Starbucks faces a difficult and controversial management challenge. The company’s most recent market research has revealed unexpected findings implicating that Starbuck is not always meeting customer’s expectations in the area of customer satisfaction. The purpose of this memo is to analyze and provide recommendation on whether or not the company should go forth with a $40 million investment in additional labor in the stores. This $40 million investment is necessary in order to bring service time down to a three-minute interval and ultimately increase customer satisfaction.
A marketing strategy and corresponding recommendation will be provided for your approval. Situation Analysis: Numerous factors accounted for Starbucks’ extraordinary success in the early 1990’s. To begin, Starbucks was the first coffee house to provide a premium coffee based on Italian values to the United States population. This high quality coffee attracted a great deal of people, especially affluent, well-educated, white-collar women between the ages of 24 and 44. They were able to achieve such high standards for their products by controlling as much of their supply chain as possible.
In addition to their high quality products, Starbucks offered the public great product variety. They introduced and launched an array of products on a regular basis, ranging from new holiday beverages to their Frappuccino beverages, distributed by PepsiCo. This product innovation is one of the leading factors contributed to Starbucks’ positive sales growth throughout the years. Customer service also played a key role in Starbucks’ success in the early 1990’s. The company offers extensive training to their “partners” or “baristas” in order to provide customers with the most optimal, personalized experience.
Starbucks trains their employees on both hard and soft skills, allowing them to ensure product quality and also provide the best service possible. Lastly, Starbucks’ ability to reach their customers everywhere they can has brought the company great success. Starbucks has numerous channels of distribution. The majority of their stores are located in “high-traffic, high-visibility settings, such as retail centers, office buildings and university campuses”. However, Starbucks additionally sells products through non-company-operated retail channels called “Specialty Operations” nd also grocery stores and warehouse clubs. As a result, the company is able to reach customers in their home, but also where they work, travel, shop and dine. This broad distribution strategy proved to be extremely successful. It is evident that Starbucks has flourished and has been an extremely successful company over the years. The aforementioned factors greatly contribute to their success in addition to Starbucks’ compelling value proposition. Starbucks sought out to create an “experience around the consumption of their coffee”.
They wanted this experience to coincide with their customer’s daily lives. Secondly, they wanted to create an experience of “customer intimacy” within their stores. They do this through the ability to personalize and customize products to meet customer preferences. Lastly, Starbucks sought out to create a specific atmosphere based on “human spirit, a sense of community and the need for people to want to come together”. Starbucks hopes to persuade people to enter the store through friendly employees and a comfortable setting.
I believe these three components of the company’s value proposition and branding strategy evoke substantial interest and admiration in a powerful way. At the time, I believe Starbucks hoped to create a brand image of “high quality coffee on the go”. The company wanted to give customers a perceived image that they could provide premium coffee anywhere, adding to the appeal of their value proposition. After research, Starbucks’ market research team discovered that customer satisfaction scores have begun to decline.
After careful analyzing, I believe this can be attributed to the fact that Starbucks has focused primarily on product quality, and has lost focus on service quality. Starbucks has put heavy concentration on product innovation, new product launches and branding strategies and as a result, the company has lost sight of the customer’s wants and needs. Ultimately, Starbucks is not properly or correctly measuring customer satisfaction. They are basing these scores on characteristics affecting the product, and not precisely measuring the quality of their services.
As Exhibit 10 from the case study shows, Starbucks’ customers ranked a clean and convenient store as the most important attributes of creating customer satisfaction. As marketing research is beginning to reveal, this should not be the only focus. Starbucks needs to shift their priorities and rank fast service, customer experience, and atmosphere as most important, as new studies suggest. The market research team has also discovered that Starbucks’ customer base is evolving. The customers tend to be younger and less well educated.
Regardless of this insight, customer behavior remains the same. According to Figure A in the case study, the typical customer visits just five times a month. I believe this is in part due to Starbucks’ inability to meet customer expectations and increase satisfaction. In order for the company to increase the frequency of customer visits, customer satisfaction must improve. Thus, the ideal, most profitable consumer for Starbucks is one who is a frequent and loyal buyer. This customer ideally visits the stores 8 to 12 times per month and will remain a customer for around 8 to 10 years.
This type of customer obtains a high satisfaction level, which in turn allows them to be labeled as loyal. These highly satisfied customers will generate the most revenue for the company. After looking at the information provided in Exhibit 9 of the case study, it is possible to quantitatively calculate a “highly satisfied customer”; a customer who will remain loyal to Starbucks. Calculations can be seen and reviewed below (these numbers are referenced from Exhibit 9): Value of Highly Satisfied Customer = Starbucks Visits/Month x Avg. Ticket Size/Visit x Avg. Customer Life = 7. 2 x (8. x 12 months) x 4. 42 = 3169. 6704 As you can see, a highly satisfied customer is valued at around 3170. Now we will compare this to the value of just a satisfied customer. See below. Value of Satisfied Customer = Starbucks Visits/Month x Avg. Ticket Size/Visit x Avg. Customer Life = 4. 3 x (4. 4 x 12 months) x 4. 06 = 921. 7824 As evident from the previous calculations, a highly satisfied customer is roughly three times more valuable than just a satisfied customer. This evidence proves the importance of maintaining highly satisfied customers and also shows that loyal customers are the most ideal.
Recommendations: After thorough research and analysis, it is my recommendation that Starbucks proceeds with investing an additional $40 million annually in the company’s 4,500 stores, which will allow each store to add approximately 20 hours of labor per week. I believe this plan of action will improve the company’s speed of service and efficiency, which will thereby increase customer satisfaction. This recommendation proves to be the most logical plan as increasing customer satisfaction is imperative in order to increase customer loyalty.
Loyal customers will be the most ideal and profitable for Starbucks, thus, increasing profits, revenues, and sales growth. There will be compelling arguments that an additional 20 hours per week of labor is a substantial expense. However, in my opinion, management must move away from seeing labor as an expense and focus on the fact that it is a customer-related investment that will generate a positive return for the company. As part of this, I recommend that Starbucks continues to improve efficiency by removing all non-value added tasks and simplifying the beverage production process.
The company should increase production of automated beverage machines, much like the “verismo machines”, which will in turn reduce the amount of shared work and help to bring service time down to the benchmark of three minutes. Finally, I recommend that Starbucks alters the way customer satisfaction is measured and also better communicate their values to customers. First, the company needs to find a solution for decreasing the “service gap” between Starbucks scores on key attributes and customer expectations.
These attributes need to closely match the characteristics that customers revealed to make them feel like valued customers. These attributes consist of improvements to service, most importantly “speed-of-service”. In addition, the company needs to deliver on these expectations. The service needs to be as fast as the customer expects and it needs to be of high quality. The $40 million investment should cover the expense for additional labor, but Starbucks should also consider better training employees on soft skills or removing some of the more unpopular items from the menu.
Secondly, Starbucks needs to shift their focus. According to Table B in the case study, research shows that the company’s brand image is increasingly being associated with corporate growth and money. If the company wants to highlight their “live coffee” mantra brand strategy and the “experience” they provide around the consumption of coffee, Starbucks needs to clearly communicate their values to their customers in order to change the attributes they want their customers to associate with their brand. With these adjustments, customer satisfaction and brand image will positively increase.
I have completed a break-even analysis in order to evaluate the profit potential of this investment and in order to avoid any risks of my recommendations and strategies. This break-even analysis will show per store, how many customers Starbucks needs to convert from satisfied to highly satisfied, in order to break even on this $40 million investment. Revenue Per-Unit: $384. 50 (7. 2 * 4. 42 * 12) Variable Cost Per-Unit: $209. 50 (4. 3 * 4. 06 * 12) Total Fixed Costs: $8,750 ($40,000,000/4,574 stores) Units to Break Even: 50 customers.
Revenue to Break Even: $19,225 Total Variable Costs: $10,475 Total Fixed Costs, $8,750 Difference in Annual Revenue (between a satisfied and highly satisfied customer): $175 (384. 50-209. 50) Average Daily Customer Count, Per Store: 570 After using the break-even analysis tool, I have concluded that per store, Starbucks needs to convert 50 satisfied customers to highly satisfied, in order to break even on the investment. Additionally, Starbucks will need to have sales of at least $19,225 to cover all costs.
In order to make a profit, the company will need to convert more than 50 of 570, or 9 percent of customers, or have sales of more than $19,225. Finally, although Starbucks is a mega-brand, the company is extremely capable of delivering customer intimacy. Customer intimacy is one of the three components of Starbucks’ value proposition and the company has proven their ability to carry this out. The company is able to do this through adequate training of their baristas. The baristas are responsible for providing the customers with an uplifting experience every time they enter the store.
They can execute this through, fast service and personalization, such as remembering names of loyal clientele. In addition, I recommend that Starbucks feeds off the use of their stored-value card (SVC) and initiate rewards programs for repetitive visits. This would strengthen the customer experience and also help to persuade customers to keep returning for their “rewards”. In addition, they could use these cards in collaboration with a customer relationship management (CRM) system in order to closely track consumer preferences and satisfy personal needs.
This will help with the efficiency of the stores and help Starbucks to continue to deliver customer intimacy. Conclusion: Starbucks should move forward with the $40 million investment towards an additional 20 hours of labor a week. The company will break even on this investment if they convert 50 satisfied customers into highly satisfied customers. I believe this will be feasible through correctly measuring customer satisfaction, communication, increasing customer intimacy and continuing to follow the value proposition.
Starbucks needs to shift its focus from product quality to service quality and the marketing department needs to look at the “big picture” of their research. In conclusion, I seek your approval of this plan of action and I can be contacted at lmb5212@psu. edu. “I, Lindsey Blodgett, affirm that I have neither given, received nor witnessed unauthorized aid on this deliverable and have completed this work honestly and according to the professor’s guideline. ”
