Starbucks Case Analysis

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I. Market Research Reveals a Service Gap at Starbucks Retail Stores In 2002, Starbucks was a high-growth company, successfully implementing ambitious retail expansion and product innovation in spite of the economic downturn. However, despite uninterrupted growth, recent market research suggested that everything was not going according to plan for the company. Starbucks built its empire on a foundation of customer service, but data collected in 2002 suggested that its consumer base did not feel a high level of satisfaction at Starbucks stores. Christine Day, a Starbucks senior VP, was concerned by data which showed that service performance in their retail stores was not meeting customer expectations. Specifically, Day believed that speed of service was a key factor in customer satisfaction and proposed a $40M investment in labor hours to serve customers with-in three minutes (from back of the line to drink in hand). Most importantly, the market research findings called into question one of Starbucks key value propositions – service or “customer intimacy”. Without a cohesive marketing department, Starbucks overlooked an alarming “service gap” – customer satisfaction did not reflect the brand strategy Starbucks believed they were executing. It is clear that improving customer satisfaction at Starbucks retail stores is a critical issue and closely tied to maintaining the company’s brand strategy. Day’s attention to market research was relevant to keep loyal customers coming back and timely for acquiring new customers. Our objective was to understand the impact of investments that improve customer satisfaction on Starbucks bottom line. Key assumptions and calculations are explained below.

II. Day’s Proposal
After careful deliberation, we’ve concluded that the $40 million investment under Ms. Day’s proposed plan is not advisable. We support making an investment designed to improve customer satisfaction in general, but not under the terms of the stated plan. Our analytical framework started with a segmentation of the two customer bases, as outlined in the table below:

New customersEstablished customers
First visit0-1 years ago5+ years ago
% of customers27%23%
number of visits(monthly)(1)3.97.2
Average ticket per visit(1)$3.90$4.40
Annual revenue per customer$182$382
# of Customers Visits(2)252,780,750215,331,750
# of Unique Customers (3)5,401,2982,492,266
Note: (1) Number of ‘Newer customers’ refers to ‘Unsatisfied customer’ in exhibit 9 and number of ‘Established customers’ refers to ‘Highly satisfied customers’ in exhibit 9 (2) Derived from total number of customers in 2002 (daily customers per store*number of store*365) (3) # of customers visits / (monthly visit * 12)

We focused on two customer segments, representing what we believe are the quintessential “new” and “established” customers. Our new customers first visited Starbucks in the past year, and represent 27% of our customer base. Our established customers first visited Starbucks 5 or more years ago, and represent 23% of our customers. We believe that the $40 million investment would have a positive effect on the new customers overall, but based on our analysis of this customer segment’s preferences, particularly the fact that they are price sensitive, we are assuming only a 0.5% increase in annual customer visits from this group. Additionally, we have assumed that the investment strategy will backfire for the established customers, who we believe may feel rushed and a reduced sense of intimacy as a result of the increased emphasis on reduced wait time. Accordingly, we have assumed a 0.3% decrease in annual customer visits for this customer segment based on the investment. New customers generated only $182 in annual revenue for Starbucks, while the established customers generated $382, so the loss of an established customer has a greater negative effect than the addition of a new customer has a positive one. The following table outlines...
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