INDIAN INSTITUTE OF PLANTATION MANAGEMENT BENGALURU

(An Autonomous Organization of the Ministry of Commerce and Industry, GoI)

PGDM-ABPM 2021-23 Trimester – I

Course: STATISTICS FOR MANAGEMENT

Topic: Case Analysis 1: Starbucks

Submitted to:

Dr. Ganesh Kumar C,

Assistant Professor,

Decisions Sciences& Operations Management,

IIPMB
 1. What factors accounted for the extra-ordinary success of Starbucks in the early
1990s? What was so compelling about the Starbucks value proposition? What brand
image did Starbucks develop during this period?

Factors accounted for success of Starbucks:

Many factors accounted for the extra-ordinary success of Starbucks in the early 1990’s.
Starbucks owns nearly one-third of America’s coffee bars, which is more than its next five
biggest competitors combined. Almost all of Starbucks’ locations in North America are
company-owned stores located in high-traffic, high-visibility settings such as retail centres,
office buildings, and university campuses. This made Starbucks a very convenient coffee bar
because of the many different locations. Starbucks also worked to add more depth to their
product in the coffee shops. In addition to selling whole-bean coffees, these stores sold rich-
brewed coffees, Italian-style espresso drinks, cold-blended beverages, and premium teas.
Product mixes vary depending on the stores size and location; however, most stores offer a
variety of pastries, sodas, juices, coffee-related accessories and equipment, CDs, games, and
seasonal novelty items. Starbucks also sold products through non-company-operated retail
stores such as hotels, airlines, and restaurants. Starbucks worked very hard to expand the
number of retail stores as well as product innovations and service innovations. New products
were launched on a regular basis, such as one new hot beverage every holiday season. The
store-value card (SVC) was also introduced which led to reduced transaction times. Due to
the innovations and brand equity Starbucks had built Starbucks was able to achieve extra-
ordinary success.

The value proposition of Starbucks

The value proposition of Starbucks focused on a brand strategy that was comprised of three
components. The brand strategy was best captured by the phrase “live coffee.” This phrase
reflected the importance of keeping the national coffee culture alive. From a retail
perspective, this meant creating an “experience” that people would want to incorporate into
their everyday lives. There were also three components to the branding strategy. The first
component was simply the coffee. Starbucks offered the highest-quality coffee in the world
and controlled much of the supply chain as possible to help insure that. Starbucks worked
directly with growers to purchase green coffee beans, it oversaw the custom-roasting process,
and it controlled distribution to retail stores around the world. The second brand component
was service, or what was also referred to as “customer intimacy.” This included simple things
such as remembering someone’s name or drink order. The third brand component was
atmosphere. Starbucks stated that people came for the coffee but stayed for the atmosphere.
Therefore, it was important to provide a comfortable atmosphere that allowed a sense of
community. All of these things combined led to a compelling value proposition.

Brand image developed by Starbucks

The brand image that Starbucks developed during this period was not necessarily the best.
Starbucks was known for being widely available, their gourmet/specialty coffee, and being
trendy. Customers also though that the stores were clean and overall satisfied with the
Starbucks product. However, the market research team discovered that Starbucks’ brand
image was declining. The number of respondents that agreed with the statement, “Starbucks
cares primarily about making money,” was up from 53%to 61%. The number of respondents
that agreed with the statement, “Starbucks cares primarily about building more stores,” was
up from 48% to 55%. Starbucks brand image was becoming more about the growth plans of
Starbucks rather than the value they wanted to provide to their customers.

2. Why have Starbucks customer satisfaction scores declined? Has the company’s
service declined, or is it simply measuring satisfaction the wrong way?
Starbuck’s customer satisfaction score declined due to some factors like

• Diluted brand image: Consumer belief that Starbucks primarily concerned about money and
store availability rather than customer satisfaction.

• Perceived difference of image and product differentiation compared to independent coffee

shops was less, hence paying a premium price for Starbucks was questionable.

• Considered to be less trendy

• Speed of service was not satisfactory

 Customers Atti tudes
60%
60% 51% 50% 44% 45% 44%
34% 40% 41%
40% 30% 32% 31% 31% 26% 25%
15% 20%
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New customers Old customers

• Lack of hard and soft skills

Declined company’s service or measuring satisfaction in wrong way: The overall

company service was not declined necessarily. Overall customers are pleased with product
quality, cleanliness and atmosphere. However, waiting time is increased. This was the main
problem if someone wants to go for the Starbucks for first time, they will go for experience
only and many people get their coffee and are out of door this is the place where satisfaction
has begun to decline. Due to dramatic expansion of customer base, Starbucks now has to
serve customer that were not original part of the target market whose expectations and
behaviours are different and there is impact on both sides. Original target customer gaze at
long menu starts a friendly conservation with barista and requested customized beverage
while the new customer complain about the service slowing down during rush hours times.

3. How does the Starbucks of 2002 differ from the Starbucks of 1992?

      The Starbucks of 1992 was obviously still in the beginning stages of establishing
themselves as a prestigious company.  However, by 1992, Starbucks acquired 140 stores and
were contending against other coffee brands.  The kind of customer Starbucks attracted
during this time was white-collar business-type individuals, who were always on the go.  The
Starbucks business was booming and continued to grow.  Also, during 1992, people just
wanted coffee instead personalized orders.  This made it easier for partners to communicate
with customers and understand the customer on a personal level.  So, Starbucks decided to go
public and make the coffee brand accessible to varieties of people.  Businessmen tried to talk
Howard Schultz out of the idea but nevertheless the company became a huge success. The
Starbucks of 2002 became trendy because of the companying becoming public over the
years.  The company began serving 20 million diverse customers in over 5,000 stores. 
          The Starbucks brand was known in North America primarily by word-of-mouth. 
Starbucks saw an increase of 40 percent of the compound annual growth rate and net profits
of 50 percent.  Starbucks was also opening more stores each day.  So, their partners had to
work more hours per week in order to serve the growing number of customers.  Eventually,
the minimum wage partners received benefits such as health insurance.  Younger, middle
class adults became attracted to the Starbucks brand.  Starbucks added a variety of beverages
and foods to there menu and the prices of these goods began to increase over the years. 
Starbucks also made it easier to the beverages by using mechanized equipment.  However,
the prominent difference between the Starbucks of 1992 and the Starbucks of 2002 is the
customer satisfaction.  The Starbucks of 2002 is different from the Starbucks of 1992 because
the company has grown so much and so quickly that the company has lost sight of the
customer. 
 4. Describe the ideal Starbucks customer from a profitability standpoint. What
would it take to ensure that this customer is highly satisfied? How valuable is a
highly satisfied customer to Starbucks?
Ideal Starbucks customer:

It is no surprise that lower prices are not one of Starbuck’s values that lead to its success.
With this Starbuck’s concentrating mainly on value, customer satisfaction, and atmosphere,
there was little room for low prices. The ideal Starbuck’s customer would be the customer
that visits a Starbuck’s at least eight times a month.

Also, the highly satisfied customer will be the one who will be highly spent $4.42 per visit.
The highly satisfied customer will have a customer life of 8.3 years.

Customer high satisfaction:

1. A clean store was the number one factor leading to customer satisfaction, with 83%. If a
store appears to be cleaned and had a high sanitation grade, customers will be assured that
what they are consuming has been made from and kept in a clean environment.

2. Convenience is the next factor leading to customer satisfaction, with 77%. Starbuck’s has
done an excellent job with saturating the market.

3. Other factors that ranked highly for customer satisfaction were being treated as a valuable
customer (75%) and friendly staff (73%).

Value of a highly satisfied customer to Starbucks:

Unsatisfied Satisfied Highly

Customer Customer Satisfied
Customer

Number of Starbucks Visits/Month 3.9 4.3 7.2

Average Ticket Size/Visit $3.88 $4.06 $4.42
Average Customer Life (Years) 1.1 4.4 8.3
revenue generated per month $15.13 $17.46 $31.82
revenue generated per year $181.58 $209.50 $381.89
revenue generated over average
$199.74 $921.78 $3,169.67
 customer life

The total lifetime value of a highly satisfied customer is around $ 3170 while that of satisfied
customer is around $ 922 and unsatisfied customer is around $ 200

Thus, the difference of lifetime value between highly satisfied and satisfied customer is:

$(3170-922) = $ 2248

Also, the difference of lifetime value of highly satisfied and unsatisfied customer is:

$ (3170-200) = $ 2970

Thus, it is of utmost importance for Starbucks to raise its customer satisfaction scores.

5. Should Starbucks make the $40 million investment in labor in the stores? What
is the goal of this investment? Is it possible for a mega brand to deliver customer
intimacy?

Whether or not Starbucks should invest $40 million into labour in their stores has a more
complicated answer than a simple yes or no. Starbucks needs to examine how much they are
willing to spend to reach their goal of customer intimacy. As stated in the case study, the
biggest decision Howard Schultz and Orin Smith have to make is how much they want to
impact their bottom line. Going the whole way with the labour is very risky. I would
recommend another option. This option would propose implementing more labour, but
testing out the effects in certain urban stores worldwide. If the increased labour has the
desired effect, then Starbucks can slowly add the extra labour to every store. However, if the
cost is the exceeding the profit, then it would easier to cut back.

Goal of $40 million investment:

The goal of this potential investment is to increase customer satisfaction while attempting to
generate more profit. This is from a survey Starbucks conducted in 2002 that stated 65% of
customers wanted faster service (exhibit 10 in the case study). Starbucks found customers
would leave the store if they had to wait for the coffee, and if they can cut service time then
more customers would be served.

Possibility of Starbucks to deliver customer intimacy:

Starbucks trains their employees in two different directions. One direction is learning the
procedures to making all the different drinks, learning and working the register, and so far.
The other training is in customer satisfaction and creating customer intimacy. Starbucks
wants their employees to remember the loyal or frequent customers’ names and orders, have
conversations with customers, etc. They want those customers to feel special and welcome
when they enter the store. Starbucks believes if they are able to create customer intimacy then
they can keep those customers and increase their sales. However, in today’s time creating
customer intimacy is harder than ever, especially in Starbucks. I believe a mega brand can
create it, but it would have to be in the right atmosphere. The atmosphere that would probably
work best for customer intimacy is stores that cater to the upper class. They have a more
consistent customer base, they have the ability to have personal interaction or relationships,
and just by percentages in one city or town there is only going to be so many from the elite
circle that can shop in that category. It is still difficult to create it, but those upper crust stores
would have more of a shot than a store like Belk’s where there are all sorts of customers.