Marketing-II

Case Analysis Starbucks

Section-F
Group-10 Avantika Garg Amritansh Gupta F Muhammad Hashim M Prasanna Kumar Prateek Bansal Ruchika Chaudhary Varun Singh Bothiyal

Starbucks Case analysis

EXECUTIVE SUMMARY:
Starbucks is an international coffee and coffeehouse chain based in Seattle, Washington. Started as a small shop specializing in selling whole Arabica coffee beans to a niche market of coffee purist, Starbucks rose to dominate the specialty-coffee brand market in North America in the year 2002. Sales grew at a CAGR of 40% and the net earnings rose at a CAGR of 50% in 2002. The company served 20 million unique customers in over 500 stores around the globe. In fact Starbucks was opening on an average 3 stores every day. The stores sold Whole beans and premium-priced coffee beverages by the cup and catered primarily to the affluent, well educated, white collar patrons especially women in the age group of 25 to 44. Starbucks relied on product innovation and excellent service as the major forte for its operations. Starbucks stores offered rich-brewed coffees, Italian-style espresso drinks, cold-blended beverages and premium teas. The Starbucks value proposition was as follows Quality Starbucks offered the Highest-quality coffee in the world and sourced it from the Africa, Central and South America, and Asia-Pacific region. Starbucks controlled the supply chain as much as possible so as to ensure standards and quality. Service Starbucks believed in Customer Intimacy which aimed at creating a rich experience for the customer through service and product. Atmosphere Starbucks provided an ambience with lounging and layout that were designed to provide an upscale yet inviting environment to its customers.

Distribution Channels:
Starbucks had company operated stores located in high-traffic, high-visibility settings such as retail centers, office buildings and university campuses. Product mix tended to vary depending on a stores size and location. Starbucks also sold coffee products through Non-Company-operated retail channels (Specialty Operations) 15% net revenues. These included the North American food-service accounts. 18% came from domestic retail stores licenses such as in airports. 55% of the specialty revenues came from international stores, grocery stores and warehouse clubs. Starbucks also had a joint venture with

Pepsi-cola to distribute bottled Frappuccino and Dreyers Grand Ice Cream to develop and distribute a line of premium ice creams.

Starbucks Partners:
All employees in Starbucks are called partners. There were 60000 partners worldwide with 50000 in North America. Most were hourly-wage employees called Baristas. Most of the employees were between 17 and 23 years of age. Starbucks took care of its employees through Health Insurance and Stock options. Thus employee turnover rate was lowest at Starbucks with only 70% turnover when compared to the industry average of 300%. Starbucks encouraged promotion within its own ranks where 70% of the store managers were ex-baristas and 60% of its district managers were ex-store managers. A new partner was given two types of training 1. Hard Skills Training such as how to use the cash register and learning how to mix drinks 2. Soft Skills The employees were trained as to how to connect with the customers. They were expected to welcome the customers to the stores, establish eye contact with the customers, smile and try to remember the names and orders if the customers were regulars.

SITUATION ANALYSIS Competition analysis

Starbucks competed against the variety of small scale specialty coffee chains, most of which were regionally concentrated. Each one tried to differentiate from Starbucks in different ways. Minneapolis-based Caribou Coffee, which operated more than 200 stores in nine states tried to differentiate through store environment. California based Peets Coffee & Tea, which operated about 70 stores in five states tried to build super premium brand by offering freshest coffee on the market. Starbucks also competed against the specialty coffee shops which offered wide range of food and beverages. Another competitor of Starbucks is Dunkin Donuts which operated over 3700 stores in 38 states. In recent years Dunkin started flavored coffee and tea. Starbucks also competed against donut and bagel chains such as Dunkin Donuts, which operated over 3700 stores in 38 states.

Market analysis
Coffee consumption is rising in the United States and more than 109 million people are drinking coffee every day. Specialty coffee is having the biggest growth potential. There are still eight states to be covered in the US itself. In North America, Specialty coffee was estimated to be $3.2 billion business and star bucks was estimated to have 4% share Starbucks had a share of 5% in the food-service channels (estimated $5 billion), a share of 7.3 % in the ground-coffee category and 21.7% in whole-beans category. It was estimated that one-third of all U.S. coffee consumption took place outside of the home, in places such as offices, restaurants, and coffee shops. The company believed it was far from reaching saturation levels in many existing markets. Only seven stated had more than 100 Starbucks locations. Starbucks owned close to one-third of Americas coffee bars, more than its next five biggest competitors combined.

Customer Analysis

According to customer snapshot scores, Starbucks service is one of the best in the industry with constant increase in quality and cleanliness. The serving time also is decreasing over a period of time and standing little over 3 minutes. The customer base for Starbucks is changing younger and less well educated, and in a lower income bracket than Starbucks more established customers. Their visit frequency and the perception about the brand are completely different from the established customers as we can see from the Starbucks customer retention survey. Also more revenue comes from the highly satisfied customer who visits the store more number for times then a typical customer. But usually a typical customer visit to Starbucks is not as high as Starbucks expected.

SERVICE PERFORMANCE MEASURES

Starbucks tracked service performance through a variety of metrics, including monthly status reports and self-reported checklists. They used a measurement tool called Customer Snapshot in which every

store was visited by an anonymous mystery shopper three times a quarter. The measures used to evaluate a store (Basic Service) were Service Includes greeting of customers and making them feel at home and making eye contact with customer Cleanliness Cleanliness of the stores, counters, tables and restrooms Product Quality Accurate filling of order, temperature of the drink and its consistency Speed of Service How quickly the drink was delivered to the customer Depending on the Basic Service, the stores were also rated on Legendary Service which was defined as the behavior that created a memorable experience for a customer which inspired a customer to return often and tell a friend.

PROBLEMS
1. Customer satisfaction is decreasing and Starbucks is losing the customer loyalty. 2. Market research team found that people are having the image about Starbucks is more focusing on money making and store expansion. The perception of Starbucks Brand Image in the Recent Findings of peoples experiences: Starbucks cares primarily about making money - from 54% to 61% Starbucks cares about building more stores - from 48% to 55% 3. Customer Snapshot score not showing reality. There is service gap between Starbucks scores on key attributes and customer expectation.

4. Customer base is changing from the affluent, more educated to less well educated and in lower
income group

PROPOSITION
Starbucks should go ahead with the plan to add 20 hours of additional labor hours per week per store based on the below calculations of expected benefits of adding extra labor hours: 1. Assuming the same sale ratio as per exhibit 3, by increasing the labor hours, profits can increase by $16.6 million, which means approximately 40% of the additional labor cost would be recovered just by maintain the current sales per labor hour.

1 2 3 4 5 6 7

Average hourly rate Total labor hour per week Average weekly store volume Average Ticket Average daily customer count, per store Additional hours per week Additional Revenue per store per week because of increase in additional labor (3/2*6) Additional Revenue per store per annum (7*52) Additional Revenue for the company (8*4500) Increase in Net Income (@ 8.32% of Revenue)

$9.00 360 $15,400.00 $ 3.85 570 20

$855.56 $44,488.89 $200,200,000 $16,656,640

8 9 10

Analyzing why it is necessary to increase satisfaction level Unsatisfied Customer Number of Starbucks Visits/Month Average Ticket Size/Visit Average Customer Life (Yrs) Total Revenue per customer throughout life Percentage Increase in Revenue 3.9 3.88 1.1 199.74 Satisfied Customer Highly Satisfied Customer 4.3 7.2 4.06 $ 4.42 4.4 8.3 $ 3,169.67 244%

$ NA

921.78 361%

Analysis of Exhibit 9 tells us, as a customer moves from Unsatisfied to Satisfied Category, the total revenue generated per customer increase by 360% and 244% when customer moves from Satisfied to Highly Satisfied Customer. Therefore, in long term the deficit cost of 24 million will be recovered and will also generate additional revenue and increased Customer Satisfaction.