Prof.

P K Bansal Professor Marketing & Sales Department Amity Business School

STARBUCKS COFFEE
(The dorosin issue) (Terri Feldman Barr, Thomas More College, David W. Rosenthal, Miami University, and Thomas C. Boyd, Miami University.)

This case has been written for the purpose of stimulating students discussion on the concepts of service recovery taught in the class. The author has collected information from the web-site of Starbucks Corporation, various recorded discussions on the issue, and reported comments of Jeremy Dorosin in public. All events in the case are real. Some individuals identities have been disguised.

STARBUCKS COFFEE: THE DOROSIN ISSSUE Betsy Reese, Corporate Customer Relations Manager for Starbucks Coffee, sat back in her chair, unsure of what to do next. She had just hung up the telephone with Jeremy Dorosin, a loyal and frequent Starbucks customer, who was completely dissatisfied with what he felt, was the companys response to an escalating sequence of unsatisfactory encounters. Dorosin had taken his concerns up through company channels all the way to the corporate offices without resolution. He had attracted considerable national media attention over the situation in recent weeks. Reese, other company executives, and Dorosin had been working to resolve the problem for almost six weeks to no avail and at this point the company representatives were perplexed and Mr. Dorosin was upset.

In April of 1995, Betsy Reese had become aware that Mr. Dorosin had purchased one of Starbucks Estro Vapore Espresso machines (Exhibit 1) at the Berkeley, California store, and that he had experienced some problems with it. Returning the machine, he was given a loaner, until a replacement machine came in. He liked the loaner well enough to purchase o ne, an Estro 410, as a wedding gift for a friend (Exhibit 1). Mr. Dorosins initial problem was complicated by this additional $189 purchase. He did not receive the free coffee that went with each machine purchase and the gift machine was not in good working order. Despite several telephone calls to various people at both the retail store and Starbucks corporate offices, Mr. Dorosin felt that the problem remained unresolved. He demanded that Starbucks send a top-of-the-line replacement machine to his friend, or he would take out an ad in the Wall Street Journal. Starbucks apologized for the problem, agreed to send letters of apology to both Dorosin and his friend, and send a machine of better quality to Dorosins friend, but not the $2500 replacement that he had requested. Dorosin found Starbucks solution unacceptable, and in the following weeks, he proceeded to take out four ads in the regional edition of the Wall Street Journal, asking for other peoples customer service problems with Starbucks (Exhibits 2-3). He installed a toll-free (1-800) telephone number for people to call. He also appeared on several radio and television programs, discussing his experiences with the company. Newspapers around the country picked up the story. In the meantime, Starbucks, confident that the company could come to some mutually-agreeable solution to the problem, offered replacement machines, steaming pitchers and coffee. Mr. Dorosin refused the offer. Starbucks sent a full refund for both machines and a letter of apology t o Mr. Dorosins friend along with the promise of a replacement machine. Both the check and the letter were refused. Dorosin was demanding that Starbucks underwrite a shelter for runaway juveniles which he would run. 2

Starbucks had to make a decision. How were they going to respond to this customers demands? They had several options as Reese saw it. The company could meet Dorosins initial demand for two top -of-the-line replacement machines, although there was some uncertainty as to whether they would be accepted. They could help to underwrite the runaway shelter that Dorosin had proposed. Or they could do nothing more, assuming that they had exhausted all means of satisfying Mr. Dorosin, and consider the matter closed.

COMPANY BACKGROUND Starbucks Corporation purchased and roasted high-quality whole bean coffees and sold them, along with fresh brewed coffees and Italian-style espresso beverages, primarily through company-operated retail stores. In addition to coffee beans and beverages, the companys store s offered a wide selection of coffee-making equipment, accessories, pastries, and confections. The companys objective was to establish Starbucks as the premier specialty coffee brand. Starbucks was formed in November, 1985 under the name Il Giornale Coffee Company. In August 1987, Il Giornale purchased the Seattle assets, which included seven retail stores, a roasting plant and the rights to the name Starbucks, of Starbucks Coffee Company, a corporation founded in 1971. In January 1988, Il Giornale changed its name to Starbucks Corporation. The company grew rapidly over the next several years. Starbucks sales for 1994 were approximately $285 million, with corresponding earnings of over $10 million from almost 400 stores. The companys stock was publicly traded. An additional 200 stores were expected to be opened in 1995.

Retail Stores Location. Starbucks stores were typically clustered in high-traffic, highvisibility locations in each market. Starbucks stores varied in size from approximately 300 to 2,200 square feet, with an average of approximately 1,200 square feet. Product Mix. The product mix in each store varied and was dependent on the size of the store and its location. The companys mix of merchandise as a percentage of retail sales was approximately 55% coffee beverages, 21% whole bean coffees, 14% food items, and 10% coffee-related hardware and equipment. Coffee. All Starbucks stores offered a choice of regular or decaffeinated coffee beverages and changing coffees of the day. Larger stores c arried over 30 varieties of whole bean coffees; smaller stores and kiosks carried a more limited selection of whole bean coffees. Starbucks priced its coffees at or above the prevailing high-end coffee prices in each of its markets, reflecting the higher quality of the companys coffees and its higher level of customer service. The average customer transaction was approximately $3.01, about the price of a large espresso. Coffee-Related Products. The larger Starbucks retail stores carried a range of coffee-related products, including high quality coffee-making equipment. Espresso machines, coffee makers that allowed coffee connoisseurs to brew strong espresso beans and steam milk for a frothy combination, ranged in price at the company stores from under $75 to over $2000. Competition for the espresso machine market was intense, as these specialty coffee makers could be purchased at local department stores, gourmet kitchen specialty stores, and the national discount retails at a wide range of prices.

Starbucks stores also sold accessories bearing the Starbucks logo. Accessories included coffee mugs, coffee grinders, storage containers, coffee filters, and specialty food products. There was a two-year limited warranty on the coffee and espresso makers and coffee grinders. A copy of the Limited Warranty is found in Exhibit 4. Customer Service. Customer service was a key ingredient to Starbucks success. One of the five guiding principles of the company was Develop enthusiastically satisfied customers all of the ti me. A statement from the 1994 Annual Report elaborated: Of all our valued relationships, the one we enjoy with our customers is most honored. Its a relationship of trust thats renewed day by day. Its based on consistency of our coffee, our merchandise, and our service. On flexibility each beverage is made the way youd like. And on a promise that goes something like this: come in, youre welcome here; know that these are the worlds best beans, freshly roasted; that the products on our shelves have been tested and found superb; that everyone here is truly knowledgeable passionate! -- about coffee; and that we genuinely look forward to your visits every day. The company took customer service very seriously. Employees received 24 hours of formal classroom training at a Starbucks training center, and up to 30 hours of practical on-site training, before they worked as a barista, the term for people who made coffee drinks. They were taught drink -calling, drinkmaking and cup management skills, terminology, along with three key Star Skills: Maintain or Enhance Self-Esteem, Listen and Acknowledge, and Ask for Help. Retail Management. Starbucks retail managers were responsible for the ongoing day-to-day running of the stores. They reported on a regular basis to district offices. The Berkeley store manager reported to the Northwest District Office in San Francisco. 5

Social Responsibility/Community Service Starbucks strongly adhered to its corporate principle, Contribute positively to our communities and our environment. To this end, each retail store chose a local charity to which coffee was donated. Additionally, each store had a bean bankcoffee it could donate to other community events. The goal of the company was to be an active, responsive corporate citizen. Another example of the companys commitment to the world community was its partnership with CARE, the international relief organization. Starbucks had created a variety package which it called a CARE Sampler. Starbucks donated two dollars of every CARE Sampler that it sold in addition to providing an ongoing annual grant to CARE. The support helped people living in several coffee-producing countries around the world. Starbucks was also involved in environmental issues, and was committed to making responsible environmental choices. The company recycled, reused, and examined the environmental impact of all of the products that they sold.

INDUSTRY OUTLOOK Competition The companys coffees and coffee products competed directly against specialty coffees sold at retail through supermarkets, specialty retailers, and a number of specialty coffee stores. The companys coffee beverages competed directly against all restaurant and beverage outlets that served coffee as well as an increasing number of espresso stands, carts, and stores. The specialty coffee segment was becoming increasingly competitive. Both the companys whole bean coffees and coffee beverages competed indirectly against all other coffees on the market. The company believed that its customers chose retailers primarily on the basis of quality and convenience, and, to a lesser extent, on price. 6

Management believed that supermarkets, carrying a vast number of nationally-branded premium coffee products, posed the greatest competitive challenge in the whole bean coffee market because supermarkets offered customers the convenience of not having to make a separate trip to the companys stores. In addition, the company competed for whole bean coffee sales with numerous franchise operators and locally-owned specialty coffee stores in both the United States and Canada. The companys primary competitors for beverage sales were restaurants, shops, and street carts. Although competition in the beverage market was fragmented at the time, a major competitor with substantially greater financial, marketing, and operating resources than the company could enter this market at any time and compete directly against Starbucks. The company also expected that competition for additional retail space would become more intense.

THE SEQUENCE OF EVENTS Betsy Reese reviewed the sequence of events leading up to her present dilemma. Keeping in mind that Mr. Dorosins version of the events did not match the companys version of what happened, she contemplated the options. (Note: Dorosins story is presented in regular typeface; Starbucks story is presented in italics.) Sometime Prior to April, 1995 Jeremy Dorosin went to the Berkeley, California Starbucks store and bought himself an Espresso maker (Vapore) for $299.00. April, 1995 He found it defective, returned it and received a loaner on a less expensive machine (which he loved), an Estro 410, which retailed for 7

$189.00. He got his new replacement and gave the loaner back, but asked if Starbucks planned to sell the loaners because he really likes it. An employee at the Berkeley Starbucks store replied: no, were sending them back. Jeremy Dorosin returned a defective Vapore ($299.00) and we gave him a loaner Estro 410 ($189.00). Dorosin returned the loaner when his new replacement came in.

End of April, 1995 (approximately two weeks after picking up his replacement) Dorosin bought a new Estro 410 model (like the loaner) as a wedding gift for a friend. It had to be ordered, as the store had none of that model number in stock. He (Dorosin) later came back to buy a machine like the loaner as a gift for a friend, Ms. Cohen.

A Few Days Later Dorosin came back into the store to pick up the gift machine for his friend, however, it couldnt be found. The store employee then found the machine in a different (and damaged) box. Dorosin expressed concern that they were giving him a loaner or a used machine, prompting him to ask the clerk to inspect it, which she did. She said it was fine. He also did not get the lb. of free coffee that was supposed to come with each machine purchase. He took the gift machine to his friend. However, there was no instruction manual. He called the store manager and explained his dissatisfaction with his prior visit and the fact that this new machine

had no manual. The store manager apologized and said to come in for the manual, the lb. of coffee and a free cup of coffee. Dorosin did not get the lb. of coffee to which he felt he was entitled when he picked up the gift 410. He called the store manager who agreed he should have gotten the pound, apologized to him and told him to come back in for the coffee.

At Some Point Shortly Thereafter His friend for whom he purchased the Espresso machine found rust in the machine, and there were parts missing. Dorosin called the Starbucks store from which he purchased the machine and was told that those parts didnt exist. Dorosin returned the gifts to the store from which it was purchased and told his story to the store manager. The manager offered a refund, which Dorosin refused. He was then sent to the San Francisco (District) office where he told his story a second time. He finally ended up speaking by telephone to Bill Stein, Customer Service Supervisor, in Seattle, to whom he told the whole story again for a third time. In his conversation with Bill Stein, Dorosin proposed that Starbucks: Replace his machine (the Vapore) which had just broken for the second time. Send his friend, the bride, a letter of apology. Send the bride the nicest replacement they had, then asked what the next best machine was. Stein told him it was the $495 model.

Dorosin said to replace his, send an apology and the $495 machine to his friend, and the matter would be resolved. May 1, 1995 Starbucks District Manager (San Francisco) called Corporate Customer Service Supervisor, Bill Stein (Seattle), and explained the situation the retail store had with Dorosin. Stein called Dorosin, listened to his concerns about the way he was treated in the store, and the condition of the gift machine (Estro 410). Dorosin demanded that a $2495.00 Starbucks top-of-the-line machine be sent to his friend to compensate for the defective $189.00 gift, or he would place an ad in the Wall Street Journal. Stein apologized for his frustration and told him the company would work with him to get either replacement machines at better quality, or a refund. May 2, 1995 Stein called back with a counter proposal: Send Dorosin a $269 machine (although he paid $299) to replace his twice-broken machine. Send his friend a $269 machine for her original one which was priced at $189. Dorosin said that he was not happy with the companys proposal, and asked Stein to reconsider his (Dorosins) proposal. Stein called back and said that the companys proposal was the best that could b e done. Dorosin was incensed. Stein spoke to Dorosin a second time. Stein told Dorosin again that the company would replace the machines with ones of equal or better value and write a letter of apology to him and his friend, but that a $2,495.00 replacement machine was not a reasonable solution. Dorosin gave Stein a 10

two-hour ultimatum: send him a $2495.00 machine or hed place an ad in the Wall Street Journal soliciting other dissatisfied Starbucks customers. Stein expressed concern, but could not meet Doro sins demands, and began preparations to send replacement machines, coffee and letters of apology. Immediately Thereafter Dorosin called attorneys who told him that he didnt have a case. He then decided to run a local ad ($800) in the Wall Street Journal. Upon informing Stein about his plans, Dorosin reported that Stein said, in a condescending tone, Gee, Im sorry you feel this way. Dorosin said he thought Steins implication was that Dorosin was lying. Upon the first advertisements appearance, Dorosin received a ton of calls. Some were from stockholders of Starbucks who were angry. He said he had received thousands of calls, from customers, competitors and employees who felt Starbucks

misrepresented themselves to the public. He said that competitors told him that Starbucks was devious and unfair. May 5, 1995 Dorosin ran his first Wall Street Journal ad, in the West Coast, San Francisco edition. Betsy Reese, Corporate Customer Relations Manager, talked to Dorosin, expressed Starbucks concern for his d ilemma, and once again offered to work toward a reasonable solution. Reese explained the steps that Starbucks was taking (sending machines, coffee and letters). However, Dorosin said it was too little, too late. He instead demanded that Starbucks place a full page ad of apology admitting that the company knowingly sold used equipment, signed by the company Chairman. He further wanted the opportunity to proofread the ad contents. Otherwise, he indicated that he would place a second ad. Reese told him that further ads would not be necessary, that the company was confident that the two parties could come to a mutually-agreeable solution for his experience. Starbucks offered replacement machines for 11

him and his friend, steaming pitchers, and free coffee all of which were in excess of his original purchases by over $175.00. Mr. Dorosin refused the offer, for the second time. Dorosin suggested that Starbucks take out a double full page ad in the Wall Street Journal apologizing, although he insisted that this was not about money. Reese suggested that instead of taking out an ad, the company take the amount that an ad would cost and donate it to charity. Dorosin agreed. Note: While Dorosin apparently believed at this point that an agreement had been made, the conflict continued further. May 10, 1995 Since Starbucks couldnt satisfy Dorosin, a decision was made to try to at least take care of his friend. Starbucks sent an apology letter to Dorosins gift recipient, Ms. Cohen, explaining that a replacement machine was on its way as an apology gift to her. Additionally Starbucks sent a full refund via certified mail. Dorosin ran a second ad in the Wall Street Journal. May 11, 1995 Stein had another conversation with Dorosin. Starbucks sent verification of the May 2, 1995 offer in writing to Dorosin via certified mail. May 14, 1995 KGA News (the ABC affiliate in San Francisco) did a story on Dorosin. May 18, 1995 Dorosin ran the third Wall Street Journal ad. May 19, 1995

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The written offer of May 11, 1995 was returned to Starbucks by Dorosin, refused. The refund check sent on May 10, 1995 to Dorosin was returned, refused. May 23, 1995 The apology letter to Ms. Cohen was returned to Starbucks, refused by Ms. Cohen. May 25, 1995 Dorosin ran the fourth ad in the Wall Street Journal. May 26, 1995 Betsy Reese sent a written recap and reiterated offers to Dorosin. May 30, 1995 A new story on the situation was reported in Contra Costa News. Dorosin called Reese with a new demand, asking for collaboration on a juvenile runaway shelter. Reese expressed that the company did not see this as a reasonable solution nor did Starbucks see a correlation between this demand and his original complaint. May 31, 1995 Dorosin called Reese to ask for a face-to-face meeting to negotiate a settlement. Reese said she would consider the request. Reese again asked for Dorosin to at least accept the refund money, which he refused. June 1, 1995 Reese received a letter from Dorosin via fax. June 2, 1995

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KIRO radio in Seattle did a talk show with Dorosin. June 3, 1995 KGO radio in San Francisco interviewed Dorosin and Reese. June 4, 1995 KIRO-TV in Seattle on Morning at 7 show interviewed Dorosin and Reese. June 13, 1995 The New York Times reported the story. June 14, 1995 KFI radio interviewed Starbucks President and Dorosin. An offer was made (by the President) to fly Dorosin up to Seattle to talk but Dorosin refused. June 16, 1995 Reese initiated a telephone conversation with Dorosin, during which Dorosin denied he declined the offer on KFI radio to come up to Seattle. Dorosin stated he was going to open a runaway shelter and run it himself. He wanted Starbucks to underwrite or sponsor it, but did not want the company to have a public presence with it. Dorosin said he planned to get celebrity endorsements for the shelter, and do TV telethons. Betsy Reese once again expressed that the company did not see this as a reasonable solution nor did they see a correlation between the shelter and his original complaints. Dorosin stated that he was no longer interested in talking to the company since he wanted to negotiate the shelter and saw that Starbucks was unwilling to meet his request. Dorosin then claimed that the company had not made him an offer to replace his machines or 14

apologized until after the second ad ran in the Wall Street Journal. (Starbucks had apologized from the beginning and offered replacement machines on the second day.)

REESES DILEMMA
Betsy considered the options available to the company. Dorosins demands seemed excessive, but at the same time, he was very persistent and the advertisements were certainly uncomfortable. Something needed to be done to move on from this conflict.

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