STARBUCKS CASE ANALYSIS

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Q.1. What are the main reasons behind Starbucks' success?
Ans. The reasons behind Starbucks success from its inception are:
• When it was started, Starbucks only catered to coffee purists, a niche segment of customer with their whole Arabica
beans. But after hiring Howard Schultz in the marketing team, he expressed to open up an espresso bar initially in
one corner of its Seattle based shop which was a prototype of his long term vision - to provide a third place for
Americans apart from the 2 places they already have or visit i.e. their home and workplace, so that they can come
and relax, be themselves or enjoy some quality time with others.

• The most impressive part of Starbuck’s success, achieved over a period of time, was that, they had spent nothing on
advertising while their entire marketing happened at the point of sale at the local stores.

• The value proposition of Starbucks captures the reasons for its success:
• Firstly, Starbucks created a “mantra” of “live coffee” which means creating a one of a kind experiential
dimension to the coffee consumption for the coffee aficionados visiting the store, which can be ascribed as an
experiential branding strategy.

• The second factor that catered to its success was the customer intimacy wherein the loyal customers, visiting
18times in a month, would be recognized while they enter as well as knowing the drink they prefer and the
customizations they choose.

• The third component of their successful branding was the ambience they have created inside their stores with
lounging and layout which generates an uplifting yet inviting environment for people who wants to stay for a
period inside.
• Their success in their distribution for which 40% of their first time visitors have
already tried their brands have been ties with third parties which shares similar
goals and commitment to quality. So people, who might not have visited the store
might have tasted the Starbuck coffee at a drive through or a grocery.

• Starbucks success can also be ascribed due to its highly satisfied workforce which is
of utmost priority of the firm, for which where fast food industry average of
employee turnover rate is 300%, Starbucks has only 70%. They call their employees
as partners and gives them generous health insurance and stock options even to
their entry level partners. The firm also looks out for a stable manager as they think
a manager stability is key to partner stability on the firms and they encourage
promotion within their own ranks than hiring from outside.
 Q.2. How did Starbucks change during the period from 1992 to 2002? Or compare Starbucks in 1992 vs
2002.
Components 1992 2002
Product Offered The stores mainly sold whole beans and premium priced Starbucks offered highest quality coffee in the
coffee beverages by the cup world, mostly handcrafted customized cup of
coffee and other beverages for individual
customers

Target Customer Starbucks primarily catered to affluent, well educated, The company was serving 20 million unique
white collar patrons (Skewed female) between the ages customers in well over 5000 stores around the
of 25 and 44 globe and was opening on average three new
stores per day.

Stores operated The company had 140 stores in the Northwest and The company had over 5000 stores across the
Chicago world
Sales and Net Revenue was half as of 2002 and also Sales were Sales had climbed at a compound annual rate of
Operating Income comparatively lower 40% and since the company had gone public net
earning had increased at a CAGR of 50%

Service Innovation During 1992 Starbucks’ main focus was on to become Starbucks’ stored value cards(SVC) was launched
America’s “third Place” where people can go to relax around this time and it was found to be most
and be themselves. significant product innovation since Frappuccino,
they also started offering high speed internet
Q3. Analyse the customer satisfaction survey data and make meaningful
interpretation of the same

• Effective marketing communications are required to convert these people to

loyal customers.
• Customers prefer good customers more than product quality.
• From Exhibit 8 (second table) - customer-base composition might be slowly
getting populated with the less elitist, younger generation.
• Exhibit 10. We can observe that the attributes that are considered to be really
important are those that are very basic like cleanliness, convenience, service,
taste. The attributes that can be considered to be more elitist are lower in the
importance rank

Information Asymmetry Customer-base shift

Q.4. Whether it makes sense for Starbucks to invest $40 million annually to add more labor to its stores? What will be the impact of
increased customer satisfaction on store sales/profitability? Whether this goal of increased customer satisfaction is feasible?

Ans: Yes absolutely makes sense for Starbucks to invest $40 million in labor to its stores. Starbucks considers customer
service as a vital element of in-store experience. Starbucks has a service index called the ‘Customer Snapshot’
comprising ‘basic’ and ‘legendary’ service.
Speed of service forms one of the criteria of the basic service and Starbucks has improved on the parameter. However,
despite that customers want a higher speed of service this shows gap in between the company’s targets and customer
expectations.
In order to plug these expectations Christine Day, Sr. VP administration has proposed a $ 40 million per annum
additional expenditure on increased labour hours. Company’s management, however, wants that the $40 million
investment should also translate to business growth.
• With the current average hourly rate of $9 and average labour hours of 360 per week, the average weekly labour cost
comes to $3240. Also with average ticket size of $3.85 and average daily customer count of 570, the average weekly
revenue comes to $15361.50. Thus the weekly profit figure becomes $12121. Break even with the investment of $40
million can be through –
• Increasing the customer count.
• Increasing loyalty thereby increasing the average ticket size and life time value
As shown in the Exhibit 3, we can achieve the break even by either increasing the average daily customer count to 577
or by increasing the average ticket size to $3.9.
• Additionally, increase in the investment on the in store labour would have the following benefits-
• Customer Satisfaction- Starbucks is dealing with 2 customer segments i.e. the existing customers who value
customization and personal attention and new customers demanding faster service.
• Existing customer segment puts pressure on the service of the Starbucks store, yet are loyal customers of
Starbucks to whom Starbucks owes its brand identity.
• Hence Starbucks will be able to serve this segments’ needs adequately with increased labour.
• For the new customer segment speed of service is an important service parameter.
• Hence increased labour would also enhance satisfaction and loyalty of this segment translating to a higher
revenue.
• Partner Satisfaction- Investment of $40 million will also enable Starbucks to achieve a higher partner
satisfaction since the workload would get distributed. This will also enable Starbucks to introduce new
beverages at regular interval, another key proposition of Starbucks.
Justification for investment of $40 million per annum on increasing the labour hours in stores. Calculation of Break-even point.

Total Expenditure on extra labor $40,000,000

Number of stores* 4,500
Average expenditure on store $8,889
($ per annum)
Average revenue per store per annum ($15,400 X 52) $800,800

Average ticket size $4.06

(weighted average 42% X 3.88 + 37% X 4.06 + 21% X 4.42)

Average number of transactions per annum 197,241

Average unique customers served per annum 3,287

Highly Satisfied customers (21%) 690

Satisfied customers (37%) 1,216
Unsatisfied customers (42%) 1,381
Alternate approach for breakeven point calculation. Scenario 1- Increase in customer number. Scenario 2- Increase in ticket size.
In case of scenario 1, we need 7 more customer per store in order to breakeven with last year profitability. Scenario 2 requires
conversion from dissatisfied customers to satisfied customers and in the same way from satisfied to highly satisfied.

Current Scenario 1 Scenario 2

Average hourly rate (in 9 Average hourly rate (in $) 9 Average hourly rate (in $) 9
$)
Total labour hours per 360 Total labour hours per 380 Total labour hours per 380
week, average store week, with increase of 20 week, with increase of 20
hrs hrs
Labour Cost/week, 3240 Labour Cost/week, average 3420 Labour Cost/week, 3420
average store store average store

Average Ticket 3.85 Average Ticket 3.85 Break even Ticket Size 3.90

Average daily 570 Break even Customer 577 Average daily customer 570
customer count, per Count count, per store
store

Average weekly 3990 Target Customer/week 4037 Average weekly customer 3990
customer count, per count, per store
store
Weekly Revenue 15361.5 Target Revenue/week 15541.5 Target Revenue/week 15541.5

Revenue-Cost, per 12121.5 Target Revenue-Cost, per 12121.5 Target Revenue-Cost, per 12121.5
week for average store week for average store week for average store