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MGT4057 Services Marketing: Story of the Success of Starbucks

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Students will be provided with a case study on the marketing practices of a service organisation. The assessment requires students to think critically and decide what are the key issues pertaining to the case and how they can best be addressed. It is mandatory for students to submit a completed service diary.

Tasks:

1. What factors accounted for Starbucks' success in the early 1990s and what was so compelling about its value proposition? What brand image did Starbucks develop during this period? 

2. Why have Starbucks' customer satisfaction scores declined? Has the company's service declined or is it simply measuring satisfaction the wrong way? 

3. How has Starbucks al hinged since its early days? 

4. Describe the ideal Starbucks customer from a profitability standpoint. What would it take to ensure that this customer is highly satisfied? How valuable to Starbucks is a highly satisfied customer? 

5. Should Starbucks make the $40 million investment in labor in the stores? What's the goal of this investment? 

Answer:

Introduction 

The story of the success of Starbucks is well known. Starbucks is the famous coffee brand which is popular among the people in every country. Starbucks believes that the satisfaction of the customers is the most important part of the business to stay competitive in the market. So, aim of the company is to target new segments of coffee drinkers. The history of the Starbucks indicates that the company was founded in 1971 by Gerald Baldwin, Ziev Siegl and Gordon Bowker. They opened a small coffee shop in the Seattle’s Pike Place Market. That shop was specialized in selling the Arabica beans to the market of coffee purists (Latif et al, 2014). Further, idea of the founders was to create the chain of the coffeehouse which would become the ‘third place’ of America. At that time, the people had only two places i.e. home and work so; there was the need to develop such place in which they feel comfortable. In the year 2002, Starbucks was established itself as the dominant of coffee brand in the North America. In present time, the company is serving around 20 million customers with the 5,000 stores across the world. Starbucks is opening on average three new stores in a day. This report is based on the case study of Starbucks and serving the customers with its quality of coffee (Boychenko, 2012).

Problem definition 

It can be seen that the Starbucks is the strong brand which is perceived by almost every customer in terms of coffee. But there are some issues in the Starbucks of 2002 as compared to the company in 1992. In 2002, it can be seen that Starbucks has a gap while meeting the expectations of the customers in terms of customer satisfaction and value proposition (Davies & Chun, 2002). By the analysis of gathered market research data, Senior Vice President Christine Day has concluded that the main cause of decline in the customer satisfaction in the Starbucks was the speed of services. So, she suggested the idea to improve the services in time i.e. every order is served now within three minutes. But, because of this solution, company would cost 20 additional labor hours per week i.e. $40 million per year. This is the main problem of the Starbucks business i.e. to improve the speed of service, it is not appropriate to spend $40 million dollar per year. In this report, this problem is analyzed while seeking the alternative approaches to get higher benefits in the market (Allhoff, Parker & Schoenholt, 2011).

1: Starbucks’ success in early 1990


There are many factors responsible for the extra-ordinary success of the Starbucks in early 1990’s. Starbucks has around one-third of the coffee bars in America which is the more than the combination of five biggest competitors all of the locations of the Starbucks in the America are company-owned stores which are located in the high traffic and high visibility setting such as office buildings, retail centers and university campuses. Because of these factors, Starbucks is the most convenient coffee bar among the people. Along with this, Starbucks also provided more depth to the products in the coffee shops. With the selling of whole-bean coffee, the stores also sold Italian –style espresso drinks, rich-brewed coffees, premium teas and cold-blended beverages. The product mix of the company depended on the size of the stores and their locations (Dominous, 2006).

Starbucks always sold the products by non-company operated stores such as airlines, restaurants and hotels. Along with this, Starbucks focused on the joint ventures to distribute the bottled drinking products. These operations allowed the company’s brand to be recognized not only in the stores of the Starbucks but also in the other channels as well as improving the brand awareness of the company. Starbucks had worked very hard to develop and expand the number of the stores with the services and products innovation (Caceres & Paparoidamis, 2007). For this manner, new products were launched on the daily basis such as new and hot beverages in every holiday season. Further, the store value card (SVC) were also launched which led to reduced transaction times. Because of the brand quality and various innovations, Starbucks was able to achieve to gain extra-ordinary success in the market (Seaford, Culp & Brooks, 2012).

Value proposition-

Value proposition of the Starbucks includes three components. The strategy was formulated by providing ‘live coffee’ by the company. This phrase reflected the importance of the national culture that should be alive in the coffee. In terms of retail business, it means of creating a good experience for the customers who want to include into their daily lives. As mentioned above, there are three components in the branding strategy of the Starbucks. The first component of Starbucks is simply the coffee. Starbucks provided high quality to the customers and controlled the supply chain in its business. The company worked directly with the coffee growers to purchase the green coffee beans from them. The company controlled its distribution to the retail stores in all over the world (Davies & Chun, 2002). Further, second component was effective service which can also be said ‘customer intimacy’. The service included very simple things such as remembering someone’s drink ordered by him or his name. Further, third and most important component of the Starbucks was atmosphere of the stores. Starbucks revealed that customers came in the stores for the coffee but they continued there for the ambiance. So, it is very vital to offer an effective and relaxed environment to the customers which allowed the sense of community. All these things led to the value proposition in the Starbucks (Dimitriades, 2006).

Brand image-

The brand image developed by Starbucks during that time was not best. Starbucks was popular for being available, being trendy and its special coffee for the customers. The clan stores and the satisfactory products also attract the customers to come in the Starbucks stores. But, the market research team analyzed that the brand image of the Starbucks was declining. There were number of respondents who agreed with the statement that the Starbucks was focused about making money. Apart from this, there were some people who were agreed that Starbucks was focused about building more stores. Overall, the brand image of Starbucks was becoming more about the growth and success plans of the company rather than the value which the company wanted to provide its customers (Martenson, 2007).

Employee satisfaction and customer satisfaction-

At that time, the score of customer satisfaction in the Starbucks began to decline. Although Starbucks was good in presence and convenience but the rate of the customers satisfaction was decreasing. The reason was that there was little product differentiation Starbucks and the other coffee chains. The brand image of the Starbucks also had rough frame. There were many customers who agreed with the fact that Starbucks focused only on building more money and making more money. Despite of having high customer snapshot score, Starbucks faced decline in the customer satisfaction scores. It is observed that there was a service gap between the customer satisfaction and key attributes if the Starbucks. But, the overall service of the company has not declined yet (Brown & Lam, 2008).

Decline in customer satisfaction 

Despite of the good presence and the convenience, the customer satisfaction score of the Starbucks began to decline. It is observed that the customer satisfaction of Starbucks is declining. Reason of declining satisfaction level is that the company is more concerned about making money with the quick expansion rather than focusing on the demands of the customers. This had made the company lose track of the customer satisfaction along with delivering the strong customer intimacy which was believed by the customers. The services for the customers had declined due to the wrong market research done by the company. This was the reason of declining satisfaction among the customers because company did not get what the customers want and demand (Bennett & Rundle-Thiele, 2002).   Along with this, there has been the issue with the speed of service delivery. According to Collis and Montgomery (2008), the services and operations of the company are determined by the views and satisfaction level of the customers which they derive from the company.

Figure 1: Key attributes in customer satisfaction

The satisfaction level of the customers in Starbucks can be analyzed by the given case. In the exhibit 10, it can be observed that the customer satisfaction depends upon the key attributes of the company. The exhibit reveals the significance of key traits in the customer satisfaction during 2002. Based on this information it can be said that the store cleanness is the most important attribute. Consumers put the store freshness as the most crucial factor in the store of the Starbucks. Further, there are some more attributes which was selected by the customers. Those attributes are friendly staff, valuable customers, fast services, right prices and the taste of the coffee. Further, more selection was based on new beverages, whole bean selection and selection of merchandise. So, it can be seen clearly that fast customer service is not the most crucial attribute for the customers of Starbucks (Darroch, 2014). The values in the given exhibit represent the percentage of the customers which revel that the main cause of the dissatisfaction is connected with the list of the category. In the case of Starbucks, there were 73% of the customers who responded that friendly staff is the most important factor in improving the level of customer satisfaction. Customers responded that he or she would be more satisfied if the expectations in the specified category were met (Wu, 2011).

Declined in customer satisfaction or measuring satisfaction wring way:

The services of the company have not declined totally. The customers are happy with the atmosphere, product quality and cleanliness of the Starbucks. But the wait time is continuously increasing and this is the main problem of the company. At this point, satisfaction began to decline. Basically, customer satisfaction varies on the different type of the customers. Starbucks is focused on measuring how the customers view the company along with making more money. Customers are satisfied with each element of the Starbucks experience but there are some factors i.e. Starbucks’ stores and its employees. The employees of the company had done an excellent job to attract the customers. Having the drive-thru service, Starbucks had made positive impact on the target customers. The highly customer satisfaction were based on the valuable customer and friendly staff (Bloemer & Odekerken-Schroder, 2002).

Starbucks change since early days

Having core vision and values, to provide quality coffee atmosphere and the best services, Starbucks has achieved huge success since it was established 30 years ago. The company is doing very well for last 11 years having increment of 55 or more in terms of store sales even in the time of recession. However, the recent research conducted on the Starbucks revealed that there is the problem in the company regarding meeting the expectations of the customers. To improve the satisfaction level of the customers, it is important to understand the needs and requirements of the customers. It is well known that Starbucks has implemented many changes in its business from 1990 to 2002. The change of Starbucks since its early days can be analyzed by the exhibit 2 and exhibit 8 given in the case study.

Figure 2: Starbucks growth rate

In exhibit 2, the growth of the Starbucks can be seen easily. Exhibit 2 reveals the growth of Starbucks during the period of five years from 1998 to 2002. It can be seen that company had experienced financially and geographically growth. At that period, net income and the stores across the world were almost tripled. It is very important for the Starbucks to adopt the drinking style of the customers with the change of the time because the main market of the Starbucks is the unique coffee.The exhibit 8 in the given case study provides customer retention information. By this data it can be founded that there is the quite difference between the established customers and new customers in terms of income, education, and attitude towards the work. According to the exhibit 8, the customers who visited to the stores of the Starbucks five years ago have higher level of education with the higher income intensity. Apart from this, the new customers in the Starbucks do not see the company as the brand of high value. On the other hand, established customers see it to be the brand on which they trust and which offer high quality products. So, it can be seen clearly that the Starbucks has been changed since its early days in terms of atmosphere, quality products and the customer satisfaction (Gupta, Sahi & Chahal, 2013).

4: Starbucks customers from profitability standpoint

There is no surprise that lower prices are not one of the values of Starbucks hat lead the success of the company. The Starbucks is mainly focused on the customer satisfaction, values and the atmosphere of the stores but there was little room for the low prices. The higher prices of the coffee in the Starbucks were not an issue during the year of 1990 but the customer base is speedily growing. The customers are changing away by the established high-income business-women who have more throwaway income for high quality coffee. The customers of Starbucks tends to be ‘younger, less well-educated and in the lower income bracket’ during the late 1990’s and early 2000’s. A larger number of Hispanic and Cuban-Americans became the customers of Starbucks by which the customer base of the company grew.

By the exhibit 9 in the given case, the analysis of satisfied customers can be done easily. The ideal customers of the Starbucks would be those customers who visit to the Starbucks store at least eight times in a month. The conducted research reveals that customers in this bracket visit more than eight times in a month including the number of visits per month averaging eighteen. Because of these kinds of customers, Starbucks is able to make up 62% of transactions. If the visit of the number of customers increased, sales would also increase immensely. Research also reveals that the customers who visit to the stores only one to two times per month are able to generate around 11% of Starbucks’ transactions. So, Starbucks should keep focus on attracting and bringing the current customers more often. While targeting the customers by the geographical location, it does not matter that from where the customers are targeted i.e. rural and urban areas. Both the markets present same customer patterns (Olsen & Johnson, 2003).

Ensuring customers’ satisfaction:

To ensure the high satisfaction of the customers with the each and every element of the Starbucks’ experience, there are some key factors. Those key factors are aside from the coffee of the company and its stores and the employees. By the survey of Starbucks done in the 2002, number one factor of the company was a clean store which led the customers’ satisfaction with 83%. If the stores of the company look clean including high hygiene grade then it is obvious that the customer will be assured about the consumption of the product and its clean environment (Dietz, Pugh & Wiley 2004). Further, next factor is the convenience which is most important for the customer satisfaction with 77%. Starbucks had done an outstanding job with saturating the market. The locations of Starbucks are on the normal traffic routes which are loved by the customers as they do not need to drive out of the way for a cup of coffee. With the drive-thru services, Starbucks is able to make a positive impact on the customers in terms of convenience factor. At last, the other factors which considered fir the high customer satisfaction were valuable customers with 75% and friendly staff with 73%.

Highly satisfied customers are valuable:

Developing customer loyalty had proved is the cause of bulk of transaction of Starbucks as the highly satisfied customers are the most of loyal customers for the company. It is important for the Starbucks to maintain the level of customer satisfaction to keep the customers loyal for the company and its products (Bowen & Shoemaker, 2003). Without averaging eighteen visits of the customers in a month and 21% of the customers, Starbucks would lose around 62% of its total transactions. The company has realized that the highly satisfied customers have the average ticket price of $4.42 so a satisfied customer needs only to spend on average $4.06. It means, having a satisfied customer is most valuable for the Starbucks and its sales of coffee (Simon, 2009).

5: Starbucks Investment 

It is a complicated answer whether or not Starbucks should invest $40 million into the labors of the store. First of all, there is the need to examine by the company that how much the company is willing to spend the money for achieving the goal of customer satisfaction. As described in the case study, Howard Schultz and Orin Smith have to make the biggest decision that how much they want to impact the bottom line of the business. It is risky to go the whole way with the labors. There can be another option which is recommended by this report. The option is that company can implement more labor but testing out the impacts in some urban stores across the world. If the company gets desired results by the increased labor than Starbucks can add more labor slowly in each and every stores. If the cost is increasing the profit then it would b e easier to cut back (Geereddy, 2015).

Goal of the investment:

The main goal of this investment is to improve the level of customer satisfaction while the company is trying to generate more profit in the market. a survey was conducted on Starbucks in 2002 which revealed that 65% of the customers wanted faster services. Customers would leave the stores if they had to wait for the coffee and other services. If the Starbucks can cut the service time, then it will be able to serve more and more customers.

To fix this situation, there are some points which must be focused by the company. First of all, investing $40 million per year to increase labor hour per store is not the best way to fix the problem of Starbucks. By the exhibits given in the case, it can be seen that there are some more crucial issues for the customers than fast delivery services. Company can solve the situation without doing any complex changes i.e. adding 20 hours of work in a week in each store. Further, the customers of the Starbucks are connected with the company due to its unique style and quality products. By speeding up the services, company can increase the market share but this is not the crucial issue faced by Starbucks (Bowman & Ambrosini, 2000).

Further, company could lower the prices for the coffee and other products. By this, company will be able to attract more new customers. But change of lowering the price will be the cause of more variable costs and fixed costs to gain the same revenue. It means, net profit will be lower with the same amount of revenue (Cravens & Piercy, 2013). Next alternative is that Starbucks would increase the prices of the products to earn more money to increase the quality of the customer services. This alternative could work but according to the given case, customers have the assumption that Starbucks is more focused on building new stores and making more money. So, by increasing prices of the products, Starbucks will lose more customers who think so. In the time of competition, this alternative will not be suitable and appropriate for the Starbucks (Page, 2007).

Last alternative is that Starbucks should set up the strategic marketing team. By this, Starbucks will be able to get proactive feedback of the customer satisfaction and will improve faster. It is also recommended that Starbucks should keep consistency in the drinks and improve the productivity. For this manner, savings should be used in free cup after customer visit. Company can invest more money in the automated espresso machines which will be helpful in improving the speed of the service in Starbucks (Markides, 2008).

Conclusion 

In the part of conclusion, it is recommended that Starbucks should use the last alter native to increase the level of customer satisfaction. Although it is the complex alternative and it will need lots of work from the members of the company but by adopting this alternative, Starbucks will be able to improve the customer service and make the customers friendlier. Company should create the strategic marketing team which will be helpful for the company to keep in touch with the customers. From the above discussion, it is observed that Starbucks is doing very well in the market with the marketing strategy. It can be seen that the company has been little late in identifying the demands of the customers. So, marketing team will be helpful for the company to keep the distance to the competitors. Further, Starbucks should invest in the espresso machines. By this investment, company will get better solution in improving the speed of the services. After that company can add more workforces or change the prices of the products.

References 

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