Case | HBS Case Collection | June 2014
Starbucks Coffee Company: Transformation and Renewal
by Nancy F. Koehn, Kelly McNamara, Nora N. Khan and Elizabeth Legris
Starbucks Coffee Company: Transformation and Renewal analyzes the turnaround and reconstruction of Starbucks Coffee Company from 2008 to 2014 as led by CEO and co-founder Howard Schultz. The case offers executives and students an opportunity to examine in depth how Schultz and his team saved Starbucks from near-collapse, by both executing a deep, comprehensive return to its core values and, at the same time, investing in a range of new products, customer experiences and organizational capabilities designed to make the company fit for enduring success in a turbulent global economy. Set against the backdrop of the Great Recession, the case also considers the impact of unprecedented important shifts in consumer spending and confidence as well as new competitive forces on Starbucks' transformation. The case concludes by examining Schultz's own leadership journey, the lessons he learned personally during Starbucks transformation, and how he is using these lessons—within Starbucks and on the national stage—to redefine the roles and responsibilities of a public corporation in the 21st century.
Based on extensive interviews conducted with Schultz and other Starbucks executives from 2011 to 2014, the case offers a range of vital lessons on leadership, organizational transformation, restructuring, strategy, innovation, entrepreneurial vision, and customer service.
Keywords: Howard Schultz; Starbucks; transformation; turnaround; Change; Decision Making; Entrepreneurship; Growth and Development; Leadership; Organizations; Problems and Challenges; Risk and Uncertainty; Strategy; Value; Consumer Products Industry; Food and Beverage Industry; Retail Industry; North and Central America; Europe; Asia; South America; Middle East; Latin America;
What factors accounted for the extra-ordinary success of Starbucks in the early 1990s?
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 centers, 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. Additionally Starbucks formed joint ventures to distribute a bottled frappuccino thru Pepsi-Cola and an ice cream thru Dreyer’s Grand Ice Cream. This allowed the Starbucks’ brand to be recognized not only in freestanding Starbucks stores, but also throughout other channels as well increasing their brand awareness. Starbucks worked very had 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.
What was so compelling about the Starbucks value proposition?
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.
What brand image did Starbucks develop during this period?
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.
Why have Starbucks’ customer satisfaction scores declined?
Starbucks customer satisfaction scores began to decline despite the fact of Starbucks’ overwhelming presence and convenience. There was very little image or product differentiation between Starbucks and the smaller coffee chains. However, there was a significant differentiation between Starbucks and the independent specialty coffeehouses. The brand image of Starbucks also had some rough edges. More customers were beginning to agree with the fact the Starbucks cared primarily about making money and building more stores. Also, despite the high customer snapshot scores customer satisfaction scores were declining. It was believed that there was a service gap between Starbucks scores on key attributes and customer satisfaction. In polls by customers “improvements to service,” particularly speed of service, was most mentioned for improvement.
Has the company’s service declined or is it simply measuring satisfaction the wrong way?
The overall company service has not necessarily declined. Overall, customers are pleased with the cleanliness, atmosphere, and product quality. However, wait time is steadily increasing. This is the main problem. While some people go to Starbucks for the experience, many people get their coffee and are out the door. Therefore, wait time is exceedingly important. This is where the satisfaction has begun to decline. While wait time is a part of customer satisfaction it is not the only thing that determines customer satisfaction. The satisfaction level of customers also varies with the type of customer. Customers that visit more often, spend more often, and are more loyal tend to be more highly satisfied. Also, Starbucks is measuring much on how people view the company, as trying to expand and make more money, rather than how people view the coffee. Generally customers are satisfied with the coffee. While customer service has declined some, the main issue that should be addressed is the view itself of the Starbucks organization.
Describe the ideal Starbucks customer from a profitability standpoint.
It is no surprise that lower prices are not one of Starbuck’s values that lead to its success. With Starbuck’s concentrating mainly on value, customer satisfaction, and atmosphere, there was little room for low prices. These higher prices were not an issue during the 1990’s,but the customer base is rapidly evolving. The customer is changing away from the established high-income business- woman, who has more disposable income for high-quality coffee. The typical Starbuck’s customer that has grown into existence, in the late 1990’s and early 2000’s, tends to be “younger, less well-educated, and in a lower income bracket”. The customer base also grew in that a larger number of Hispanic and Cuban- Americans became a customer of Starbucks.
The ideal Starbuck’s customer would be the customer that visits a Starbuck’s at least eight times a month. Conducted research shows though that customers in this bracket visit much more than eight times a month, with the number of visits per month averaging eighteen. These customers make up 62% of all Starbuck’s transactions. If the number of customers who visited this often increased, sales would increase tremendously. Research shows that customers who visit only one to two times per month only generate a measly11% of all Starbucks transactions. Overall, Starbucks should put focus on bringing in the current customer more often. When targeting consumers the geographical location, in terms or rural and urban areas, would not matter; both of these markets present the same customer patterns.
What would it take to ensure that this customer is highly satisfied?
To ensure that the customer is highly satisfied with every element of the their Starbucks experience, there are a few key factors, aside from the coffee itself that the Starbuck’s stores and its employees must exhibit. From a Starbuck’s survey in 2002, a clean store was the number one factor leading to customer satisfaction, with 83%. If a store appears clean and has a high sanitation grade, customers will be assured that what they are consuming has been made from and kept in a clean environment.
Convenience is the next factor leading to customer satisfaction, with 77%. Starbuck’s has done an excellent job with saturating the market. Customers love having a Starbuck’s location on their normal traffic route, therefore not having to drive out of their way for a cup of coffee. Having the drive-thru service has also made a positive impact for the convenience factor. Other factors that ranked highly for customer satisfaction were being treated as a valuable customer (75%) and friendly staff (73%).
How valuable is a highly satisfied customer to Starbucks?
Creating customer loyalty has proved to be the reason behind the bulk of Starbuck’s transactions because the highly satisfied customer is the loyal customer. It is crucial that Starbuck’s maintain customer satisfaction to keep these loyal customers coming back. Without the 21% of customers, averaging eighteen visits a month, Starbuck’s would loose 62% of all its transactions. Starbuck’s has also found that highly satisfied customers have an average ticket price of $4.42, as opposed to a satisfied customer who only spends on average $4.06. Therefore, having a satisfied customer is very valuable to Starbuck’s and its sales.
Should Starbucks make the $40 million investment in labor in the stores?
Whether or not Starbucks should invest $40 million into labor 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 labor is very risky. I would recommend another option. This option would propose implementing more labor, but testing out the effects in certain urban stores worldwide. If the increased labor has the desired affect, then Starbucks can slowly add the extra labor to every store. However, if the cost is the exceeding the profit, then it would easier to cut back.
What is the goal of this 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.
Is it possible for a mega brand 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.