Q 1. Why is Starbucks’ image getting declined?

Let us examine, the possible reasons that could have resulted in actual declining
image of Starbucks. When Starbucks evolved as a business it set the standards
very high for its customers through its value proposition. Even though the company initially
managed to meet these standards, the retail expansion and the product innovation strategy
that the company followed along with the customization of the drinks had a harmful effect
on all three components (coffee quality, service, and atmosphere) of the value proposition
which had led to the declining effects of customer satisfaction. The image of the brand
changed. The store which used to be known as the “third place”, a place where you could
relax and enjoy your coffee, was now appealing to a much larger target market. It was the
store for everybody. In the past customers were paying a premium for the Starbucks
experience, but now Starbucks was not anything special. In the mind of the consumer,
Starbucks became the norm, a place which was everywhere, with good coffee and consistent
service. The loyal customers lost the touch they had with the brand; there was no reason
anymore to pay a premium for a good coffee when they could get it anywhere else for a
lower price.
Starbucks had about 150% increase in retail stores from 1998 to 2002. By geographically
clustering markets, Starbucks was compromising the “atmosphere” aspect of its value
proposition. Many stores built were small and did not have seating or lounging place.
Therefore, the upscale yet inviting environment that the company promised with its value
proposition and which brought a lot of the loyal customers to the business did not exist any
more.
The beverage customization, the addition of new items on the menus and the rapid retail
store expansion had an adverse effect on the other two important aspects of the value
proposition. Even though, there is no specific evidence cited in the case regarding the quality
of the coffee, I find it almost impossible for a company to experience a more than 3000%
expansion in its stores within 10 years and not deteriorating at least some of its product
quality. As I do not have enough data to support this, I will make the assumption that the
addition of the new items had an effect in sacrificing at least some of the quality that the
Starbucks brand gave to the consumer. As Starbucks was “caffeinating’ the world, it meant
that product sales increased throughout the company. Statistically speaking, the probability
of a product being sold lacking the necessary quality was highest. In the mind of a Starbucks
consumer or any consumer a bad experience sticks out.
The other component of the value proposition, the service was also hurt. The customer
intimacy that helped build the loyal customer base of Starbucks did not exist any more.
Starbucks proudly stated that they delivered on service and that they only hired partners
that had the ability to balance hard and soft skills and deliver on that service. As the
customer base was growing and the complexity of the drinks increased it seemed almost
impossible for the partners to deliver on those soft skills. The customized drinks slowed
down the process of delivering the beverage to a consumer and added tension to the
partners, making them lose on their soft skills. A lot of the service value was also lost on the
inconsistency. The saturation of markets with retail stores meant that customers might
purchase their coffee from different Starbucks stores that were convenient at the time of
purchase. If that was true, then it is possible that customers could see an inconsistent level
of service in stores that did not have the right personnel.

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At the same time, competition from small, specialty stores increased. As the Starbucks
market research revealed, a lot of small, independent coffee stores were perceived by
customers to be what Starbucks was and to deliver what Starbucks did in the previous years.
In fact, the Starbucks model as described through Starbucks value proposition was very easy
to imitate. Starbucks was facing fierce competition not from another chain, but from any
small, independent, specialty store that was located to a close proximity to Starbucks. These
competitors were more likely to offer the extraordinary service and the atmosphere that
Starbucks had promised. In addition to that, the image of Starbucks had changed in the mind
of the consumers who saw the fast expansion of Starbucks with the addition of stores
everywhere, as a way for the company to make more money.
These are the main reasons I feel led to the decline of the image of Starbucks

Q 2. Who are the Ideal Starbucks’ customers from ‘profitability’ standpoint?

The ideal Starbucks customer from a profitability perspective is the loyal customer who visits
the store on an average of 18 times per month. If we accept that there is a high probability
of correlation between number of visits and satisfaction level, then it is safe to assume that
this ideal customer who visits 18 times per month is also a highly satisfied one. Using
company data, obtained from customer satisfaction data, this customer spends $4.42 on
average on every visit and its average customer life is 8.3 years. Taking this into
consideration, then the ideal Starbucks customer brings an average revenue of about $954
per year or $7924 over its lifetime (see Exhibit 2). Using the same customer satisfaction data
and assuming that a highly satisfied customer visits a Starbucks coffee store 7.2 times a
month, then the average revenue that this customer brings to Starbucks is about $381 per
year or $3169 over its lifetime. Ideally, this customer purchases either ready‐made products
or easy to make beverages so that it does not take much time for partners to get him out of
the service line. Since there is a direct link between customer satisfaction and loyalty which
eventually leads to higher profits, then Starbucks should work on raising the satisfaction
levels of its current customer base or making them visit its stores more frequently.

We will also take into account the value from customer into account, when we need to see the
profitability standpoint.(from exhibit 9)

Let us see how it can be calculated in quantitative terms:

Value from Customer = Number of Starbucks visits/month *Avg customer life* Avg ticket size

= 4.3*4.4*12*4.06

= 921.78.

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Q 3 Do an analysis to calculate the no. of customers Starbucks would have to convert from
satisfied to highly satisfied to make the $40 million investment payoff.

First let’s examine what needs to be done for Starbucks to get a positive return if they
decide to proceed with the $40 million investment.
If Starbucks makes the $40 million investment in labor for its 4574 stores, the investment
comes to be about $8,750 for each store. Since the goal of this investment is to increase
satisfaction let’s see how this translates into number of customers that need to go from
being satisfied to being highly satisfied. From Exhibit 3 we can observe that the difference in
revenue per year from a highly satisfied to a satisfied customer is about $172. That means
that in order for Starbucks to break even for this investment, it needs to turn 50 customers
(8750/172) from being satisfied to be highly satisfied in each of its stores. From Exhibit 3 in
the case we know that the average daily customer count, per store is 570. This means that
Starbucks needs to turn 50 of 570 or 9% of its customers from satisfied to highly satisfied in
order to break even. There are however some major assumptions that are being made in
this case. First, the assumption is that speed of service is the number one driver for
satisfaction and that the additional labor will provide the increase of speed of service. This is
not true however. As we can see from the rankings of the key attributes by Starbucks
customers, fast service ranks #6 in importance. A second assumption is that all stores are
equal in size, number of people they serve, location and prices and that all the stores need
this additional investment. A final assumption is that satisfaction is correlated with loyalty
and that if a satisfied customer becomes highly satisfied then the number of visits per month
to the store will increase along with his ticket size.
If customer satisfaction does not increase, an alternative break-even venue for Starbucks
would be to acquire new customers. In this case, an additional 7 customers should come to
each store every day as a result of this investment. This translates to an additional 32,000
customers per year for all stores. Alternatively, if the number of customers remains the
same, $0.05 additional should be spent by each customer in each visit in order to break even
(see Exhibit 4).
Since there is a link between customer satisfaction, loyalty and average ticket size, then if
the investment will increase the customer satisfaction it would make sense. There is no
question that increased customer satisfaction will translate to more sales. The big question
however is will the investment lead to increased customer satisfaction?
Based on the company’s research, it is evident that only 10% of the Starbucks customers
have asked for a faster, more efficient service. Even if the $40 million investment is made
and customers get a faster service, there is a big risk in losing value in some of the other
perceptions. Having more partners in a specified work area might lead to the risk of less
friendlier, less attentive staff and might also risk the loss of the personal treatment. It even
appears impractical and inefficient to allocate the $40 million investment equally to the
4574 stores. It would make sense to allocate the money based on size of store, number of
customers, location and need for additional labor. There would be no need to invest in a
store where all customers are highly satisfied and there would be higher need to invest in a
store where there is a high percentage of less satisfied customers.
Based on the above assumptions, I believe that Starbucks should only invest the money in
labor wherever needed and in what amount needed. A good way to do that would be to do
a more thorough analysis of its customer base and identify areas where people are less

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satisfied because of the speed of service and then invest in those locations only. Hopefully
the addition of extra labor in those locations would eliminate problems associated with fast
service and treating the customer as valuable.
At the same time however, I believe that there are far more important investments that
need to be made and part of that $40 million could be used for those investments. As a first
step, it would be a good idea to establish an internal strategic marketing group that would
coordinate actions of the market research group, the category group and the marketing
group. This would give the opportunity for Starbucks to get faster feedback from customers,
and be proactive instead of reactive. As 77% of the company’s revenues came from
beverages which were handcrafted and since there was a problem with service times, the
company could find other ways of increasing its productivity at the point of making the
drink, such as investing in new machines or removing unpopular beverages from the menu.
The money could also be spent on better training of partners’ “soft skills” in order to ensure
that the customers are treated the way the Starbucks has promised them that they would.
Concluding, I would like to add that an investment in adding more labor to stores might help
the company increase some of its satisfaction levels and maybe even get a good return out
of it, but from the data available in the case it appears that Starbucks has a lot of other
problems that needs to tackle. They need to re‐evaluate their value proposition, examine
how their expansion strategy has led to the deterioration of their brand image and find new
ways to satisfy the customer.

Q 4. Can the Starbuck's philosophies and strategies be applied to Indian coffee chains? If
yes, how? If not, then in the same way, what changes would you suggest?

Yes, it is the Starbucks’ philosophy & strategy can be applied to Indian Coffee Chains. I would
like to cite the example of Café Coffee Day.
The following are the problems faced by them-
(i) Spoilt food served
(ii) Extra charge
(iii) Service tax charged at higher rate
(iv)Ill-treatment
The following can used to solve the problems of CCD-
(i) Reduce waste
(ii) Hard skills on cash register and how to mix drinks
(iii) Soft skills
(iv)Just say YES policy

The strategies used by Starbucks are as follows-

(i) Strategic location of stores
(ii) Novelty items
(iii) Non-Coffee items
According to me, this would be the possible steps to imbibe some of the good practices.

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