PART 6

Starbucks: Delivering Customer

CASE

14 Service
Youngme Moon and John Quelch

Starbucks, the dominant specialty-coffee brand in North America, must respond to recent market
research indicating that the company is not meeting customer expectations in terms of service. To
increase customer satisfaction, the company is debating a plan that would increase the amount
of labor in its stores and theoretically increase speed of service. However, the impact of the plan
(which would cost $40 million annually) on the company’s bottom line is unclear.

In mid-2002, Christine Day, Starbucks’ senior vice great pride in our retail service,” said Day, “but according
president of administration in North America, sat in to the data, we’re not always meeting our customers’
the seventh-floor conference room of Starbucks’ Seattle expectations in the area of customer satisfaction.”
headquarters and reached for her second cup of toffee
nut latte. The handcrafted beverage — a buttery, toffee- As a result of these concerns, Day and her associates had
nut-flavored espresso concoction topped with whipped come up with a plan to invest an additional $40 million
cream and toffee sprinkles — had become a regular annually in the company’s 4,500 stores, which would
afternoon indulgence for Day ever since its introduction allow each store to add the equivalent of 20 hours of
earlier that year. labor a week. “The idea is to improve speed of service
and thereby increase customer satisfaction,” said Day.
As she waited for her colleagues to join her, Day reflected
on the company’s recent performance. While other In two days, Day was due to make a final recommendation
retailers were still reeling from the post-9/11 recession, to both Schultz and Orin Smith, Starbucks’ CEO, about
Starbucks was enjoying its 11th consecutive year of 5%, whether the company should move forward with the
or higher, comparable store sales growth, prompting its plan. “The investment is the EPS (earnings per share)
founder and chairman, Howard Schultz, to declare: “I equivalent of almost seven cents a share,” said Day. In
think we’ve demonstrated that we are close to a recession- preparation for her meeting with Schultz and Smith,
proof product.”1 Day had asked one of her associates to help her think
through the implications of the plan. Day noted, “The
Day, however, was not feeling nearly as sanguine, in part real question is, do we believe what our customers are
because Starbucks’ most recent market research had telling us about what constitutes ‘excellent’ customer
revealed some unexpected findings. “We’ve always taken service? And if we deliver it, what will the impact be on
our sales and profitability?”

Copyright © 2003 President and Fellows of Harvard College; revised COMPANY BACKGROUND
July 10, 2006.
The story of how Howard Schultz managed to transform
Professors Youngme Moon and John Quelch prepared this case. HBS
a commodity into an upscale cultural phenomenon had
cases are developed solely as the basis for class discussion. Cases
are not intended to serve as endorsements, sources of primary data, become the stuff of legends. In 1971, three coffee fanatics
or illustrations of effective or ineffective management. — Gerald Baldwin, Gordon Bowker, and Ziev Siegl —
opened a small coffee shop in Seattle’s Pike Place Market.
1 Jake Batsell, “A Grande Decade for Starbucks,” The Seattle The shop specialized in selling whole arabica beans to a
Times, June 26, 2002. niche market of coffee purists.

Case Studies 591

In 1982, Schultz joined the Starbucks marketing team. unique customers in well over 5,000 stores around the
Shortly thereafter, he traveled to Italy, where he became globe and was opening on average three new stores a
fascinated with Milan’s coffee culture, in particular, the day. (See Exhibits 1 to 3 for company financials and store
role the neighborhood espresso bars played in Italians’ growth over time.)
everyday social lives. Upon his return, the inspired
Schultz convinced the company to set up an espresso What made Starbucks’ success even more impressive
bar in the corner of its only downtown Seattle shop. As was that the company had spent almost nothing on
Schultz explained, the bar became the prototype for his advertising to achieve it. North American marketing
long-term vision: primarily consisted of point-of-sale materials and
local-store marketing and was far less than the industry
The idea was to create a chain of coffeehouses average. (Most fast-food chains had marketing budgets
that would become America’s “third place.” At in the 3% to 6% range.)
the time, most Americans had two places in
their lives — home and work. But I believed that For his part, Schultz remained as Chairman and Chief
people needed another place, a place where they Global Strategist in control of the company, handing
could go to relax and enjoy others, or just be by over day-to-day operations in 2002 to CEO Orin Smith,
themselves. I envisioned a place that would be a Harvard MBA (1967) who joined the company in 1990.
separate from home or work, a place that would
mean different things to different people.

A few years later, Schultz got his chance when Starbucks’ THE STARBUCKS VALUE
founders agreed to sell him the company. As soon as
Schultz took over, he immediately began opening new PROPOSITION
stores. The stores sold whole beans and premium-priced
Starbucks’ brand strategy was best captured by its “live
coffee beverages by the cup and catered primarily to
coffee” mantra, a phrase that reflected the importance the
affluent, well-educated, white-collar patrons (skewed
company attached to keeping the national coffee culture
female) between the ages of 25 and 44. By 1992, the
alive. From a retail perspective, this meant creating
company had 140 such stores in the Northwest and
an “experience” around the consumption of coffee, an
Chicago and was successfully competing against other
experience that people could weave into the fabric of
small-scale coffee chains such as Gloria Jean’s Coffee
their everyday lives.
Bean and Barnie’s Coffee & Tea.
There were three components to this experiential
That same year, Schultz decided to take the company
branding strategy. The first component was the coffee
public. As he recalled, many Wall Street types were
itself. Starbucks prided itself on offering what it believed
dubious about the idea: “They’d say, ‘You mean, you’re
to be the highest quality coffee in the world, sourced
going to sell coffee for a dollar in a paper cup, with Italian
from the Africa, Central and South America, and Asia–
names that no one in America can say? At a time in
Pacific regions. To enforce its exacting coffee standards,
America when no one’s drinking coffee? And I can get
Starbucks controlled as much of the supply chain as
coffee at the local coffee shop or doughnut shop for 50
possible: It worked directly with growers in various
cents? Are you kidding me?’”2
countries of origin to purchase green coffee beans. It
oversaw the custom-roasting process for the company’s
Ignoring the skeptics, Schultz forged ahead with the
various blends and single-origin coffees. It controlled
public offering, raising $25 million in the process. The
distribution to retail stores around the world.
proceeds allowed Starbucks to open more stores across
the nation. By mid-2002, Schultz had unequivocally
The second brand component was service, or what the
established Starbucks as the dominant specialty-
company sometimes referred to as “customer intimacy.”
coffee brand in North America. Sales had climbed at a
“Our goal is to create an uplifting experience every
compound annual growth rate (CAGR) of 40% since the
time you walk through our door,” explained Jim Alling,
company had gone public, and net earnings had risen at a
Starbucks’ Senior Vice President of North American
CAGR of 50%. The company was now serving 20 million

2 Batsell.

592 Case 14 ▪ Starbucks: Delivering Customer Service

 PART 6
Exhibit 1 Starbucks’ financials, FY 1998 to FY 2002 (in million $)

FY 1998 FY 1999 FY 2000 FY 2001 FY 2002

Revenue

Co-owned North American 1,076.8 1,375.0 1,734.9 2,086.4 2,583.8

Co-owned International (UK, Thailand, Australia) 25.8 48.4 88.7 143.2 209.1

Total company-operated retail 1,102.6 1,423.4 1,823.6 2,229.6 2,792.9

Specialty operations 206.1 263.4 354.0 419.4 496.0

Net revenues 1,308.7 1,686.8 2,177.6 2,649.0 3,288.9

Cost of goods sold 578.5 747.6 961.9 1,112.8 1,350.0

Gross profit 730.2 939.2 1,215.7 1,536.2 1,938.9

Joint-venture incomea 1.0 3.2 20.3 28.6 35.8

Expenses:

Store operating expense 418.5 543.6 704.9 875.5 1,121.1

Other operating expense 44.5 54.6 78.4 93.3 127.2

Depreciation & amortization expense 72.5 97.8 130.2 163.5 205.6

General & administrative expense 77.6 89.7 110.2 151.4 202.1

Operating expenses 613.1 785.7 1,023.8 1,283.7 1,656.0

Operating profit 109.2 156.7 212.3 281.1 310.0

Net income 68.4 101.7 94.5 181.2 215.1

% Change in monthly comparable store salesb

North America 5% 6% 9% 5% 7%

Consolidated 5% 6% 9% 5% 6%

Source: Adapted from company reports and Lehman Brothers, November 5, 2002.

a
Includes income from various joint ventures, including Starbucks’ partnership with the Pepsi-Cola Company to develop and distribute
Frappuccino and with Dreyer ’s Grand Ice Cream to develop and distribute premium ice creams.
b
Includes only company-operated stores open 13 months or longer.

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Exhibit 2 Starbucks’ store growth
FY 1998 FY 1999 FY 2000 FY 2001 FY 2002

Total North America 1,755 2,217 2,976 3,780 4,574

Company-operated 1,622 2,038 2,446 2,971 3,496

Licensed storesa 133 179 530 809 1,078

Total international 131 281 525 929 1,312

Company-operated 66 97 173 295 384

Licensed stores 65 184 352 634 928

Total stores 1,886 2,498 3,501 4,709 5,886

Source: Company reports. a

Includes kiosks located in grocery stores, bookstores, hotels, airports, and so on.

Exhibit 3 Additional data, North American company-operated Channels of Distribution

stores (FY 2002)
Almost all of Starbucks’ locations in North America were
Average
company-operated stores located in high traffic, high
Average hourly rate with shift supervisors and
$9.00 visibility settings, such as retail centers, office buildings,
hourly partners and university campuses.4 In addition to selling whole-
Total labor hours per week, average store 360 bean coffees, these stores sold rich-brewed coffees,
Italian-style espresso drinks, cold-blended beverages, and
Average weekly store volume $15,400.00
premium teas. Product mixes tended to vary depending
Average ticket $3.85 on a store’s size and location, but most stores offered a
Average daily customer count, per store 570 variety of pastries, sodas, and juices, along with coffee-
related accessories and equipment, music CDs, games,
Source: Company reports. and seasonal novelty items. (About 500 stores even
carried a selection of sandwiches and salads.)
retail. “Our most loyal customers visit us as often as 18
Beverages accounted for the largest percentage of sales
times a month, so it could be something as simple as
in these stores (77%); this represented a change from 10
recognizing you and knowing your drink or customizing
years earlier, when about half of store revenues had come
your drink just the way you like it.”
from sales of whole-bean coffees. (See Exhibit 4 for retail
sales mix by product type; see Exhibit 5 for a typical menu
The third brand component was atmosphere. “People
board and price list.)
come for the coffee,” explained Day, “but the ambience
is what makes them want to stay.” For that reason, most
Starbucks also sold coffee products through noncompany-
Starbucks had seating areas to encourage lounging, and
operated retail channels; these so-called “specialty
layouts that were designed to provide an upscale yet
operations” accounted for 15% of net revenues. About
inviting environment for those who wanted to linger.
27% of these revenues came from North American
“What we have built has [a] universal appeal,” remarked
food-service accounts, that is, sales of whole bean and
Schultz. “It’s based on the human spirit, it’s based on
ground coffees to hotels, airlines, restaurants, and the like.
a sense of community, the need for people to come
Another 18% came from domestic retail store licenses
together.”3
that, in North America, were only granted when there
was no other way to achieve access to desirable retail
space (e.g., in airports).

4 Starbucks had recently begun experimenting with drive-throughs.

3 Batsell. Less than 10% of its stores had drive-throughs, but in these
stores, the drive-throughs accounted for 50% of all business.

594 Case 14 ▪ Starbucks: Delivering Customer Service

 PART 6
Exhibit 4 Product mix, North American company-operated The company had a generous policy of giving health
stores (FY 2002) insurance and stock options to even the most entry-
Percent of Sales level partners, most of whom were between the ages of
Retail Product Mix
17 and 23. Partly as a result of this, Starbucks’ partner
satisfaction rate consistently hovered in the 80% to 90%
Coffee beverages 77% range, well above the industry norm,5 and the company
Food items 13% had recently been ranked 47th in the Fortune magazine
list of best places to work, quite an accomplishment for
Whole-bean coffees 6%
a company with so many hourly wage workers.
Equipment & accessories 4%
In addition, Starbucks had one of the lowest employee
Source: Company reports. turnover rates in the industry — just 70%, compared with
fast-food industry averages as high as 300%. The rate
The remaining 55% of specialty revenues came from was even lower for managers, and as Alling noted, the
a variety of sources, including international licensed company was always looking for ways to bring turnover
stores, grocery stores and warehouse clubs (Kraft Foods down further: “Whenever we have a problem store, we
handled marketing and distribution for Starbucks in this almost always find either an inexperienced store manager
channel), and online and mail-order sales. Starbucks also or inexperienced baristas. Manager stability is key. It not
had a joint venture with Pepsi-Cola to distribute bottled only decreases partner turnover but also enables the store
Frappuccino beverages in North America, as well as a to do a much better job of recognizing regular customers
partnership with Dreyer’s Grand Ice Cream to develop and providing personalized service. So our goal is to
and distribute a line of premium ice creams. make the position a lifetime job.”

Day explained the company’s broad distribution strategy: To this end, the company encouraged promotion from
within its own ranks. About 70% of the company’s store
Our philosophy is pretty straightforward — we managers were ex-baristas, and about 60% of its district
want to reach customers where they work, travel, managers were ex-store managers. In fact, upon being
shop, and dine. In order to do this, we sometimes hired, all senior executives had to train and succeed as
have to establish relationships with third parties baristas before being allowed to assume their positions
that share our values and commitment to in corporate headquarters.
quality. This is a particularly effective way to
reach newcomers with our brand. It’s a lot less
intimidating to buy Starbucks at a grocery store
than it is to walk into one of our coffeehouses DELIVERING ON SERVICE
for the first time. In fact, about 40% of our
new coffeehouse customers have already tried When a partner was hired to work in one of Starbucks’
the Starbucks brand before they walk through North American retail stores, he or she had to undergo
our doors. Even something like ice cream has two types of training. The first type focused on “hard
become an important trial vehicle for us. skills,” such as learning how to use the cash register and
learning how to mix drinks. Most Starbucks beverages
were handcrafted, and to ensure product quality, there
Starbucks Partners was a pre-specified process associated with each drink.
All Starbucks employees were called “partners.” The Making an espresso beverage, for example, required seven
company employed 60,000 partners worldwide, about specific steps.
50,000 in North America. Most were hourly wage
employees (called baristas), who worked in Starbucks The other type of training focused on “soft skills.” Alling
retail stores. Alling remarked, “From day one, Howard explained:
has made clear his belief that partner satisfaction leads
to customer satisfaction. This belief is part of Howard’s In our training manual, we explicitly teach
DNA, and because it’s been pounded into each and every partners to connect with customers — to
one of us, it’s become part of our DNA, too.”
5 Industrywide, employee satisfaction rates tended to be in the
50–60% range. Source: Starbucks, 2000.

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Exhibit 5 Typical menu board and price list for a North American company-owned store

Espresso Traditions Tall Grande Venti Cold Beverages Tall Grande Venti
Classic Favorites Iced Caffe Latte 2.55 3.10 3.50
Toffee Nut Latte 2.95 3.50 3.80 Iced Caramel Macchiato 2.80 3.40 3.80
Vanilla Latte 2.85 3.40 3.70 Iced Caffe Americano 1.75 2.05 3.40
Caffe Latte 2.55 3.10 3.40 Cold Alternatives Tall Grande Venti
Cappuccino 2.55 3.10 3.40 Toffee Nut Crème 2.45 2.70 2.95
Caramel Macchiato 2.80 3.40 3.65 Vanilla Crème 2.20 2.45 2.70
White Chocolate Mocha 3.20 3.75 4.00 Caramel Apple Cider 2.45 2.70 2.95
Caffe Mocha 2.75 3.30 3.55 Hot Chocolate 2.20 2.45 2.70
Caffe Americano 1.75 2.05 2.40 Tazo Hot Tea 1.15 1.65 1.65
Espresso Solo Doppio Tazo Chai 2.70 3.10 3.35
Espresso 1.45 1.75 Whole Beans: Bold 1/2 lb 1 lb
Extras Our most intriguing and exotic
Additional Espresso Shot .55 coffees
Add flavored syrup .30 Gold Coast Blend 5.70 10.95

Organic milk & soy French Roast 5.20 9.95

available upon request Sumatra 5.30 10.15
Frappuccino Tall Grande Venti Decaf Sumatra 5.60 10.65
Ice Blended Beverages Ethiopia Sidame 5.20 9.95
Coffee 2.65 3.15 3.65 Arabian Mocha Sanani 8.30 15.95
Mocha 2.90 3.40 3.90 Kenya 5.30 10.15
Caramel Frappuccino 3.15 3.65 4.15 Italian Roast 5.20 9.95
Mocha Coconut Sulawesi 6.10 11.65
3.15 3.65 4.15
(limited offering)
Whole Beans: Smooth, richer, more 1/2 lb 1 lb
Crème Frappuccino Tall Grande Venti flavorful coffees
Ice Blended Crème
Espresso Roast 5.20 9.95
Toffee Nut Crème 3.15 3.65 4.15
Decaf Espresso Roast 5.60 10.65
Vanilla Crème 2.65 3.15 3.65
Yukon Blend 5.20 9.95
Coconut Crème 3.15 3.65 4.15
Café Verona 5.20 9.95
Tazo Tea Frappuccino Tall Grande Venti Guatemala Antigua 5.30 10.15
Ice Blended Teas
Arabian Mocha Java 6.30 11.95
Tazo Citrus 2.90 3.40 3.90
Decaf Mocha Java/SWP 6.50 12.45
Tazoberry 2.90 3.40 3.90
Whole Beans: Mild 1/2 lb 1 lb
Tazo Chai Crème 3.15 3.65 4.15
The perfect introduction to
Brewed Coffee Tall Grande Venti Starbucks coffees
Coffee of the Day 1.40 1.60 1.70 Breakfast Blend 5.20 9.95
Decaf of the Day 1.40 1.60 1.70 Lightnote Blend 5.20 9.95
Decaf Lightnote Blend 5.60 10.65
Colombia Narino 5.50 10.45
House Blend 5.20 9.95
Decaf House Blend 5.60 10.65
Fair Trade Coffee 5.95 11.45

Source: Starbucks location: Harvard Square, Cambridge, Massachusetts, February 2003.

596 Case 14 ▪ Starbucks: Delivering Customer Service

 PART 6
enthusiastically welcome them to the store, On the one hand, we train baristas to make
to establish eye contact, to smile, and to try beverages to our pre-established quality
to remember their names and orders if they’re standards — this means enforcing a consistent
regulars. We also encourage partners to create process that baristas can master. On the other
conversations with customers using questions hand, if a customer comes in and wants it their
that require more than a yes or no answer. So way — extra vanilla, for instance — what should
for example, “I noticed you were looking at the we do? Our heaviest users are always the most
menu board — what types of beverages do you demanding. Of course, every time we customize,
typically enjoy?” is a good question for a partner we slow down the service for everyone else. We
to ask. also put a lot of strain on our baristas, who are
already dealing with an extraordinary number
Starbucks’ “Just Say Yes” policy empowered partners to of sophisticated drinks.
provide the best service possible, even if it required going
beyond company rules. “This means that if a customer One obvious solution to the problem was to hire more
spills a drink and asks for a refill, we’ll give it to him,” said baristas to share the workload. However, the company
Day. “Or if a customer doesn’t have cash and wants to pay had been extremely reluctant to do this in recent years,
with a check (which we aren’t supposed to accept), then particularly given the economic downturn. Labor was
we’ll give her a sample drink for free. The last thing we already the company’s largest expense item in North
want to do is win the argument and lose the customer.” America (Exhibit 3), and Starbucks stores tended to be
located in urban areas with high wage rates. Instead, the
Most barista turnover occurred within the first 90 days of company had focused on increasing barista efficiency
employment; if a barista lasted beyond that, there was a by removing all non-value-added tasks, simplifying the
high probability that he or she would stay for three years beverage production process, and tinkering with the
or more. “Our training ends up being a self-selection facility design to eliminate bottlenecks.
process,” Alling said. Indeed, the ability to balance hard
and soft skills required a particular type of person, and In addition, the company had recently begun installing
Alling believed the challenges had only grown over time: automated espresso machines in its North American
cafés. The verismo machines, which decreased the
Back in the days when we sold mostly beans, number of steps required to make an espresso beverage,
every customer who walked in the door was a reduced waste, improved consistency, and generated an
coffee connoisseur, and it was easy for baristas overwhelmingly positive customer and barista response.
to engage in chitchat while ringing up a bag.
Those days are long gone. Today, almost every Measuring Service Performance
customer orders a handcrafted beverage. If the
line is stretching out the door and everyone’s Starbucks tracked service performance using a variety
clamoring for their coffee fix, it’s not that easy to of metrics, including monthly status reports and self-
strike up a conversation with a customer. reported checklists. The company’s most prominent
measurement tool was a mystery shopper program called
The complexity of the barista’s job had also increased over the “Customer Snapshot.” Under this program, every
time; making a venti tazoberry and crème, for instance, store was visited by an anonymous mystery shopper three
required 10 different steps. “It used to be that a barista times a quarter. Upon completing the visit, the shopper
could make every variation of drink we offered in half would rate the store on four “Basic Service” criteria:
a day,” Day observed. “Nowadays, given our product Service Did the register partner verbally greet
proliferation, it would take 16 days of eight-hour shifts. the customer?
There are literally hundreds of combinations of drinks Did the barista and register partner
in our portfolio.” make eye contact with the customer?
Say “thank you”?
This job complexity was compounded by the fact that Cleanliness Was the store clean? The counters?
almost half of Starbucks’ customers customized their The tables?
drinks. According to Day, this created a tension between The restrooms?
product quality and customer focus for Starbucks:

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Product quality Was the order filled accurately? Was In addition to Basic Service, stores were also rated on
the temperature of the drink within “Legendary Service,” which was defined as “behavior
range? Was the beverage properly that created a memorable experience for a customer that
presented? inspired a customer to return often and tell a friend.”
Speed of service How long did the customer have to Legendary Service scores were based on secret shopper
wait? observations of service attributes such as partners
initiating conversations with customers, partners
The company’s goal was to serve a customer within recognizing customers by name or drink order, and
three minutes, from back-of-the-line to drink-in hand. partners being responsive to service problems.
This benchmark was based on market research which
indicated that the three-minute standard was a key During 2002, the company’s Customer Snapshot scores
component in how current Starbucks customers defined had increased across all stores (Exhibit 6), leading Day to
“excellent service.” comment, “The Snapshot is not a perfect measurement
tool, but we believe it does a good job of measuring trends

Service Cleanliness
95 94
94 93
93 92
92 91
91 90
90 89
Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q3 Q4 Q1 Q2 Q3 Q4 Q1
01 01 02 02 02 02 03 01 01 02 02 02 02 03

Product Quality Average Wait Time

95 4.00 (in [Link])
94 3.80
93 3.60
92 3.40
91 3.20
90 3.00
Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q3 Q4 Q1 Q2 Q3 Q4 Q1
01 01 02 02 02 02 03 01 01 02 02 02 02 03

Legendary Service Scores

100%

80%

60%

40%

20%

0%
Q4 01 Q1 02 Q2 02 Q3 02 Q4 02 Q1 03
1 or 2 star 3 star 4 star 5 star

Exhibit 6 Customer Snapshot scores (North American stores)

598 Case 14 ▪ Starbucks: Delivering Customer Service

 PART 6
over the course of a quarter. In order for a store to do well in the world.”6 This ambitious goal required an aggressive
on the Snapshot, it needs to have sustainable processes growth strategy, and, in 2002, the two biggest drivers
in place that create a well-established pattern of doing of company growth were retail expansion and product
things right so that it gets ‘caught’ doing things right.” innovation.

Retail Expansion
Starbucks already owned close to one-third of America’s
COMPETITION coffee bars, more than its next five biggest competitors
In the US, Starbucks competed against a variety of combined. (By comparison, the US’s second-largest
small-scale specialty-coffee chains, most of which were player, Diedrich Coffee, operated fewer than 400 stores.)
regionally concentrated. Each tried to differentiate However, the company had plans to open 525 company-
itself from Starbucks in a different way. For example, operated and 225 licensed North American stores in
Minneapolis-based Caribou Coffee, which operated 2003, and Schultz believed that there was no reason North
more than 200 stores in nine states, differentiated itself on America could not eventually expand to at least 10,000
store environment. Rather than offer an upscale, pseudo- stores. As he put it, “These are still the early days of the
European atmosphere, its strategy was to simulate the company’s growth.”7
look and feel of an Alaskan lodge, with knotty-pine
cabinetry, fireplaces, and soft seating. Another example The company’s optimistic growth plans were based on a
was California-based Peet’s Coffee & Tea, which operated number of considerations:
about 70 stores in five states. More than 60% of Peet’s • First, coffee consumption was on the rise in the US,
revenues came from the sale of whole beans. Peet’s following years of decline. More than 109 million
strategy was to build a super premium brand by offering people (about half of the US population) now drank
the freshest coffee on the market. One of the ways it coffee every day, and an additional 52 million drank
delivered on this promise was by “roasting to order,” it on occasion. The market’s biggest growth appeared
that is, by hand-roasting small batches of coffee at its to be among drinkers of specialty coffee,8 and it
California plant and making sure that all of its coffee was estimated that about one-third of all US coffee
shipped within 24 hours of roasting. consumption took place outside of the home, in
places such as offices, restaurants, and coffee shops
Starbucks also competed against thousands of (Exhibit 7).
independent specialty-coffee shops. Some of these
• Second, there were still eight states in the US without
independent coffee shops offered a wide range of food and
a single company-operated Starbucks. In fact,
beverages, including beer, wine, and liquor; others offered
the company was only in 150 of the roughly 300
satellite televisions or Internet-connected computers.
metropolitan statistical areas in the nation.
Still others differentiated themselves by delivering highly
personalized service to an eclectic clientele. • Third, the company believed it was far from reaching
saturation levels in many existing markets. In the
Finally, Starbucks competed against donut and bagel Southeast, for example, there was only one store
chains such as Dunkin Donuts, which operated over for every 110,000 people (compared with one store
3,700 stores in 38 states. Dunkin Donuts attributed for every 20,000 people in the Pacific Northwest).
half of its sales to coffee and, in recent years, had begun More generally, only seven states had more than 100
offering flavored coffee and non-coffee alternatives, such Starbucks locations.
as Dunkaccino (a coffee and chocolate combination
available with various toppings) and Vanilla Chai (a
combination of tea, vanilla, honey, and spices).

CAFFEINATING THE WORLD 6 Starbucks 2002 Annual Report.

7 Dina ElBoghdady, “Pouring It On: The Starbucks Strategy?
The company’s overall objective was to establish Locations, Locations, Locations,” The Washington Post, August
Starbucks as the “most recognized and respected brand 25, 2002.
8 National Coffee Association.

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 2000 - $21 billion 2002E - $21.5 billion 2005E - $22 billion
Specialty Specialty Specialty
Coffee Coffee Coffee
27% 31% 41%

Traditional Traditional Traditional

Coffee Coffee Coffee
73% 69% 59%

Starbucks Share of Starbucks Share of Starbucks Share of

Specialty Coffee Market Specialty Coffee Market Specialty Coffee Market
38% 42% (estimate) 50% (estimate)

Source: Adapted from company reports and Lehman Brothers, November 5, 2002.

Other estimatesª for the US retail coffee market in 2002:

• In the home, specialty coffeeb was estimated to be a $3.2-billion business, of which Starbucks was estimated to have a 4% share.
• In the food-service channel, specialty coffee was estimated to be a $5-billion business, of which Starbucks was estimated to have a 5% share.
• In grocery stores, Starbucks was estimated to have a 7.3% share in the ground-coffee category and a 21.7% share in the whole-beans category.
• It was estimated that, over the next several years, the overall retail market would grow less than 1% per annum, but growth in the specialty-coffee
category would be strong, with compound annual growth rate (CAGR) of 9–10%.
• Starbucks’ US business was projected to grow at a CAGR of approximately 20% top-line revenue growth.

a The value of the retail coffee market was difficult to estimate, given the highly fragmented and loosely monitored nature of the market (i.e., specialty
coffeehouses, restaurants, delis, kiosks, street carts, grocery and convenience stores, and vending machines).
b Specialty coffee includes espresso, cappuccino, latte, café mocha, iced/ice-blended coffee, gourmet coffee (premium whole bean or ground), and
blended coffee.

Exhibit 7 Total US retail coffee market (includes both in-home and out-of-home consumption)

Starbucks’ strategy for expanding its retail business was Starbucks’ international expansion plans were equally
to open stores in new markets while geographically ambitious. Starbucks already operated over 300 company-
clustering stores in existing markets. Although the owned stores in the UK, Australia, and Thailand, in
latter often resulted in significant cannibalization, the addition to about 900 licensed stores in various countries
company believed that this was more than offset by the in Asia, Europe, the Middle East, Africa, and Latin
total incremental sales associated with the increased America. (Its largest international market was Japan, with
store concentration. As Schultz readily conceded, “We close to 400 stores.) The company’s goal was to ultimately
self-cannibalize at least a third of our stores every day9.” have 15,000 international stores.

When it came to selecting new retail sites, the company Product Innovation
considered a number of criteria, including the extent
to which the demographics of the area matched the The second big driver of company growth was product
profile of the typical Starbucks drinker, the level of innovation. Internally, this was considered one of
coffee consumption in the area, the nature and intensity the most significant factors in comparable store sales
of competition in the local market, and the availability growth, particularly since Starbucks’ prices had remained
of attractive real estate. Once a decision was made to relatively stable in recent years. New products were
move forward with a site, the company was capable of launched on a regular basis; for example, Starbucks
designing, permitting, constructing, and opening a new introduced at least one new hot beverage every holiday
store within 16 weeks. A new store typically averaged season.
about $610,000 in sales during its first year; same-store
sales (comps) were strongest in the first three years and The new-product development process generally
then continued to comp positively, consistent with the operated on a 12- to 18-month cycle, during which the
company average. internal research and development (R&D) team tinkered
with product formulations, ran focus groups, and
9 ElBoghdady. conducted in-store experiments and market tests. Aside

600 Case 14 ▪ Starbucks: Delivering Customer Service

 PART 6
from consumer acceptance, whether a product made it to speed access to the Internet in 2,000 Starbucks stores in
market depended on a number of factors, including the the US and Europe, starting at $49.99 a month.
extent to which the drink fit into the “ergonomic flow”
of operations and the speed with which the beverage
could be hand-crafted. Most importantly, the success of
a new beverage depended on partner acceptance. “We’ve STARBUCKS’ MARKET RESEARCH:
learned that no matter how great a drink it is, if our
partners aren’t excited about it, it won’t sell,” said Alling. TROUBLE BREWING?
Interestingly, although Starbucks was considered one
In recent years, the company’s most successful innovation
of the world’s most effective marketing organizations, it
had been the 1995 introduction of a coffee and noncoffee-
lacked a strategic marketing group. In fact, the company
based line of Frappuccino beverages, which had driven
had no chief marketing officer, and its marketing
same-store sales primarily by boosting traffic during
department functioned as three separate groups — a
non-peak hours. The bottled version of the beverage
market research group that gathered and analyzed market
(distributed by PepsiCo) had become a $400-million10
data requested by the various business units, a category
franchise; it had managed to capture 90% of the ready-
group that developed new products and managed
to-drink coffee category due in large part to its appeal to
the menu and margins, and a marketing group that
non-coffee-drinking 20-somethings.
developed the quarterly promotional plans.

Service Innovation This organizational structure forced all of Starbucks’

In terms of nonproduct innovation, Starbucks’ stored- senior executives to assume marketing-related
value card (SVC) had been launched in November responsibilities. As Day pointed out, “Marketing is
2001. This prepaid, swipeable smart card — which everywhere at Starbucks — it just doesn’t necessarily
Schultz referred to as “the most significant product show up in a line item called ‘marketing.’ Everyone
introduction since Frappuccino”11 — could be used to pay has to get involved in a collaborative marketing effort.”
for transactions in any company-operated store in North However, the organizational structure also meant that
America. Early indications of the SVC’s appeal were very market- and customer-related trends could sometimes
positive: After less than one year on the market, about be overlooked. “We tend to be great at measuring things,
six million cards had been issued, and initial activations at collecting market data,” Day noted, “but we are not
and reloads had already reached $160 million in sales. very disciplined when it comes to using this data to drive
In surveys, the company had learned that cardholders decision making.” She continued:
tended to visit Starbucks twice as often as cash customers
did and tended to experience reduced transaction times. This is exactly what started to happen a few
years ago. We had evidence coming in from
Day remarked, “We’ve found that a lot of the cards are market research that contradicted some of the
being given away as gifts, and many of those gift recipients fundamental assumptions we had about our
are being introduced to our brand for the first time. Not brand and our customers. The problem was
to mention the fact that the cards allow us to collect all that this evidence was all over the place — no
kinds of customer-transaction data, data that we haven’t one was really looking at the “big picture.” As a
even begun to do anything with yet.” result, it took a while before we started to take
notice.
The company’s latest service innovation was its T-Mobile
HotSpot wireless Internet service, which it planned to
introduce in August 2002. The service would offer high- Starbucks’ Brand Meaning
Once the team did take notice, it discovered several
things. First, despite Starbucks’ overwhelming presence
and convenience, there was very little image or product
10 Refers to sales at retail. Actual revenue contribution was much
lower due to the joint-venture structure.
differentiation between Starbucks and the smaller coffee
11 Stanley Holmes, “Starbucks’ Card Smarts,” BusinessWeek, chains (other than Starbucks’ ubiquity) in the minds of
March 18, 2002. specialty coffeehouse customers. There was significant
differentiation, however, between Starbucks and the
independent specialty coffeehouses (Exhibit 8).

Case Studies 601

Exhibit 8 Qualitative brand meaning: Independents vs. The Changing Customer
Starbucks
The market research team also discovered that Starbucks’
customer base was evolving. Starbucks’ newer customers
Independents:
tended to be younger, less well educated, and in a
• Social and inclusive lower income bracket than Starbucks’ more established
• Diverse and intellectual
customers. In addition, they visited the stores less
• Artsy and funky
• Liberal and free-spirited frequently and had very different perceptions of the
• Lingering encouraged Starbucks brand compared to more established customers
• Particularly appealing to younger coffeehouse (Exhibit 10).
customers
• Somewhat intimidating to older, more mainstream
coffeehouse customers
Furthermore, the team learned that Starbucks’ historical
customer profile — the affluent, well-educated, white-
Starbucks: collar female between the ages of 24 and 44 — had
• Everywhere — the trend
expanded. For example, about half of the stores in
• Good coffee on the run southern California had large numbers of Hispanic
• Place to meet and move on customers. In Florida, the company had stores that
• Convenience oriented; on the way to work catered primarily to Cuban-Americans.
• Accessible and consistent

Customer Behavior
Source: Starbucks, based on qualitative interviews with specialty coffeehouse
customers. With respect to customer behavior, the market research
team discovered that, regardless of the market — urban
versus rural, new versus established — customers tended
More generally, the market research team discovered
to use the stores the same way. The team also learned
that Starbucks’ brand image had some rough edges.
that, although the company’s most frequent customers
The number of respondents who strongly agreed with
averaged 18 visits a month, the typical customer visited
the statement “Starbucks cares primarily about making
just five times a month (Exhibit 11).
money” was up from 53% in 2000 to 61% in 2001, while
the number of respondents who strongly agreed with the
statement “Starbucks cares primarily about building more 100%
stores” was up from 48% to 55%. Day noted, “It’s become 21%
80%
apparent that we need to ask ourselves, ‘Are we focusing
62%
on the right things? Are we clearly communicating our 60% 37%
value and values to our customers, instead of just our
growth plans?’” (Exhibit 9). 40%
27%
20% 42%
Exhibit 9 The top five attributes consumers associate with the
Starbucks brand 11%
0%
% of Total % of All
• Known for specialty/gourmet coffee (54% strongly Starbucks Starbucks
agree) Customer Base Transactions
• Widely available (43% strongly agree)
• Corporate (42% strongly agree) Customer visit 8+ times/month
• Trendy (41% strongly agree) Customer visit 3–7 times/month
• Always feel welcome at Starbucks (39% strongly agree) Customer visit 1–2 times/month

Source: Starbucks, based on 2002 survey. Exhibit 11 Customer visit

602 Case 14 ▪ Starbucks: Delivering Customer Service

 PART 6
Exhibit 10 Starbucks’ customer retention information Measuring and Driving Customer Satisfaction
% OF STARBUCKS’ CUSTOMERS WHO FIRST STARTED Finally, the team discovered that, despite its high
VISITING STARBUCKS… Customer Snapshot scores, Starbucks was not meeting
In the past year 27 expectations in terms of customer satisfaction. The
satisfaction scores were considered critical because
1–2 years ago 20
the team also had evidence of a direct link between
2–5 years ago 30 satisfaction level and customer loyalty (see Exhibit 12
5 or more years ago 23 for customer satisfaction data).
Source: Starbucks, 2002. Based on a sample of Starbucks’ 2002 customer base.
Exhibit 12 Starbucks’ customer behavior, by satisfaction level

Highly
Unsatisfied Satisfied
Established Satisfied
New Customers Customer Customer
Customers Customer
(First Visited in
(First Visited 5+ Number of 3.9 4.3 7.2
the Past Year)
Years Ago) Starbucks
Visits/Month
Percent female 45 49
Average $3.88 $4.06 $4.42
Average age 36 40 Ticket Size/
Percent with college 37 63 Visit
degree or higher Average 1.1 4.4 8.3
Average income $65,000 $81,000 Ticket Size/
Visit
Average # cups 15 19
of coffee/week Source: Self-reported customer activity from Starbucks survey, 2002.
(includes at home
and away from
home) While customer satisfaction was driven by a number
Attitudes toward of different factors (Exhibit 13), Day believed that the
Starbucks: customer satisfaction gap could primarily be attributed to
High-quality brand 34% 51% a service gap between Starbucks scores on key attributes
Brand I trust 30% 50% and customer expectations. When Starbucks had polled
its customers to determine what it could do to make
For someone like me 15% 40%
them feel more like valued customers, “improvements
Worth paying more 8% 32% to service” — in particular, speed-of-service — had been
for
mentioned most frequently (Exhibit 14).
Known for specialty 44% 60%
coffee
Known as the coffee 31% 45%
expert
REDISCOVERING THE STARBUCKS
Best-tasting coffee 20% 31%
Highest-quality 26% 41% CUSTOMER
coffee
Responding to the market research findings posed a
Overall opinion of 25% 44%
difficult management challenge. The most controversial
Starbucks
proposal was the one on the table before Day — it
Source: Starbucks, 2002. “Attitudes toward Starbucks” measured according involved relaxing the labor-hour controls in the stores to
to the percent of customers who agreed with the above statements. add additional 20 hours of labor per week per store, at a
cost of an extra $40 million per year. Not surprisingly, the
plan was being met with significant internal resistance.
“Our CFO is understandably concerned about the
potential impact on our bottom line,” said Day. “Each
$6 million in profit contribution translates into a penny
a share. But my argument is that if we move away from

Case Studies 603

To be read: 83% of Starbucks’ customers rate a clean store as being highly important (90+ on a 100-point scale) in
creating customer satisfaction.
0% 20% 40% 60% 80% 100%
Clean store 83%
Convenient 77%
Treated as a valuable customer 75%
Friendly staff 73%
72%
Highest-quality coffee 67%
Fast service 65%
Appropriate prices 65%
Freshest coffee 60%
Best espresso drinks 60%
Pleasant atmosphere/ambience 50%
Knowledgeable staff 39%
Place to relax, meet friends 37%
Best ice-blended drinks 34%
Involved in the community 30%
Highest-quality tea 20%
Highest-quality pastry, desserts 17%
Selection of noncoffee beverages 17%
Selection of whole beans 16%
New, innovative beverages 13%
Selection of merchandise 5%

Exhibit 13 Importance rankings of key attributes in creating customer satisfaction

604 Case 14 ▪ Starbucks: Delivering Customer Service

 PART 6
Exhibit 14 Factors driving “valued customer” perceptions We need to bring service time down to the three-
minute level in all of our stores, regardless of the
How could Starbucks make you feel more % time of day. If we do this, we’ll not only increase
like a valued customer? Responses customer satisfaction and build stronger long-
Improvements to Service (total) 34% term relationships with our customers, we’ll also
Friendlier, more attentive staff 19%
improve our customer throughput. The goal is
to move each store closer to the $20,000 level in
Faster, more efficient service 10%
terms of weekly sales, and I think that this plan
Personal treatment (remember my name, 4% will help us get there.
remember my order)
More knowledgeable staff 4% In two days, Day was scheduled to make a final
Better service 2% recommendation to Howard Schultz and Orin Smith
Offer Better Prices/Incentive Programs 31% about whether the company should roll out the $40
(total) million plan in October 2002. In preparation for this
Free cup after X number of visits 19%
meeting, Day had asked Alling to help her think through
the implications of the plan one final time. She mused:
Reduce prices 11%
Offer promotions, specials 3% We’ve been operating with the assumption that
Other (total) 21% we do customer service well. But the reality is,
Better quality/variety of products 9% we’ve started to lose sight of the consumer. It’s
Improve atmosphere 8% amazing that this could happen to a company
like us — after all, we’ve become one of the
Community outreach/charity 2%
most prominent consumer brands in the world.
More stores/more convenient locations 2% For all of our focus on building the brand and
Don’t Know/Already Satisfied 28% introducing new products, we’ve simply stopped
talking about the customer. We’ve lost the
Source: Starbucks, 2002. Based on a survey of Starbucks’ 2002 customer base,
including highly satisfied, satisfied, and unsatisfied customers.
connection between satisfying our customers
and growing the business.

seeing labor as an expense to seeing it as a customer- Alling’s response was simple: “We know that both
oriented investment, we’ll see a positive return.” She Howard and Orin are totally committed to satisfying
continued: our retail customers. Our challenge is to tie customer
satisfaction to the bottom line. What evidence do we
have?”

Study Questions

1. What factors accounted for Starbucks’ success in the early 1990s and what was so compelling about
its value proposition? What brand image did Starbucks develop during this period?
2. Why have Starbucks’ customer satisfaction scores declined? Has the company’s service declined or
is it simply measuring satisfaction the wrong way?
3. How has Starbucks changed since its early days?
4. Describe the ideal Starbucks customer from a profitability standpoint. What would it take to ensure that
this customer is highly satisfied? How valuable to Starbucks is a highly satisfied customer?
5. Should Starbucks make the $40 million investment in labor in the stores? What’s the goal of this
investment? Is it possible for a mega-brand to deliver customer intimacy?

Case Studies 605