STARBUCKS Delivering Customer Service Steve Malloy Brian Nothacker Bhumik Parikh Heidi Utley

Class Discussion Coffee drinkers? Brew at home vs. buy Regular or occasional drinkers Brew at home vs. buy If buying, where and what type? Brand loyalty? Reasons for or against Customer service

Evolution of Economic Offerings Customization Commodities Goods Services Experiences Commoditization Adapted from J.R. Meredith and S.M. Shafer, Operations Management For MBAs, John Wiley & Sons, Inc, 2007, p. 15.

Starbucks Mission Statement To inspire and nurture the human spirit – one person, one cup, and one neighborhood at a time. Our Coffee Our Partners Our Customers Our Stores Our Neighborhood Our Shareholders

Company Background/History 1971 – First store opened 1982 – Howard Schultz joins company 1983 – Italian espresso bars serve as inspiration. He sees Opportunity to develop similar culture in the US America’s “third place” 1987 – Company sold to HS Immediate expansion-17 total stores

Company Background/History 1992 – Completes IPO (SBUX) and continued expansion (165 total stores) 1993-1995 – Enters into partnerships/alliances with various organizations 1995 – Product innovation Begins serving Frappuccino® blended beverages Begins selling CDs Ice cream

Company Background/History 1996-2000 – Grow, grow, grow! International expansion Acquisitions/Partnerships 3,501 total stores (2000) HS transitions to chief global strategist and Orin Smith named CEO 2002 – Becomes dominant specialty-coffee brand in North America Sales climbed at a CAGR of 40% Served 20M customers in >5000 stores Opened an average of 3 new stores per day Virtually no marketing

Statement of Problem Starbucks must determine whether (and how best) an active investment in customer satisfaction will provide a positive return and increased loyalty.

Starbucks Branding Coffee Service Atmosphere Prided itself on being the highest quality coffee in the world Controlled much of the supply chain and worked directly with growers, custom roasting, and distribution around the world Service Tried to create “customer intimacy” and an “uplifting experience” Repeat customers are bread and butter and creating a personal experience typically creates loyalty Atmosphere “People come for coffee but the ambience makes them stay” Seating areas that encourage lounging in upscale, inviting environment “Universal appeal” building on people’s need to come together

Distribution Locations in North America mostly company owned in high traffic, high visibility areas Sell whole bean coffees, brewed coffees, espresso, cold blended beverages, premium teas. Product mix depends on size and location Some stores offered variety of cold drinks, juices and pastries along with novelties like games and CDs Beverages accounted for 77% of sales Additional “specialty” channels accounted for 15% of net revenue (hotels, licenses, airlines etc, international licenses, grocery stores) Partnership with Kraft Foods for grocery distribution, Pepsi for Frappuccino drinks, Dreyer’s for ice cream. Using all of these avenues to reach customers where they “work, travel, shop, and dine”

Employees = Partners 60,000 partners worldwide, 50,000 in USA Mostly hourly wage employees (baristas) Believe that if partners are happy, customers will be too. Generous policy of health insurance and stock options led to satisfaction rates between 80-90% 47th in Fortune best places to work Low turnover rate (70%, fast food rate > 300%) Believe manager stability is key to decreasing turnover, which increase customer satisfaction (regular customers recognized etc) Company encouraged promotion from within (70% of managers were once baristas etc). All senior managers were trained as baristas before being allowed to assume position in corporate headquarters.

Service Employees trained in “hard skills” (drinks and cash register) as well as “soft skills” such as communication with customers etc “Just Say Yes” policy – allowed employees to go above and beyond in satisfying customer requests Times changing… Product mix and handcrafted specialty drinks making it more difficult to serve customers quickly Customers more worried about speed than chit chat Complexity of beverages reducing speed and making barista’s job more difficult ½ of all customers customized their drinks Company reluctant to hire more baristas because of economy and expense so they began to remove non value add tasks, simplify beverages, and add automated espresso machines

Measuring Service Performance Monthly Status Reports Self-Reported Checklist Mystery Shopper -> “Customer Snapshot” Service Cleanliness Speed Product Quality “Basic Service” versus “Legendary Service” – memorable experience During 2002, scores were increasing across all stores and was considered a reliable measurement

Caffeinating the World Overall objective = Starbucks as the most recognized and respected brand in the world Aggressive growth strategy Retail Expansion Open another 525 retail, 225 licensed stores in North America, eventually expand to 10,000 stores Consumption on the rise, eight states with no stores, believed it was far from saturation Goal of 15,000 international stores Product Innovation Continually launching new products like holiday drinks and blended beverages to increase same store sales and increase traffic Service Innovation Gift Cards Wireless HotSpots

Can You Guess Where This Is?

Forbidden City – Beijing, China

Trouble Brewing Starbucks has a distributed marketing structure Each officer was responsible for their own groups marketing “Marketing is everywhere” Data was taken but not used effectively Starbucks realized this and immediately noticed trends

Brand Differences Trendy Good for a quick drink Convenient Consistent Predictable Intelligent Artsy Inclusive Welcoming to lounging Appeals to youth

Bad Trends on the Rise “Starbucks cares primarily about making money” “Starbucks cares primarily about building more stores”

Evolving Trends in Demographics Loyal Starbucks addicts Average customer

What’s the first thing that enters your mind when somebody says, “Starbucks”?

37% of customers 21% of customers 42% of customers 62% of transactions Are from:

What kind of risk might this data indicate? transactions 27% of transactions 11% of transactions 37% of customers 21% of customers 42% of customers Are from: What kind of risk might this data indicate?

Customer Satisfaction Dips Feelings of: Lack of attentiveness by the Baristas Too much going on in the store Long lines

What Changes to Make? Goal: Lower service time below three- minutes per customer Goal: Maintain a high-standard of friendly customer service Initial Plan Relax labor-hour controls Add 20 hours of labor per store at a cost of $40M

What Changes to Make? Goal: Lower service time below three- minutes per customer Goal: Maintain a high-standard of friendly customer service Initial Plan Relax labor-hour controls Add 20 hours of labor per store at a cost of $40M What would you do with $40M to improve operations at a retail coffee shop?

Alternatives What are the advantages / disadvantages of a order kiosk?

QUESTIONS?