Chad Ogle MGMT 620 HBS Case 9 Starbucks: Delivering Customer Service History In 1971, Starbucks started as a small coffee shop which targeted a specialized market of coffee purists. Howard Schultz, who later owned the company and initiated the high growth period, joined Starbucks’ marketing team in 1982. Main concept of Schultz marketing strategy was too make Starbucks “America’s third place” considering home and work the two other places where Americans spend most of their time. In 1992, Schultz acquired Starbucks and made an initial public offering.
Despite Wall Street’s doubts about the IPO, $25 million was raised by Starbucks. By 2002, Starbucks had opened over 5,000 stores and average three store openings per day. In 2002 Starbucks experienced its 11th consecutive year of 5% or more sales growth. Despite continued sales growth, market research had shown that in the first two years of the 21st century customer expectations of service were not being met. The company had a mystery shopper program which provided evaluations called “Customer Snapshots”.
These were a very important tool in Starbucks’ market research. Christine Day, senior VP of administration in North America, proposed a plan to invest $40 million in the company’s 4500 stores to be used for adding 20 hours of labor for each store. The goal of this investment is to improve customer service. This is based upon the premise that adding hours for employees will allow speed of service to improve. Indirectly this creates some extra time to be used to build rapport with the customer and as an opportunity to strengthen customer intimacy.
The Starbucks brand has always been dependent on customer service at its coffeehouses and was a major component of the coffee experience which Starbucks continuously sought to provide and improve. Value Starbucks had three components to its brand strategy of creating a unique coffee experience. The first component was the coffee itself. The company prided itself on providing the highest quality coffees even if it needed to be imported from remote places in the world. This added value to the coffee and customers were more than willing to pay a little more than for an average cup of coffee.
Service is the second component of Starbucks value strategy. Either by customizing each customers drink just the way they like it or knowing customers by name, Starbucks believed that these were key facets of providing excellent customer service. Chad Ogle MGMT 620 HBS Case 9 The third component of Starbucks value strategy is the atmosphere. One of Starbucks main goals was to create an ambience that meshes with coffee drinking. A social but comfortable setting is what Starbucks was looking to create. This type of setting entices customers to stay and take their time drinking their coffee and also make repeat visits.
Repeat customers make up a great portion of Starbucks sales and it is crucial to maximize the satisfaction of each and every Starbucks customer. Value of a highly satisfied customer As shown by Exhibit 9, when customer satisfaction level increases from satisfied to highly satisfied, the number of customer visits per month increases 67% (from 4. 2 visits/month to 7. 3). Since this is a significant increase, Starbucks is probably very aware that there is a great difference between “satisfied” and “highly satisfied” customers.
Exhibit 9 also shows a greater average ticket size per visit and a greater average customer life. These factors are all very crucial to increased sales to profitability as well. By comparing estimates of sales amounts for the satisfied customer as opposed to sales amounts for the highly satisfied customers it is obvious the level of satisfaction is very influential on sales for Starbucks. Using the statistics from Exhibit 9 , including average number of visits/month, average ticket size, and average customer life, the cumulative sales figure for one satisfied customer is [4. visits/mo) X (12 months) X ($4. 06 avg. ticket size) X (4. 4 customer life years)] $921. 78. Calculating sales amount for the highly satisfied customer using the same method shows an amount of [(7. 2 visits/mo) X (12 months) X ($4. 42 avg. ticket size) X (8. 3 customer life years)] $3,169. 67. The sales figure for the highly satisfied customer is nearly three and a half times as much as the satisfied customer. This is why it is very important for Starbucks to figure out how to provide more customer satisfaction.
The company needs to do research to find out if quality of service has actually declined. There is always the societal perception that a large mega brand is incapable of delivering customer intimacy. This perception is not necessarily a foregone conclusion. It’s just a matter of Starbucks collecting accurate information regarding both quality and quantity of its customer service. The company needs to take a look at itself and determine if its customer service strategy had changed from 1992 to 2002. This is an era indicative of the massive growth.
Starbucks needs to answer the question, “Did we lose our focus on customer service quality by concentrating too much on opening more stores? ”. Chad Ogle MGMT 620 HBS Case 9 According to Exhibit 8, the profile of the customers retained had changed. The brand image was not as strong for the newer customers (first visited in the year prior to date of exhibit) as it was for established customers (First visited more than 5 years prior to data collection). While 51% of established customers agreed that Starbucks is a high-quality brand, only 34% of new customers agreed.
The most significant difference in Exhibit 8 was the discrepancy in perception of price. While 32% of established customers stated that Starbucks coffee was worth paying more for, only 8% of new customers agreed. This statistic indicates that competitors have a better chance to take sales away from Starbucks’ new customers than they do established customers. Since the customers first established 5 or more years ago represents only 23% of its retained customers, the perception that its coffee is overpriced should be very troubling for Starbucks.
Exhibit 11 only accentuated this since 31% (second highest response) of customers surveyed stated that Starbucks need to offer better prices and/or incentive programs. Many competitors, including Dunkin’ Donuts have loyalty programs there are much more rewarding than Starbucks’ loyalty programs. Personal Evaluations I recently visited three different Starbucks locations near my home and evaluated stores on the same four criteria that Starbucks used for its mystery shopper program. The results of the evaluations provided by this program were called Customer Snapshots.
I am creating my own Customer Snapshots of the three locations near my residence. The four components I am evaluating are service, cleanliness, product quality, and speed of service. The store I visited first was located in Michigan City, Indiana. The customer base varied widely as there were twentysomething kids reading books, retirees reading newspapers and professionals drinking their last cup before heading to the office. There was a staff of five “partners”. One barista gave me a friendly welcome while two of the others had an unkempt appearance. Their shirts were very wrinkled and they had messy hair.
As for cleanliness, the floor in the main area was dirty and littered with wrappers. This was more than a mere oversight since I was there when the store first opened. The bathroom was fairly clean but I continued thinking about the dirty floor that had been overlooked the night before and that morning. . There was whipped cream smeared against the dome lid. I stayed and drank my coffee for about twenty minutes. As I read a newspaper and listened to music I was surprised when I heard a commercial during the music. The store was playing music with the stereo tuned to a standard
Chad Ogle MGMT 620 HBS Case 9 FM radio station. I thought back to an earlier point in my Starbucks customer life and remember the store having XM satellite commercial free radio. At that point satellite radio was a real novelty and I thought Starbucks was very hip for having this playing in their store. Being ten or so years later, I was given an impression that Starbucks had somehow taken steps backward. I’m not sure it is reasonable to base this on something as subtle as the music selection being different but it did create a sense of customer dissatisfaction.
The coffee did taste good but presentation a little sloppy. The speed of service was OK but my checkout was slowed down. I went to buy a newspaper and the employees could not scan the paper correctly. I grabbed a paper from a shelf marked “Chicago Sun-Times” but the newspaper was a Post-Tribune ( a northwest Indiana paper). The employee scanned the paper and told me the paper was $1. 00. I looked down at the price and it said $ . 75. The employee ended up giving me the paper for free since he was unable to enter the proper price into the register.
The next store I visited was on Willowcreek Road in Portage, Indiana near an Indiana Toll Road interchange. The few customers in the store at that time appeared to be travelers in their late forties and early fifties. There were four employees at this store. The register partner was friendly but when I asked her what their highest caffeine content coffee was, she had to go ask the manager. I assumed this was information she would have know firsthand. The store was very clean and had a pleasant smelling scent in the air.
I ordered a Mocha Frappucino and it had a weak flavor relative to the bottled Frappucinos I had been buying at gas stations. I told myself that this was not a fair comparison but I was still dissatisfied with the product quality. I did get very quick service and the staff was pleasant and well groomed. The third Starbucks I visited was in Portage, Indiana just off of I-94 near a Bass Pro Shop. The customer base in there was a mixture of outdoorsman waiting for Bass Pro Shop to open and professionals enjoying a cup of coffee before heading to work. There were three employees working at this location.
When I stepped to order I asked which coffee had the highest caffeine content. The employee quickly replied “Our Frappucinos, sir”. I noticed that the staff was the most friendly of the three locations I visited. However, cleanliness of the store was very poor. The floor felt gritty when walking on it and the bathroom had unpleasant odors and a dirty sink. The Frappucino seemed much stronger and better tasting than the one I had at the other location in Portgage the day before. The speed of service was slow but I did take into consideration that there were only three employees at this location.
Chad Ogle MGMT 620 HBS Case 9 After completion of my personal evaluations I noticed that I had a mixture of results between the locations. While one location had quality coffee, quick service and good overall service, it was not clean. The second location was clean with good service, but the product quality was below average. The third store I visited had friendly staff but slow service and unclean floors. The main contributor to the shortcomings at this third store was definitely the small number of staff. Increasing staff would definitely improve this store.
Since the service was excellent there already, this store would grade very well on a Customer Snapshot if one employee was added. In conclusion, upon reading this case, reviewing exhibits, and doing personal evaluations I did get the sense that Starbucks has somehow changed in the past ten years. I trusted this instinct because I actually have been buying Starbucks coffee, either at a grocery store or a gas station continuously but have not visited its coffeehouses very often in the last ten years. With this ten year gap in place I definitely notice a decrease in service quality.
While comparing my recent evaluations to my memory of Starbucks around 2001/2002 I noticed a considerable dropoff. In my visits in 2001/2002 I recalled having visits that always seemed smooth and any bad experiences were very minimal. I don’t remember the stores ever being dirty, the employees were more experienced and knowledgeable, and there was never slow service. It seems to me that Starbucks has lost part of its customer service image which was excellent in past years. I believe that hiring more employees would help bolster customer service since the extra employee can concentrate on a store’s particular weakness.
The company could find the weaknesses of each store and train a new employee with a focus on improving that particular facet. This is “customizing” employees to fit the needs of each individual store. This would be the best method to provide the most value from the new employee to the Starbucks store and collectively to the whole company. It does appear from my analysis that Starbucks, from about 2002 to 2006 (date of the case file) did indeed put expansion goals ahead of maintaining or improving its customer service.