Starbucks is a dominant specialty-coffee brand in North America. The company has had 5% and higher comparable store sales growth for 11th consecutive year. However, the recent market research had shown that the company fails to meet its customer expectations in terms of service. In order to solve this issue Starbucks plans to invest $40 million annually in the company’s stores to increase the amount of labor, thus improving speed-of-service and gradually customer satisfaction. Since Labor is already the company’s largest expense, the CFO is highly concerned with this investment’s potential impact on the company’s bottom line.
The objective of the following analysis is to find out whether this investment is beneficial in the scope of current situation in the company, market and the state of customer satisfaction.
Starbucks is a popular brand known for its high quality product and service, and has enjoyed a 5% and higher growth for the last 11 years.
The company’s idea was to become the “third place” people would go other than their work and home, where they could relax and enjoy the atmosphere. The company was serving 20 million unique customer with over 5,000 stores around the world and was opening on average 3 new stores a day.
Starbucks’s success was based on several aspects such as well-established brand and growth strategies, as well as unique corporate culture. The stores operated in high-traffic, high-visibility settings and in addition to whole-bean coffees also sold rich-brewed coffees and a variety of pastries. Beverages accounted for 77% of the stores’ sales. The company reached these results with minimal investments on advertising.
Starbucks concentrated on creating an “experience” around the consumption of coffee, which will become a part of people’s routine lives. The objective was to establish Starbucks as the most recognized and respected brand in the world. In order to reach this target company’s brand strategy relied on three highly customer-centric components:
1. Providing highest quality coffee in the world
2. Delivering superior service
3. Establishing inviting and comfortable atmosphere.
Starbucks pursued aggressive growth strategy which was based on retail expansion and product innovation. The expansion strategy included opening stores in new markets and expanding both in US as well as internationally. Another significant factor of sales growth was product innovation. This was particularly important, since Starbuck’s price had remained relatively stable recently.
Starbucks employed 60,000 workers who were called “partners”, most of the hourly waged. The company corporate culture was based on the idea that partner satisfaction leads to customer satisfaction. Due to this culture as well as generous health insurance policy and other benefits Starbucks’ partner satisfaction rate was consistently within 80-90% range. This resulted in one of the lowest employee turnover rates in the industry. This corporate culture has become one of the competitive advantages of the company, which is especially hard to mimic for the competitors.
Market and Competition
Coffee consumption was rising in the US (109 million people drinking daily and 52 million on occasions), with the largest growth taking place among specialty coffee drinkers. In US Starbucks competed against three type of competitors:
1. Small-scale specialty coffee chains such as Caribou Coffee (200 stores) and Peet’s Coffee & Tea (70 stores), the majority of which were regionally concentrated. The former differentiated itself on store environment, whereas Peet’s Coffee and tea – on super-premium brand offering the freshest coffee.
2. Thousands of independent specialty coffee shops providing a wide range of food and beverages, or highly personalized service.
3. Donut and bagel chains such as Dunkin Donuts (3,700 stores).