Starbucks Case Study

Starbucks has successfully gained the biggest amount of market shares in "specialty coffee" industry (estimated 50%), which makes Starbucks the strongest player in the business. Net earnings increased around 18.7% together with a 21% increase in total stores in North America comparing to 2001. The rapid expanding strategy allows Starbucks to be more accessible to customers, delivering their services and products in more areas. Expansion of the target segments is a crucial strategy for Starbucks' continuous success, usage of innovative products, technology allows Starbucks to connect with the customer closely while delivering best quality coffee and best in store experience. Starbucks value their customers by providing the highest quality coffee, legendary service and a nice atmosphere that can make them to stay. These three components of Starbucks's strategy really differentiate Starbucks from other coffee shops, adding much value to the company. However, a retail based business cannot survive in the long run without marketing and advertising, Starbucks' marketing and advertising cost is nearly nothing. Although one of Starbucks' strategy is to rapidly open new stores to gain exposure and awareness, it's not effective enough in terms of market data analysis and decision making, these factors can significantly influence Starbucks' future growth opportunity.

Starbucks can't succeed without customers, from the beginning target segment which consist mainly well educated, white collar females aged between 24-44, to multiple segments that consist of urban professionals, high income white collars, teenagers, low income brackets, less well-educated and even non-corporate retail channels, Starbucks has discovered a larger customer pool since the beginning. However, to retain customer and gain new customers is still the main focus for Starbucks. Continuously delivering good quality product as well as best in-store experience is the strategy to keep established customers and gain more new customers. It is extremely valuable for Starbucks to have highly satisfied customers, the value and profit that one satisfied customer can generate is significant. By calculations, A highly satisfied customer visits a store 7.2 times a month and spends an average $4.42 per visit, which gives an average sale of $31.824 for Starbucks, however on the other hand, a satisfied customer can bring Starbucks $17.458 of sales, an unsatisfied customer can bring $15.132. Comparing to a highly-satisfied customer, the total sales that are generated from a satisfied customer and an I satisfied customer is $32.59, which is just $0.766 in difference. Also from figure A, 62% of the transactions are generated by customers that visit 8+ times a month (highly satisfied customers), and the rest 38% are generated by the others. Simply looking at this huge difference in profit, we can see how valuable is it to have a highly-satisfied customer over the others. A highly-satisfied customer can potentially be Starbucks' loyal customer, which allow them to build long term relationship with Starbucks. A highly-satisfied customer will bring 31.824*12= $318.888 a year, if this customer becomes a potential loyal customer, in five years, one loyal customer can bring 318.888*5 =$1909.44 to Starbucks, and this number is without any consideration of increasing demand or increasing in price in the next 5 years. The point is clear, it is extremely valuable to have a highly-satisfied customer.

Starbucks is the biggest player in this industry, the company has absolute advantage over products, customers, distribution in all areas. Giving Starbucks the strength to survive in the long run. Three major competitors including small scale specialty coffee chains, independent specialty coffee shop, donut and bagel chains.

Although all these competitors try to differentiate themselves from Starbucks, but the concept and brand value of Starbucks are irreplaceable. Continuous innovation of products and services, consistency of high quality and legendary service will help Starbucks' long term success, and eventually give Starbucks the ability to survive in the competition.

One of Starbucks’ challenge is the staffing issue. As new products come out every year, 77% of the customer walks into the store to get handcraft beverages, which require multiple steps to make, adding more time to make one specific drink. Additionally, with the “Just Say Yes” policy, it makes the job more complicated and time consuming. Day’s approach is to relax labor hours by investing 40 million dollars to have 20 additional labor hours each store.

I recommend Starbucks to invest 40 million dollars immediately, because this strategy will lead to increased profit. Like Day said, if we look at this 40 million dollars’ expense as an investment, the outcome is different. Let’s pretend we are focusing on the company operated stores in North America, there are 3496 stores in 2002, which means each store will get up to $11441 to have extra labor hours. Average hourly rate is $9, $11441/$9=1271.2 hours, so total hours available for each store is around 1271 hours. However, Starbucks aims to have an additional 20 hours a week, which allows each store to have 63 weeks of additional 20 hours a week.

Now we look at what can 20 additional labor hours do to one store. From Exhibit 3&7, I discovered that average waiting time is around 3 minutes, there are 570 customers daily per store, so 570*7*3=11970 minutes or 199.5 hours of waiting time in total per week. Holding all else constant, the ratio between labor hours and total customer waiting time is 199.5/360 originally, if there’s a 20 hour increase in the labor hours, to get the same ratio, waiting time in total becomes 210.583 hours, the differences in total waiting time is 210.583-199.5=11.08 hours. The question is, what does tis 11.08 hours mean? It simply shows that with an increase of 20 hours of labor hours, each store is expected to experience an increasing 11.08 hours of waiting time or 664.8 minutes, holding all else constant, including the average waiting time, each store will expect 664.8min/3min=221.8 additional customers per week. (This approach didn’t change the average waiting time, in real life scenario, the waiting time should be less per each customer. By holding everything constant, I’m able to have an abstract number of increasing customers). Now if we calculate total increasing sales associated with one store, 221.8*$3.85=$853.93 per week, Total increasing sales is $853.93*63weeks=$53797.59. Total increasing sales in North America is $53793.59*3496=$188,076,374.6. Per this calculation, an investment of 40 Million will have a return for about 188 million. This strategy leads to increased profit.

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