What should Starbucks do to better survive and prosper?

University Degree Business and Administrative studies

Marketing 221/222 Dr Peter Lenney January 2007

What should Starbucks do to ‘better survive and prosper’?

Coffee has always played an integral role in western culture, from the establishment of international trade, to the espresso bars of modern society. Initially only consumed by the upper echelons of society, coffee was perceived as a luxury and only consumed within specialist coffee bars hidden in the shadows of western society. One of the lead organisations that brought coffee out of the shadows and into the limelight was Starbuck’s during the late twentieth century. Ever since that day, Starbuck’s has evolved to be a household name and has transformed the commodity of coffee from a luxury into an upscale cultural phenomenon.

In 1992, Starbucks had 140 stores in the northwest and Chicago, with all outlets operated centrally. It sold a variety of whole beans and premium-priced coffee by the cup. The general demographic attracted were well educated, affluent, white collar and predominantly young to middle aged females. Ten years later Starbucks has evolved into a commercial monster pulling in net revenues of over $3bn for the financial year ending April 2002. Originally being a relatively small organisation, Starbucks is now a huge coffee chain with 125,000 employees as of November 2006 with 12,440 stores worldwide.

The change in the Starbucks business has been considerable since 1992. Originally half of stores revenue came from the sales of whole beans. Now, the product mix has become much more varied. 77% of products sold are coffee beverages, followed by 13% as food and finally leaving only 10% for whole beans and accessories such as thermos mugs. 15% of all revenues now come from speciality operations such as acting as a supplier to hotels, airlines, restaurants, grocery stores and even selling online.

Starbucks have 3 business aims; to provide the best quality coffee in the world, offer service second to none and finally provide customers with an atmosphere that they enjoy. They have made many changes to the core company in order to achieve these aims, with a strong emphasis placed on employees: “partner satisfaction leads to customer satisfaction”. As a result of this, a lot of money is spent on rigorous training for the first few months of an employee’s career providing them with both hard skills, such as learning to use a till and making drinks, and soft skills, such as how to provide excellent customer service.

With an ever changing world Starbucks has had to adapt to alterations in the market in which they operate. Problems derived from overly high barista workload are difficult to resolve due to economic downturn, also the prospects for other firms to make profit from the coffee industry has attracted more competition towards Starbucks. The number of small specialist and large regional firms grew a lot in the 10 years since 1992, each attempting to differentiate themselves from Starbucks by offering super-premium coffee or different atmospheres for the customers to enjoy. As a result of the aggressive growth strategies implemented, Starbucks skyrocketed to owning nearly one third of America’s coffee bars. Starbucks had kept competitive during the decade by providing new innovative product and constructing large volumes of outlets throughout the country.

Along with the changing economic climate, there has also been a big shift in the type of demographic attracted to Starbucks. We must then ask the question: Are Starbucks providing what the new demographic want? No longer are the majority of customers affluent females between the age of 25 and 44. More and more customers fit into the younger, less educated and possible most importantly, a lower income bracket. Some stores in specific areas around the US cater primarily for Hispanic or Cuban-American customers, a long way from the original demographic.

In 1992 Starbucks brand image was very ...

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In 1992 Starbucks brand image was very much about the three business aims covered earlier; quality, service and atmosphere. However Starbucks’ brand perception had change substantially since then and in 2002 the company identified that there was a problem. Market research was undertaken and although the majority of respondents agreed with the fact that Starbucks offered an accessible and convenient service, where they provide both good coffee on the run and a comfortable place to meet and relax, 55% of customers also believed that Starbucks’ aim was not primarily to provide excellent service and products, but to build more and more stores. Only 39% of participants strongly agreed that they always felt welcome in the stores.

Starbucks growth began in the 1990’s and has been expanding ever since, due to the Howard Shultz’s strong desire to achieve his dream of creating America’s “third place”. Shultz dream and approach is one of the main reasons for Starbucks’ extraordinary growth, and it lead to Starbucks’ quickly developing as a market leader. The fast growth of outlets was integral to Shultz’s dream, and meant that Starbucks’ coffee bars were accessible throughout the whole of America in a short space of time. This has lead to Starbucks’ developing a significant competitive advantage through mass coverage with 4,574 outlets, just over eleven times more than its nearest US competitor (2002). This further illustrates the lack of competitors within Starbucks’ market place, which is another reason for their astonishing growth throughout the nineties. This growth strategy was aided by the growing inclination for coffee drinking which Starbucks’ exploited. It was trendy to be seen within an espresso bar, and Starbucks was one of the first to offer both the product and the service on a wide scale. Therefore Starbucks based its outlets on the experience consumers encountered, rather than simply just a cup of coffee. For that reason Starbucks created three components to achieve this; firstly the coffee, which Starbucks prides as the highest quality in the world, and for that reason, try to control as much of the supply chain as possible. Secondly the service, or “customer intimacy” as Starbucks partners were endorsed to offer a happy and enjoyable experience to all customers, especially the most loyal. Thirdly the atmosphere, Starbucks outlets were designed to create a relaxing ambience encouraging customers to increase visit duration and frequency, usually resulting in increased expenditure.

While Starbucks was enjoying its eleventh consecutive 5% or higher annual growth, a recent market study had revealed unexpected findings. Even though service (good etiquette and professionalism toward customers, e.g. greeting, saying thank you and maintaining eye contact), product quality (accuracy of product orders and presentation), average wait time (speed of service, characterized by hitting the 3 minute bench mark, from back-of-the-line to drink-in-hand) and cleanliness – and 83% or customers rated a clean store as highly important – had all improved, Christine Day, Senior Vice President, did not feel like celebrating: news that customer’s expectations had not been met and customer satisfaction scores had declined made her anxious. How was that possible, when all seemed to go well? Customer satisfaction had always been a key objective for Howard Schultz; it was even one of the features that helped Starbucks rise to success, this “third place” in American’s hearts. What are then, the reasons for this decline?

When Starbucks store expansion began, people were curious: they wanted to try this new “sensation”, this new “thing” in town everybody was talking about. Undoubtedly, the majority of customers were pleasantly surprised with the choice, but also the taste and quality of the products. After a few years, however, this “surprise effect” is lost, and people are not bored, but accustomed to those products. This surprise effect may have persuaded people to buy the products at the start, despite high prices, but once gone, people do not see the drinks as sensational anymore, and therefore the value of those products, and therefore the amount of money people are prepared to spend for them decline.

It is vital to realise that Starbucks clientele has changed. Starbucks is a luxury, and has always been. In the past, Starbucks main customers, those white collar patrons, aged between 25 and 44 (earning their own salary), were eager to treat themselves. Today’s customers however tend to be younger, less well-educated and with a smaller, relatively limited disposable income. Furthermore, today’s society, encouraging cheaper and cheaper goods is making today’s customer realise that even though they enjoy their coffee at Starbucks, they are not entirely benefiting of the competitive prices they could be entitled to.

The view people have had of Starbucks over the decades is changing dramatically. With only a single store at the start, Starbucks has now more than 10,000. Constantly increasing its amounts of stores, people are starting to view Starbucks as a fierce and unstoppable giant. 61% of respondents in 2001 strongly agreed that “Starbucks cares primarily about making money”. People are even starting to associate Starbucks with McDonalds, to the profound distress and “disgust” of Howard Shultz. Quite a number of analysts remember when McDonalds suffered from its overexpansion of stores and started stalling when it reached the critical number of 30,000 stores worldwide. Plans that Starbucks has not finished with expansion, and the growing anti-American feeling is not really playing in their favour, pondering the question; will Starbucks continue in a similar manner?

However, it is important to note that Organisations have always found it difficult to define the important dimension that is “customer satisfaction”. In recent times, Starbucks has a seen a substantial fall in their personal satisfaction surveys, however are these the true definition of what their customers really think? Can the survey be considered unbiased? Were all the customers represented properly in the survey?

What should Starbucks do to better survive and prosper?

The Starbucks brand has developed itself so greatly since its birth in 1971, that survival is no longer a key issue. The future for Starbucks instead revolves around its ability to thrive and diversify its business within the constantly changing, freshly produced drinks industry and related markets. This can only be achieved through changes in the core business structure with particular interest to the fad of becoming more socially responsible in the eyes of the consumer.

In the light of negative media attention, Starbucks needs to vastly revolutionise their attitudes towards ethical practices along their self-controlled supply chain, with particular focus on issues such as fair trade and exploitation. In conjunction with this, an alteration to the brand image would repair the damages created from overly optimistic growth targets, and portray Starbucks as a socially responsible organisation. In an attempt to demonstrate to its customers that they are more important than the strategy of business expansion, a loyalty card could be produced, offering deals and promotions to customers that frequently visit the outlets, solving a major branding issue.

The business processes within Starbucks must be streamlined, leading to improved productivity and a reduction in costs. These improvements have already begun with the introduction of the payment card; however this is only the beginning. From our experiences in the Preston Starbucks branch, we found that the ordering system was overly complex, resulting in the consumer choosing a more familiar and ultimately cheaper option. In addition to this the complexity led to unnecessary augmentation in waiting times, as consumers could not make a decision. We believe this process can be improved with the use of detailed or helpful product option guides. They must find a way to further increase the speed of service to a level better than what is expected by the consumer, through standardisation and training.

Standardisation has its limits; Starbucks has always prided itself on offering flexible drink options to meet the ever changing customers individual needs, be it caramel syrup or extra cream. Within recent years Starbucks has introduced many new products, enticing new customers and improving the overall experience of the loyal clientele. We believe that this specialisation offers a competitive advantage over other firms in the market. Product innovation is insufficient in the race towards optimum customer retention, and therefore it is necessary to provide varying atmospheres and layouts.

One of the key aspects identified by Starbucks is that “partner satisfaction leads to customer satisfaction”, highlighting the importance of happy, well trained staff. Starbucks have empowered the workforce by recognising the importance of their roles within the company, and as such have named them “partners”. The training offered to the partners involves both hard and soft skills, including interpersonal and customer service skills as well as efficient drink production.

With the growth of high speed internet and broadband the Starbucks website has become more widely used by customers and therefore has become a vital tool in the Starbucks growth plan. This medium has enabled customers to learn more about the real Starbucks and offers interactive options such as the store locator, to simplify and aid customers in their search of a local outlet. Furthermore, it helps to educate customers about their favourite beverages, and enhances their “drink of choice” portfolio. The product surround could be further improved through more advanced measures, whereby technological improvements and innovations now allow for the introduction of self service machines for the more basic and simple options. This will result in shortened queues and a reduced workload for the employees, leading to greater customer and partner satisfaction, backing up the earlier statement. In addition to this, we identified fundamental problems within the store design. Starbucks would benefit from the implementation of a new queuing system, and a simpler till layout. This would allow for better product displays, boosting the sales of secondary products, which is an important measure in ensuring future growth and success for Starbucks. A more radical option would be to diversify the Starbucks brand by offering mobile refreshment stands. These carts could cater for customers on the move, and expand the promotion arm of Starbucks into areas currently out of the store’s catchment areas.

While nobody can take the sweet taste of success away from Starbucks, it is time they realise they are moving down a well trodden path to becoming an emotionless corporate giant.
It is clear that they have had great success in the past, but the last thing they want to do is taking their situation for granted. Resting on one’s laurels has never benefited anybody, especially in this competitive and fast paced world we live in today. Rather, innovation and evolution are the key aspects Starbucks needs to pay close attention to in order to grapple the few customers they have not yet reached. However, Starbucks should always remind itself that the company is where it is because of one great idea: combining a relaxing atmosphere and good coffee. Quality, not quantity are what pleases and retains clients, and while people appreciate and understand Starbucks’ thrive to change, they do not want to lose the experience they feel when entering a Starbucks: this is why slow but steady expansion is also a preferable option.
It is questionable whether Starbucks are putting enough emphasis on customer satisfaction and this has been reflected by poor results in recent surveys. Without customers, no business survives. Starbucks should continue cherishing its clientele as never before, or suffer from the consequences. Soulless coffee shops already exist. Nobody wants more.