Starbucks Final Proof

8/3/2019 Starbucks Final Proof

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By: Jared SabelhausJeff Porter

Kevin Clark



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Introduction

It used to be regular or decaf when people talked about what kind of coffee they

preferred, however today it is a whole new world when people talk about their coffee

drink of choice. Sure, regular and decaf are still choices, but with the proliferation of

Starbucks nationally and worldwide, one is more likely to hear orders that include; Toffee

Nut Crème, Caramel Macchiato, Espresso Macchiato or many more variations of the new

coffee drinking generation. Although, Starbucks has humble beginnings, it evolved over

the years into a retail giant, branching out into new areas and partnering with other giants

to get their brand to the masses.

There are several reasons why Starbucks is on top of their market, one being the

meticulous attention they pay to details. Starbucks prides itself in providing the highest

quality product with excellent customer service. Coffee beans were imported from all

over the world and freshly roasted in shop. The stores were constructed to give the

customer a unique and intimate experience upon every visit. The immense effort by

Starbucks employees was part of Starbucks brand strategy to weave the coffee house

experience into America’s “third place.” A place between home and work where people

could read by themselves or meet with friends while drinking the best specialty drinks in

the country. Though Starbucks grew to be the icon for the specialty coffee market, after

the turn of century, market and customer research started to show alarming trends. The

data was not only showing a lack of image and product differentiation between

Starbucks’ products and other smaller coffee chains but also a discontent with customer

service. In response to these issues, Starbucks decided to make changes with one option



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being a $40 million dollar investment in additional labor for its’ retail stores. In this case

we analyzed the current issues and problems facing Starbucks, and we came up with

different options and alternatives that they could possibly pursue. In conjunction with

our options we are going to analyze the presenters’ approach and our critiques on options

they provide.

Assumptions

• The data collected on customer service for Starbucks from mystery shopper

programs and other sources is accurate and reflects the current feelings of

customers.

• All information from financial statements that are taken from the credible

internet sources is accurate.

History

1970 - Company founded by Gerald Balwin, Gordon Bowker and Ziev Siegl.

1971 - Starbucks opens its first location in Seattle’s Pike Place Market.

1982 - Howard Schultz joins Starbucks as director of retail operations and marketing.

Starbucks starts providing coffee to fine restaurants and espresso bars.

1983 - Schultz travels to Italy, where he’s impressed with the popularity of espresso bars

in Milan. He sees the potential in Seattle to develop a similar coffee bar culture.

1984 - Schultz convinces the founders of Starbucks to test the coffee bar concept in a

new location in downtown Seattle.

1985 - Schultz founds Il Giornale, offering brewed coffee and espresso beverages made

from Starbucks coffee beans.



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1987 - With the backing of local investors, Il Giornale acquires Starbucks assets and

changes its name to Starbucks Corporation.

1988 - Starbucks introduces a mail order catalog with service to all 50 states.

1991 - Establishes a relationship with CARE, the international relief and development

organization, and introduces the CARE coffee sampler. It becomes the first

privately-owned U.S. company to offer a stock option program that includes part-

time employees. Opens first licensed airport location in Seattle.

1992 - Starbucks completed initial public offering with Common Stock being traded on

the Nasdaq National Market under the trading symbol “SBUX.”

1996 - Starbucks opens its first stores abroad in Japan, Hawaii, and Singapore.

Starbucks and Dreyer’s Grand Ice Cream, Inc. introduce Starbucks® Ice Cream

and Starbucks Ice Cream Bars. Pepsi-Cola and Starbucks form a business venture

called North American Coffee Partnership and it begins selling a bottled version

of Starbucks Frappuccino® blended beverages.

1998 - Acquires Seattle Coffee Company in the United Kingdom with more than 60

retail locations. They signed a licensing agreement with Kraft Foods Inc. to

extend the Starbucks brand into grocery channels across the U.S. They opened

two new coffeehouse concepts, Café Starbucks in Seattle and Circadia Coffee

House in San Francisco.

1999 - Starbucks acquired Tazo®, a Portland, Oregon based tea company.

2001 - They begin offering wireless internet access in stores. They begin offering the

Starbucks card, a store value card for customers to use and reload (3).



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S.W.O.T.

Strengths

• Although Starbucks spent little money on building their name it has become one

of their biggest strengths. Starbucks has ingrained itself as a household name and

even been immortalized in movies.

• Starbucks size has contributed to its continued sales growth. Radio show hosts

Bob and Tom have a running joke about a Starbucks on every corner. This might

not be an accurate portrayal, however; they do have over 4500 retail stores,

thereby giving Starbucks the ability to distribute their product more effectively

than their competitors.

• Atmosphere of Starbucks is one that is meant to get people to relax. To do this

Starbucks provides fireplaces, leather chairs, newspapers, etc. This combined with

a very large product line gives the customer the feeling of having a relaxing and

trendy experience.

• Starbucks continues to be a trendy place to go. With live music and other events

continually going on at the local Starbucks, people go to be seen as well as to be a

consumer (8).

Weaknesses

• No coordinated strategic marketing group. Though, senior executives assume

marketing-related duties often times however, due to dual roles, information on

trends is overlooked.



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• With the expansion comes increased overhead costs such as; taxes, insurance, and

utilities expenses.

• The wide variety of products though a strength for product diversification is also a

weakness because it places a heavy burden on Starbucks partners to learn a huge

variety of drink combinations and thereby taking more time to complete drinks

which slows the delivery down (8).

Opportunities

• Coffee consumption is on the rise in the U.S. with the biggest growth being

among drinkers of specialty coffee. This coupled with that fact that eight states

are without a single company-operated Starbucks and that it is widely believed

that the company is far from reaching saturation levels in many of their existing

markets bodes well for expansion not only in the U.S. but also worldwide.

• Licensing agreements with other distribution channels is a very good way for

Starbucks to extend their brand name. For instance, a bottled version of

Frappuccino that is distributed by PepsiCo is a $400 million dollar franchise.

• Continued innovation of products and service. Innovations in product lines will

continue to drive sales while innovations in service will enable Starbucks partners

to quickly make new products (8).



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Threats

• Loss of intimate atmosphere with continued expansion. Customers will feel that

each retail store has just become a cookie-cutter of other Starbucks.

• Evolving customers and customer expectations. Service time is among the top

complaints of customers and Starbucks overlooked new customer wants and

needs.

• Loss of image and/or product differentiation. Competition from smaller coffee

chains has blurred the differentiation in the eyes of specialty coffee drinkers. No

longer are patrons of coffeehouses there because they know a lot about quality

coffee but more for the convenience and specialty of drinks (8).

Marketing And Finance

To fully evaluate Starbucks, we need to take a closer look at their financial

statements and ratios. These numbers come from the fiscal year 2002. The profit margin

tells us for every dollar in sales it generates .065 cents in profit, or 6.5% (3). A measure

of profitability is the return on equity, which is a measure of how the stockholders did

during the year (10). For every dollar in equity, Starbucks generated around 12.5 cents in

profit, or 12.5% (3). Return on assets is a measure of the profit per dollar of assets (10).

For every dollar of total assets, Starbucks generated about 9.4 cents in profit, or 9.4% (3).

For some liquidity ratios, we will use the current ratio, quick ratio, and net working

capital. The current ratio is a measure of a company’s short-term liquidity (10). For every

dollar in current liabilities, Starbucks is covered 1.58 times over (3). The quick ratio is



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computed almost exactly like the current ratio except it excludes inventory (10).

Starbucks quick ratio is 1.09 times (3). Net working capital is the ability to meet short-

term obligations (10). The net working capital for Starbucks is around $310 million (3).

One feature of Starbucks is that its debt to equity ratio has been 0 or slightly over 0 for

many years meaning that they are financing their assets with equity. The total assets have

increased from $1,846,519,000 in 2001 to $2,292,736,000 in 2002, an increase of about

24%. The total asset turnover for Starbucks is 1.43 times meaning for every dollar in

assets they generate $1.43 in sales (3).

Starbucks seems to have a solid financial background with increasing profits.

From the year 1998 to 2002, gross profit has increased from $730 million to over $1.9

billion. Net revenues from 2001 to 2002 increased about 24%, while the cost of goods

sold only increased 21% (3). The year before that net revenues increased by 21.5% and

cost of goods sold by only 15.5%. Net income has steadily been increasing from $68.4

million in 1998 to around $215 million in 2002. The cash flow provided by operating

activities in 2002 was over $477 million compared to $318 million in 2000. The net cash

flow from investing in 2002 is -$485 million compared to -$373 million in 2000 (3).

Finally, net cash provided by financing activities was $67 million in 2002 compared with

the 2000 total of $59 million. The reason this isn’t a very large increase is because of the

repurchase of over $52 million in common stock in the year 2002 decreasing the amount

of cash provided (3). The key ratios and financial statements for Starbucks are for the

most part above the industry standard (2). Starbucks statements provide it with a solid

foundation to continually grow at the pace they want to.



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Financial Ratios Starbucks

Profit Margin 6.5%

Return on Equity 12.5%

Return on Assets 9.4%

Current Ratio 1.58

Quick Ratio 1.09

Net Working Capital $310 million

http://www.starbucks.com

$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

2001 2002

Total Assets

Current Assets

Total Liabilities

Current Liabilities

Total Equity

$40 Million Investment

Starbucks had not been meeting the customers’ expectations as far as customer

service goes. Christine Day made up a plan that would invest an additional $40 million

annually in the company’s 4,500 stores, thereby allowing each store to add what would

be 20 hours of labor a week. She thought this would solve the problem of customer

satisfaction by improving the speed of service and making it more convenient. However,

this plan has to be looked at in detail to see if it is worth it and what impact it may have

on their financial statements and bottom line figures. Day says, “The investment is the

EPS equivalent of almost seven cents a share” (8). She believes we shouldn’t look at this



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extra labor as an expense, but more like an investment. “Each $6 million in profit

contribution translates into a penny a share,” says Day. If customers want better service,

we’ll invest in it and we’ll see a positive return, not an expense (8). By our calculations

the $40 million investment would cause the general and administrative expenses, since it

is a labor expense, to increase by $40 million to $242,161,000 (3). This in turn would

cause operating income to decrease from $318,725,000 to $278,725,000. Net income

would then decrease by $40 million from over $215 million to around $175 million. If we

used 2002 numbers, the effect of EPS would be about a 10 cent decrease because before

it was 54 cents and now it is only 44 cents (3). This is not just a one time investment of

$40 million though. To keep the customer satisfaction level high, they must continue to

invest in extra labor if they feel this will help with the satisfaction of customers. So each

year Starbucks will be spending at least $40 million, probably more since they

aggressively want to expand, just to add 20 hours of labor each week in each store. What

will shareholders think when their earnings are possibly losing anywhere from 7 to 10

cents a share just from this one investment? Since this investment will have to occur

every year, Starbucks earnings will have to dramatically increase just to keep pace with

their earning per share so they won’t continue falling.

Market Summary

Starbucks is beginning to move into a coffee shop style of business offering the

internet to the growing number of customers who are using it. Their focus has been more

on customer service and providing high quality products. Starbucks is expanding their



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brand recognition by licensing their products and providing more incentives through the

Starbucks Card (8).

Target Market

Starbucks target market includes those between the ages of 18-40 that are

affluent, well educated, and sophisticated. Both men and women enjoy coffee today, so

there is no real distinction among gender. A rise in consumption among ethnic groups has

given Starbucks more opportunities in areas that include Hispanic and Cuban Americans.

Office workers in downtown urban areas that are near professional buildings are gaining

popularity. College campuses, airport terminals, and busy shopping areas are all high

traffic locations for potential customers (8).



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Market Analysis

Starbucks is currently attempting to pursue the following types of people to adopt

their products and continue doing business with them for a long time. They want people

that are loyal customers and who continue to spend their money with us. As you can see

from the graph on the previous page, established customers have a higher, more positive

attitude toward Starbucks. Those people with a hectic, always on the run lifestyle need

the caffeine of our products to keep them going, but also people with a relaxed lifestyle

who like to spend the time in our stores reading or browsing the internet can do so (8).

Market Needs

Starbucks knows that people need that extra shot of caffeine to keep them going

many days, and often times people even become addicted to their products. The growth

of the internet and the use of the internet within Starbucks’ stores allows for customer

loyalty and brand recognition because Starbucks was one of the first to do this. A highly

trained, knowledgeable, friendly and efficient staff will increase customer satisfaction

(8).

Market Growth

The total number of stores opening has increased since 1998 from 1,886 stores to

5,886 in 2002, an increase of over 212% (8). Large cities that cater to large numbers of

traveling business people and tourists have typically become beneficial to those wishing

to use the internet. Business people use the internet services to catch up on email and

communications with their family, and tourists do the same. Population continues to

grow, especially with college and university students providing for an even larger market.



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Target Market Growth

Starbucks has been trying to expand overseas for a couple years now. The total

number of international stores has grown from 131 stores in 1998 to 1,312 in 2002, an

increase of over 901% (8). Currently, Starbucks has stores located throughout Europe

including Switzerland and England with future plans for Germany. They already operate

over 300 stores in the United Kingdom, Australia, and Thailand with Japan being its

largest international market at over 400 stores (8). Their goal is ultimately to have over

15,000 international stores.

Competition

Starbucks faces competition from small-scale specialty coffee chains. Caribou

Coffee tried to differentiate itself through its environment by providing the look and feel

of an Alaskan lodge with fireplaces. Peet’s Coffee & Tea tried to provide the freshest



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coffee by having the coffee roasted and shipped within 24 hours (8). They also face

competition from independent specialty coffee shops. These shops offer a wide range of

food and beverages, including beer, wine, and liquor. Competition also comes from donut

and bagel chains like Dunkin Donuts, which is beginning to offer flavored coffees (8).

Keys to Success

There are many key factors for Starbucks to remain successful. They must

continue to “be big and stay small”. This means that growing at the pace they are they

must continue to establish new markets with new customers, but at the same time remain

small enough to remain authentic and not have the same store outline everywhere.

Starbucks must continue to treat all employees, customers, and the environment with

respect. Almost all employees have some kind of stock option plan and health care. They

must maintain their unique, innovative, upscale atmosphere that will differentiate it from

their competition. The establishment of Starbucks as the “third place” where people can

come for socialization and entertainment is a key (8). They must continue to be

innovative and diversified. By constantly coming up with new products and by having a

wide range of products they can attract new customers and retain existing ones.

Critical Issues

Starbucks faces many critical issues that involve risks. It could be very difficult to

change some older habits of coffee drinkers that just like a traditional or decaffeinated

drink. Older people may be intimidated by the upscale atmosphere and many do not

know how to use the internet. Younger people however may not have the money to buy

from Starbucks and are often times bored with the music and entertainment selection.

Another issue is whether or not people are willing to pay for the services of the internet.



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A lack of knowledgeable staff will significantly reduce the satisfaction among customers

if service is just average.

Marketing Strategy

The main strategy for Starbucks is to deliver improved customer service through

service, cleanliness, quality, and speed of service. The growth of the company will occur

through expansion of the retail market, product innovation, and finally service

innovation. They will try to cluster their stores by locating them in close proximity so

they can saturate the market. Starbucks will focus on building a loyal customer base that

will use their services. The sales staff at Starbucks must know how to make each drink in

a timely manner so hands-on training is necessary before anything else can occur (8).

Marketing Mix

Starbucks will provide a place where people can enjoy a cup of coffee and also

use the latest technology in their upscale atmosphere. Starbucks can be enjoyed only at

company-owned stores or those that are licensed. This means Starbucks can be found

almost anywhere from the street corner to the airport to a college campus. They want to

continue to create new products every year and add new combinations to diversify their

menu and keep customers happy. Pricing for Starbucks has tried to remain as constant as

possible without losing market share or profits. Starbucks promotion will rely on

stressing the differences between themselves and other local and specialty coffee shops

(8).



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Segmentation

Starbucks is segmented by its atmosphere, types of coffee beans, and types of

coffee. Below is a picture of where Starbucks would be located, specialty coffee, in the

market.

Taste

Specialty coffee

Price

Instant coffee

Product Innovation

The biggest thing for Starbucks in introducing new products to their menu is

testing them to make sure that people will actually buy them. It would all start out with

testing from within the company by research and development. They would tinker with

product formulations and possibly come up with a new drink (8). These could then be

tested at certain stores throughout the country by giving away samples to customers and

then getting their opinion on whether they would buy the new drink. Focus groups could

be used to ask customers personally by employees about the drinks they like and what

they would like to see. This could also tell us what gender and the ages of those who like

certain drinks. All drinks however could not make it to the final stage because the speed



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at which some could be made would not fit with the speed needed for better customer

satisfaction (8).

Service Innovation

In 2001, Starbucks introduced its store-value card. This could be used to pay for

transactions in any store in North America with just a swipe of the prepaid card. Over six

million cards were issued in one year with sales from activations and reloads reaching

$160 million. People with this card visited Starbucks twice as often as those who paid

with cash and experienced faster transaction times (8). The cards also act as a way of

reaching new customers since they are given away as gifts to people who have never

been to Starbucks. Another ability of the cards is to collect data on customers’

transactions possibly giving Starbucks a hint as to what age group, gender, or profession

buys what drink.

Problems

No unified Marketing Department

Most companies of Starbucks magnitude use a hierarchical system when it comes

to their marketing department. Even though Starbucks is considered to have one of the

most effective marketing organizations, there was no one person calling the shots (8).

They were lacking more than just a strategic marketing department; they didn’t have a

chief marketing officer either. Things are done on a more bureaucratic basis. There is

not one marketing department with several different duty-specific departments. There is

one marketing department that functions as three different groups: a market research

group, a category group, and a marketing group. The market research group gathers and



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analyzes market data requested by the various business units (8). The category group

develops new products and also manages the menu and margins (8). The marketing

group develops the company’s quarterly promotional plans (8). To continue the theme of

a bureaucratic organization Starbucks also forced all of its senior executives to assume

marketing-related responsibilities. Christine Day was quoted as saying “Everyone has to

get involved in a collaborative marketing effort (8).” We feel that for an organization to

be successful there must be a collective effort, but in the case of Starbucks we feel that

with three different groups on a level playing field that it is leaving the company wide

open for conflict. It seems that each group has the same decision making power as the

other. Some may argue that the groups have different focuses therefore; having differing

opinions isn’t a big problem. We think that each group has their own agenda and goals

they are trying to accomplish but they are all in the marketing department. They may

have different agendas but all should have the same collective goal. Even if they don’t

whose to say which group is right? That is the problem we would like to avoid. Up to

date Starbucks has good enough luck that their reputation and service has taken them

virtually everywhere they have wanted to go without any significant turmoil. We are just

trying to prevent all the what-if scenarios.

Declining Customer Satisfaction

Starbucks is known for having customer satisfaction ratings well above the

industry average. Their goal has always been to gain a lifetime customer with every

purchase. Customer satisfaction scores are so critical to Starbucks because they have

evidence of a direct link between the satisfaction level and customer loyalty (8). After

finding out that Starbucks was not meeting their high customer satisfaction requirements



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Day pinpointed the problem to customer service. After Starbucks conducted a poll on its

customers they found that “improvements to service”, specifically the speed of service

was the most frequently mentioned problem. Schultz always wanted to mimic the Italian

coffeehouse atmosphere, where people come to a place that is comfortable. Where they

are greeted with a warm smile, a place where every person feels like they are the center

of attention. Today’s American society is fast paced with people looking for ways to fit

more into the day. Our society is based on convenience. People want to know where

they can get a cup of the highest quality coffee on the go. We don’t think the majority of

people care as much about the conversation as they are with how fast they can get their

beverage. We think that as long as people are greeted with a smile and they get their cup

of high-quality coffee in a timely fashion they will be happy.

Declining Genuine Image

From the company’s inception Howard Schultz’s goal was to provide a place that

people could go to meet and feel comfortable no matter the occasion. Schultz’s dream

had been realized until as of late. Starbucks image was one of comfort, quality and

status. This image is now shifting to one that is more corporate. Now they are looked at

as more of an on-the-go type establishment. Instead of attracting those only of the

socially elite, Starbucks is now the universal trend. Their biggest demographic is no

longer middle aged educated women, but young adults of both genders. In a survey

conducted by Starbucks in 2002 approximately 42% of customers questioned attributed

Starbucks with being “corporate.” They also found that in 2000 53% of respondents

strongly agreed that “Starbucks cares primarily about making money.” This number



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increased to 61% in 2001 (8). We feel that the number one goal of Starbucks is to

genuinely make each and every customer 100% satisfied. We just think that the data is

right there in front of them and now they have to find an effective way to use convey it to

the public.

Intimidating Store Presence

Coffee is a very traditional beverage. We feel that Starbucks is too intimidating

for older more traditional coffee drinkers for two reasons. The first is the wide variety

they offer in their coffee line. Traditionally there was regular and decaf. Starbucks has

introduced to the mainstream mocha, latte, Frappuccino, espresso, and Macchiato. Most

people have never heard of these words, let alone know what they mean or what they

have to do with coffee. A lot of people wouldn’t care to figure it out when they can go to

the local convenience store and buy a regular cup of coffee. Before there were two

additives: crème and sugar. Now there are several flavors of coffee with several additive

options. At Starbucks anyone can get coffee with flavored syrup, toppings, whipped

cream, foam, and even an extra shot of espresso. It’s just as complicated when it comes

to the crème/milk. Before, coffee would be served with crème on the side. Now they add

2% milk, 1% milk, vitamin D milk, fat free milk, or even soymilk. To top it all off

people can now order their coffee hot or cold. Add together all these different options

and there are hundreds of different coffee combinations to choose from. Where would a

beginner into the Starbucks culture begin in the ordering process? We are a believer in

meeting everyone’s demand, but we also believe that too many choices can be

intimidating and confusing. We feel that once a consumer is familiar with the Starbucks’



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menu board it is easy to find their preference and they are more likely to return, but we

think getting to that point is a tough and intimidating road.

The second issue we have with the intimidating Starbucks store presence is their

unique language. Starbucks has taken words from other languages and incorporated them

into their everyday operations. For example, they don’t call their labor workers

employees or even servers they call them baristas, which is the Italian word for bartender.

This is just an example of a whole menu board full of Italian referenced words used to

represent all of their different alternatives. New customers’ confusion is two-fold. Not

only are they likely to be indecisive about the type of coffee they want, but also most

can’t even decipher what the choices represent.

Alternatives

Marketing With the problems discussed above we feel that changes do need to be made to

enhance Starbucks’ image and product differentiation along with adjustments to customer

service. Starbucks can proceed in several ways to smooth out the rough edges of their

image and differentiate themselves from other coffee stores. We feel that Starbucks’

marketing mix has a sound foundation but does need some tweaking in the promotion

department most notably a change in advertising. Starbucks has historically spent very

little for advertising their brand or their product compared to other fast-food marketing

budgets. Since image and product differentiation have slipped we feel that Starbucks

should go on the offensive in terms of advertising. There are several advertising types

available to Starbucks and they are listed below along with what they mean.



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Types

There are two broad categories of advertising style; product and institutional

o Product advertising- Advertising that for selling a specific product, this then has

four main sub categories (9).

o Pioneering advertising- Developing the primary demand for a product

category (9).

o Competitive advertising- Advertising that develops selective demand for a

specific brand (9).

o

Comparative advertising- Advertising that makes specific brand

comparison between two company products (9).

o Reminder advertising- Advertising to keep a company’s name in front of

public (9).

o Institutional advertising- Advertising that promotes image, and reputation of the

company rather than a specific product (9).

Along with choosing an advertising strategy Starbucks has to choose a medium that will

deliver Starbucks’ message to its customers. This medium can be in television, radio,

newspaper, magazines and many more areas.

o Television

Advantages- Wide reach, gives a Visual of product

Disadvantages- Expensive, May not reach the coffee drinkers (9)

o Newspaper

Advantages- Local, timely, more in line with a typical Starbucks customer

Disadvantages- Short life (9)



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o Magazines

Advantages- More in line with a typical Starbucks customer, targeted, good detail

(9)

Disadvantages- Long lead time, inflexible (9)

Objectives of Advertising

Whichever style and medium of advertising that is chosen, it has to accomplish

three objectives. The first objective is it has to inform consumers on how much better

Starbucks quality is than their competitors. Secondly, it must convey the image that

Starbucks is trendy. It is a place for everyone to either get a cup of coffee for the road or

be able to relax with friends. Lastly, it must target possible new customers and convey

how easy it is to go into a Starbucks and order a drink (9).

Customer Service

Customer service is very important to Starbucks, which is based on four major

areas: service, cleanliness, product quality, and speed of service. In a poll conducted by

Starbucks to determine what they could do to make consumers feel more like valued

customers, speed of service was the number one reason cited.

The foremost plan to increase speed of service is a $40 million dollar investment

per year to provide each store with twenty hours in extra labor each week (8). In the eyes

of Christine Day this investment would eliminate the service gap and get the service time

below three minutes. When we asked Store Manager Shane Rayford is what he thought

adding 20 extra hours to the weekly workforce he said, “we could definitely use the extra

help during peak hours, but I’m not sure if it would be worth the $40 million investment”



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(11). These extra hours could be used in variety of ways but would most likely be used to

cover peak time for retail stores. As a group we feel this plan has several problems. First,

it is hard to tell if adding labor is exactly the solution to the problem because not much

information is out there on productivity of workers and what the marginal

increase/decrease in productivity would be. Next, the presenting group acknowledges

that right now employees at Starbucks work longer shifts than most other fast-food chains

so a large investment in new workers will be needed. Hypothetically, since each store

will add 20 hours for labor each week, which we are assuming only half of the stores will

be able to absorb the hours without hiring anyone new. So if the remaining half hires one

new person to cover the 20 hours, then over 2250 new workers will be added. The initial

investment might be able to cover labor costs for the workers but it is not clear if they

will be able to cover the added overhead costs in the form of payroll taxes and benefit

costs. Right now Starbucks is aggressively expanding their operations, adding stores at a

rapid rate. Then it follows logically that these stores will also get the extra 20 hours and

the investment would have to be increased every year. This plan coupled with the

ambitious plan of expansion, which goal is 15,000 stores, will see an increase in costs

that will conceivably eat away at profits.

Different options include an investment in technology that will require the current

barista to be more efficient. Not only would this action help in speed of service but

would also keep Starbucks with the coveted trendy tag. For instance, in 2001 Starbucks

launched the Store-value card (SVC), which is a prepaid, swipeable smart card (8). This

card has been positively received by customers and has implications on shortening wait

time. Possible adaptations to the SVC could be to mimic the Exxon gas stations



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“Speedpass”, which is easier and faster than using a credit or debit card (6). There is no

waiting for authorization or signing receipts. Exxon’s Speedpass is used by simply

pointing the Speedpass "wand" at the area of the pump or register that says "Place

Speedpass Here." The Speedpass automatically and immediately communicates your

payment preferences. It knows what credit or check card you wish to use. Speedpass

even knows whether or not you want a receipt. This technology operates on a radio

frequency that transmits an identification and security code (6). This would be a very

trendy and time saving addition for Starbucks. A major draw back however, is this is a

relatively new technology, and the cost for development and the time to implement are

going to be significant.

Other uses of technology would be the use of the internet and telephone.

Starbucks could come up with an order online and call ahead system that would not take

very long to develop. Also, they could have a “call ahead” check out line for those who

used the system. Adding call ahead would be relativity easy but Starbucks could go

further and implement online bill pay and account reloads for their SVC.

As far as product innovations go the company can continue to improve the

automation of the drink making process. Starbucks has recently begun to install

automated espresso machines that reduce waste and increase efficiency of the worker.

These new machines have had a positive response both from customers and baristas.

Starbucks can work to bring more drinks under automation but they have to be careful to

balance automation with quality and tradition.

In regards to making Starbucks less intimidating it will have to be a two prong

effort. One effort will be using advertising as mentioned above as a way of familiarizing



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new customers with products. Another way is to continue to develop products that are

distributed by third parties like their Frappuccino line of beverages. This will allow

people to try Starbucks without having to travel to the retail store until they are ready. As

far as in-store, an effort has to be made to make customers feel comfortable right away.

Innovating and entering into partnerships with other companies such as wireless internet

access might be ways to relieve the anxiety of going into new stores.

Suggestions

We did not mention the consolidation of the marketing group because we feel that

this is not an alternative but must become a reality. Along with this consolidation of the

three marketing groups we would want to appoint a chief marketing officer in which

these departments reported. Starbucks is growing and one of the few large companies not

to advertise or have strategic marketing plan. We feel with the creation of this position

and the consolidation of the group that they will be better able to use market research to

be both proactive and reactive to market and customer information. Integration of the

marketing department and appointment of a Chief should take place over a period of a

couple of weeks. To gather feedback on this change will be difficult, but it will be

ultimately up to the new chief to organize, promote and evaluate Starbucks marketing

efforts.

In the past Starbucks has mostly just advertised new products. We feel that an

increased effort needs to not only spotlight new drinks but also, the image and product

differentiation of Starbucks. We feel that a majority of the advertising should be done in

newspapers and magazines which are tailored more to what the average Starbucks



27

customer does with their free time. As far as content, Starbucks needs to engage in both

product and institutional advertising. Customers need to know that at Starbucks product

quality and customer satisfaction are number one in their minds. Advertising needs to

really emphasize why Starbucks coffee products are better quality than their competitors.

The campaign however, needs to be positive because a negative campaign is likely to

upset the average Starbucks customer because of the education level on other aspects of

their personality. An example of a positive ad is one in which they could explain the

process on how coffee beans at Starbucks are tested after being roasted with a blood cell

analyzer and discarded if not on target. Other advertisements could emphasize the

friendliness of staff and the ease of ordering at Starbucks in effort make. The purpose of

the advertising campaign is to get people to re-evaluate the differences between

Starbucks and competitors. We feel that putting advertising campaign could take a few

months to implement. Feedback will be gathered from polling customers about brand

image and product differentiation at regular intervals to examine if the advertising is

effective or not.

As far as improvement in customer satisfaction, we feel that Starbucks should not

go ahead with the current plan to invest $40 million per year in added labor for the

reasons we stated above. Instead we feel that if the company is willing to invest to

increase customer satisfaction level then they should invest in technological

advancements. Implementing a system service innovation such as “speedpass”,

online/call ahead ordering with an express lane and product innovations like a continued

automating of machines, like the new espresso machines, will decrease the time a

customer is in line. This allows customers to either get a cup and run or spend more time



28

enjoying the interior. Investing in technology does have weaknesses, large investment

for development; however we feel that the other option is old-fashion and would not be in

the spirit of keeping Starbucks trendy like increases in technological advances. It is

unknown how long the process to develop the new advancements would take to

implement however we do feel that most should be up and running with in a year and

half. The easiest ways to measure the effect of these changes is by polling. Six months

after full implementation of changes, we would not only want to poll our customers, but

also the baristas to see how they feel about the changes and make any corrections at that

time.

Counter

Opposing Group’s Paper

We found numerous errors in their writing including arguments which we did not

agree with. One thing we thought was wrong was that they put their timeline and history

first before their introduction. Only after reading through 11 pages of their case did we

find their introduction, which kept us wondering what this paper was actually about.

Below are some statements they made that we feel aren’t accurate and need some

discussion.

Pg. 13 – “Starbucks could try to obtain more business by targeting those diet

conscious consumers. This would include having no fat milk, creamer, or other

toppings as an option to all beverages that use regular milk, creamer or other

toppings.”



29

Starbucks already offers no fat milk and creamer along with sugar free toffee and

vanilla toppings. This suggestion is wrong because this already exists in the current

market.

Pg. 14 – “Another way to bring in a younger crowd is to carry a line of sodas.

“Carbonated soft drink volume was up 0.6 percent last year, per Beverage Digest.”

The “select” refers to something other than the Cokes and Pepsis, which customers

could get at any gas station, fast food chain, or supermarket.”

This statement is contradicting because they want to give consumers an option

different from Coke and Pepsi, but will customers really go out of their way to get these

“select” sodas? This is not what Starbucks is known for because they have made a deal in

the past with PepsiCo., and Pepsi distributes their Frappuccino line of beverages.

Pg. 14 – “This “softer” line would tone down coffee in the four main areas that

coffee is measured: aroma, acidity, body and flavor. The acidity would be

moderately low, which means the coffee would not be as tangy or lively as a bolder,

richer brew of coffee. Finally, the flavor could be described as the baby food for

coffee drinking.”

If you change the four main areas that coffee is measured, then is it really still

coffee? We feel if the younger generation doesn’t like coffee, then by changing the four

main areas will not make them more likely to start drinking coffee because it will still

have a coffee taste. If the flavor is described as baby food for coffee drinking, then does

this mean that the coffee is of low quality or that maybe it tastes as bad as baby food?



30

Pg. 29 – “Starbucks should also develop products geared toward younger

consumers, and should carry a line of sodas. …Customers would enjoy the food

items with their coffee while not emptying their wallets.”

Pg. 30 – “Starbucks should put more coffee on the shelves of groceries such as

Target, allowing coffee drinkers who consume at home to enjoy the products

Starbucks offers.”

These two statements basically state the obvious. They are not very specific about

the food items that would be available and Starbucks already offers some food items such

as bagels, pastries, and cakes. The second quotation is stating what Starbucks is already

doing. They already have a specialty line of coffee in grocery stores for at-home

consumption.

Pg. 31 Financials

We feel that the opposing group didn’t fully analyze the financial statements and

didn’t fully disclose what the proposed $40 million investment would do to the financials.

They mentioned that increased use of the Starbucks cards would increase revenues, but

there isn’t information to back this up and this won’t necessarily increase revenues if

discounts are given.

ConclusionStarbucks has evolved from a small Seattle company to a specialty coffee giant

with over 4500 stores in the world. Today Starbucks has pressure from competitors but

most of the pressure is internal. We feel that since Starbucks is devoted to providing the

best customer service, changes do need to be made. We feel that the opposing group has

very good ideas but we feel that our idea of investing more in technology is the correct

action.



Works Cited

1. Dipasquale, Cara B. Macarthur, Kate. “Fast food looks for loyalty.” Advertising Age,10/28/2002, Vol. 73 Issue 43, p44, 1/2p, 2 graphs, 2c

2. http://finance.yahoo.com/q/co?s=SBUX

3. http://www.starbucks.com

4.http://moneycentral.msn.com/investor/invsub/results/compare.asp?Page=TenYearSummary&Symbol=SBUX

5. “Innovative 'Starbucks Express' Debuts In Denver.” Foodservice Equipment & Supplies,Sep2002, Vol. 55 Issue 9, p16, 1/5p.

6. Kuykendall, Lavonne. “Gadgets Galore, But Where's the Next Speedpass?” AmericanBanker. 3/23/2004, Vol. 169 Issue 56, p12A.

7. Lee, W.A.. “Starbucks Brews a Model for Prepaid Cards.” Bank Technology News,

Jun2002, Vol. 15 Issue 6, p35, 2p;

8. Moon, Youngme, Quelch, John. “Starbucks: Delivering Customer Service.” HarvardBusiness School. 3, February 2004.

9. Prerreault, William D., E. Jerome McCarthy. Basic Marketing: A Global-ManagementApproach. 14th ed. McGraw-Hill Irwin, New York 2002.

10. Ross, Stephen, Westerfield, Randolph, Jordan, Bradford. Fundamentals of Corporate

Finance.

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th

ed. McGraw-Hill Irwin, New York 2003.

11. Rayford, Shane. Store Manager. Starbucks. 5943 S East Street. Indianapolis, IN46227. (317) 788-9672. March 11, 2005. Telephone Interview.

Starbucks Final Proof

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