customers who felt that Starbucks primarily cared about making money and building more stores. This is an indication that the company lost sight of the components making up its value proposition.
Customer service was a major component of Starbucks value proposition but according to the research team by 2002 it discovered that Starbucks was not meeting expectations in terms of customer satisfaction. In fact the data collected by the research team indicated that 10% of customers would like to see improvements in service especially speed of service and 19% would like to have friendlier more attentive staff. 3. How does the Starbucks of 2002 differ from the Starbucks of 1992 and how do these changes influence service and customer needs?
There are a number of differences between the Starbucks of 1992 and the Starbucks of 2002. a. Number of stores: In 1992 the company had about 140 stores in the Northwest and Chicago areas. By 2002 the company had approximately 5,886 stores comprising of 4,574 in North America and 1,312 internationally. According to the case Starbucks goal was to become the most recognized and respected brand in the world. Based on this goal the company engaged in an aggressive expansion strategy that has resulted in a 4,104% growth rate over the ten year period.
This growth has enabled the company to venture into new markets and saturate existing markets. For customers this growth made Starbucks more accessible and convenient. However, with the expansion also came changes to the company’s store model. Some of the newer stores were smaller and did not have the lounging areas which are an integral part of the atmosphere component of the company’s value proposition. By removing this component, customers perceive Starbucks as more corporate oriented and primarily concerned with expansion and making money. b.
Product offering: According to the case in 1992 50% of the company’s revenue was generated from whole-bean coffee sales. By 2002 coffee beverages accounted for 77% of the company’s revenues and whole-bean coffee accounting for 6% of the company’s revenues in the North American Stores. Through its product innovation program the company developed an extensive menu which consisted of beverages that were more complex to prepare contributing to slower delivery service. As noted in the case researchers noted that customers valued speed of service and indicated that it is an area Starbucks can improve.
c. Customer Base: In 1992 the typical Starbucks customer was affluent, well-educated, mid to upper class professional (white-collar) who could appreciate the ambience and atmosphere of the store. By 2002 the customer base had evolved to include younger, lower income, less well-educated individuals with various ethnic backgrounds. d. Branding: In 1992 Starbucks was viewed as the ‘third place’ in the lives of Americans where they were able to socialize, relax and enjoy the experience of drinking high quality coffee.
By 2002 Starbucks had developed an image as a convenient place to meet and purchase good coffee. The intimacy factor that contributed to the success of the company in the 1990s had deteriorated by 2002. 4. Should Starbucks invest $40 million to add 20 hours per week labor in the stores? What is the goal of this investment? In order to answer this question, provide both a business rationale and an economic analysis to support or not support spending the $40 million. Starbucks should invest in labor for its stores however a $40 million investment may be excessive.
According to Day’s analysis of the research data the additional labor would increase customer satisfaction through improve speed of service. She is also recommending this investment on a continuous annual basis. This investment in labor is not really an investment but an expense which will decrease the company’s bottom line by $40 million each year. To make this investment practical the company would have to generate at least $40 million in revenues to offset this additional cost. Day’s focus is on the fact that the service time needs to be faster however there is no guarantee that the addition labor hours will improve service speed.
Furthermore based on Exhibit 11 in the case only 10% of customers involved in the survey indicated they wanted faster more efficient service Day should also look at investing in innovative technology that would eliminate some of the steps involved with making the different beverages. Such technology would enable the partners to serve the customer faster and engage in conversation while the beverages are being mixed. Additionally Day should consider Starbucks changing customer base. An increase in labor costs generally leads to an increase in the price of the products.
Exhibit 8 in the case provides Starbucks’ customer retention information which compares established customers to new customers. According to the information provided only 8% of new customers indicated that Starbucks beverages were worth paying for compared to 32% of established customers. It is also noted from the exhibit that the new customers are less-educated and fall in lower income brackets which indicates that a price increase would affect their buying habits especially considering that only 8% of those in the survey think the product is worth buying. 5. Is it possible for a mega-brand such as Starbucks to deliver customer intimacy?
According to the case it is obvious that Starbucks trains its employees to become versatile. Individuals are responsible for duties such as learning the art of mixing drinks to learning how to operate and manage cash register. Starbucks currently promotes customer intimacy to create a high level of customer satisfaction. Starbucks also encourages their employees to take the level of customer service to a higher level by providing extra services such as remembering the faces, taste and preferences of frequent clients while engaging in friendly conversations so as to make the customer feel at home.
They would like their customers to feel that level of amicability from the moment they enter the door. With this requirement, Starbucks has trained their employees to greet the customers with a smile; this in their opinion will in no doubt keep the customers coming back and indeed also add revenue to the company with sales increases. However, creating an intimate relationship with the customer requires spending time interacting and getting to know the customer. In a megastore this process would be taxing on the minds and memory of employees and on the expectations of customers requiring efficient and effective service.
The resulting delay in service to those waiting in queue would send a message of not caring about their needs. However with the assistance of technology, such as a relational customer database that captures customer information and preferences, the possibility of achieving intimate customer relationship in a mega environment is thinkable. In the ordinary course of business in a megastore the best one can expect is a friendly and helpful employee interaction with the customers but not an intimate relationship where one is greeted by name and the greeting employee remembers one’s purchasing preferences.
6. Starbucks began purchasing Fair Trade Certified™ coffee in 2000, helping grow the market for Fair Trade Certified coffee in the U. S. Fair Trade Certified™ coffee empowers small-scale farmers organized in cooperatives to invest in their farms and communities, protect the environment, and develop the business skills necessary to compete in the global marketplace. However, Fair Trade Coffee carries a premium price to non-Fair Trade Coffee. Starbucks now must face cost pressures of adding baristas to the stores.
Assuming the addition of the baristas will dilute earnings per share; Christine Day will consider recommending covering the additional expense by eliminating the Fair Trade Coffee purchasing and buy coffee on the open market at a reduced price. She will use the savings to pay for the additional baristas. She has come to you for advice. What will you tell her? According to the case, Starbucks’ brand strategy was best captured by its “live coffee” mantra. This phrase has been known and reflected as the importance the company attached to keeping the national coffee culture alive.
Starbucks customers have been accustomed to a high level of quality coffee for many years and if a decision is made to purchase their coffee on the open market, will de-value the brand. In an open market Starbucks will not have full control over the quality of their coffee. This will in no doubt go against their value proposition of creating that experience around the consumption of coffee. Secondly, in an open market the coffee will involve different producers using different processes of production resulting in differing products with differing flavors and tastes.
Starbucks currently has the ability to grow their own coffee beans and have them handpicked and made themselves offering them full control over the production process. It is recommended that Starbucks do no change to non-Fair Trade, because Starbucks will no longer be able to control the quality of the product. The control of the supply chain has been the foundation that Starbucks has built its core competence and it branding. There are other alternatives to recover the cost of adding baristas such as generation extra sales and income from the efficiency of add extra labor.
Starbuck’s value proposition of offering an experience was built on the foundation of a high quality product – its coffee. According to the case, “Starbucks prided itself on offering what it believed to be the highest quality coffee in the world,” which was achieved by controlling much of the supply chain, purchasing green beans and employing a custom roasting process. This could no longer be achieved if the company were to relinquish its premium Fair Trade status.