America is facing a dilemma. In two days she’s scheduled to meet with Howard Shultz,
Starbucks’ Chairman, and Orin Smith, Starbucks’ CEO, to offer her recommendation on whether the company should move forward with a plan to invest $40 million annually, adding 20 hours per week of labor to each of the company’s 4,500 stores. The aim of the investment is to improve speed of service and customer satisfaction.
As the case reveals, Starbucks 2002 is not the Starbucks’ of the early 1990’s, when the coffee giant got its start at a few outlets in the Pacific Northwest selling high quality bagged whole bean coffee to largely affluent gourmands. The casual, unhurried, transactions that were common during Starbucks’ early years allowed for friendly interpersonal exchanges between sales staff and clientele. Such exchanges were highly valued by Starbucks’ clientele and the welcoming, familiar ambiance differentiated Starbucks from its competitors.
In 1992, Starbucks’ partner ownership agreed to sell the company to Howard Shultz, who had previously headed up marketing at Starbucks. Shultz began expanding the company immediately. He raised $25 million from Starbucks’ IPO, added outlets across the country and began diversifying Starbucks’ product lines. While Starbucks continued to offer whole bean coffee, their primary product offering transitioned to customized single cup coffees. This proved a successful move and by 2002 coffee beverages account for 77% of all Starbucks’ sales. Within
10 years Shultz expanded Starbucks to more than 5000 outlets worldwide. During that expansion period Starbucks enjoyed a compound annual sales growth rate of 40% and a compound net earnings growth rate of 50%.
Shultz exercised a very well defined brand strategy, one that had been informed by his personal experience with the coffee culture of Milan, Italy. He aimed to make coffee drinking part of the daily experience of his patrons and, indeed, part of American popular culture. Under
Shultz’s leadership, Starbucks offered a high quality product, with superior customer service, in a relaxed and attractive environment. Costs were kept in check through substantial corporate control of the supply chain, including working with growers directly, in house custom roasting, and control of distribution centers and retail outlets.
Starbucks achieved great success quickly but success came with some sacrifices. 2002 market analysis revealed that the company had been unable to remain true to its original value proposition, tied to superior customer service. The move from whole bean bagged coffee sales to more labor intensive customized single cup coffee sales had a substantial impact on the
Starbucks’ customer experience. While the importance Starbucks placed on high product quality remained, interpersonal interactions between baristas and their clients lessened and the client service expectation evolved from personalized interactions across the counter to a quick and cordial exchange at the point of sale. Even further, retail expansion and extensive product introductions contributed to an increasingly diverse customer demographic, ostensibly less concerned with the social component of coffee buying. While Starbucks’ established customers were primarily affluent white collar individuals, newer customers tended to be younger, less well-educated, and in a lower income brackets. By 2002, Day and others at Starbucks considered that the cost of additional labor at retail outlets might prove to be a customer oriented investment that would begin to pay off immediately with increased throughput as well as increase profitability over the long-term with greater customer retention.
The $40 million investment Day was considering, translated into about $8,889 per store annually or about $171 a week at each store. To recoup $171.00 weekly at 2002 customer…