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I. Executive Summary
Since Starbucks went public in 1992, the company has grown and expanded 40% annually,
opening thousands of new stores and achieving over a decade of 5% or higher sales
growth. However, recent market data suggests that while store sales are on the rise,
customer satisfaction needs aren’t being adequately met. Christine Day, Senior Vice
President of Administration, believes that the decline in customer satisfaction is correlates
with speed of service. Consequently, she has proposed a $40 million plan that would
improve service speed by adding 20 hours of additional labor to each store per week. We
believe, however, that the drop in customer satisfaction is being caused by Starbucks’
recent deviation from its fundamental value proposition which focuses on providing a high
quality cup of coffee, a personalized, friendly service, and an inviting atmosphere.
Therefore, we recommend that Starbucks invest $40 million into more additional labor,
utilizing the extra 20 hours to hire a part-time employee whose sole focus would be to
increase customer satisfaction by renewing a commitment to the fundamental values by
which Starbucks was established.
II. Industry Analysis
By 2002, Starbucks had completely changed the retail coffee industry in a way that can
only be described as legendary, “transforming a commodity into an upscale cultural
phenomenon" (2). It has become a dominant brand in North America, holding a whopping
42% share of the specialty coffee market (Exhibit 6). Yet, despite Starbucks’ market
leadership, the specialty coffee industry itself is on the rise with an estimated compound
annual growth rate of ten percent, implying that the industry as a whole is changing. In
order to better grasp Starbucks’ role in the specialty-coffee industry, we employ the help of
Porter’s Five Forces Model.
Barriers to Entrants: There are multiple barriers to entry into the coffee industry, making
the threat of new entrants into the market somewhat low. For instance, start-up costs for
specialty coffee products can be high, especially when paired with the costs of marketing a
new coffeehouse in such an established market. Starbucks managed to spend well below
the industry
average on advertising over the years, whereas new entrants would have to spend a
significant amount on advertising to differentiate their brand. Additionally, Figure A
reveals that 21% of Starbucks customers visit eight or more times each month and
contribute to a whopping 62% of all transactions. This data supports that Starbucks has a
considerably loyal customer base, a factor that would prove difficult for new firms to
