Starbucks Fixed And Variable Costs

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Conner A Intro to Business 3/26/2013 Case Study Consumer Behavior in the Coffee Industry Did you know one franchise alone dominated an entire payment-processing market in just one year? You might have heard of this giant company by the name Starbucks. Howard Schultz, CEO of Starbucks, had a significant role in the company’s growth.

Starbucks has steadily dominated the coffee market and has even extended to being a 3rd home for many of its consumers. Based in Seattle, Starbucks had significant competition when it opened its first store in the Pike Place market in Seattle, yet still managed to become superior.

Starbucks used new advertising tactics and presented a unique experience for its customers, all of which was a game changer in the business world. Starbucks was created when three friends opened a small store to sell coffee beans and roast in 1971[1].

Jerry Baldwin, Gordon Bowler and Zev Siegl opened their store in the heart of the unique open air market in downtown Seattle. Located just off the harbor, Pike place market was the optimal location and attracted many residents and tourists.

After ten years of incredible growth, Jerry Baldwin hired Howard Schultz as head of management. When Schultz first started, he slowly learned the coffee industry and helped made subtle but significant changes. For example, Schultz noticed that “first-time customers sometimes felt uneasy in the stores”[2] so he developed “customer-friendly sales skills and produced brochures that made it easy for customers to learn about fine coffees”2 Schultz had the vision of making Starbucks a coffee lounge versus a bar after being inspired by eastern traditions.

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Starbucks Consumer Behavior Case Study

Even though he did not agree with the new direction, Baldwin allowed Schultz to open one espresso bar and in 2 years, Schultz was able to buy out Baldwin and equity owners with the help of investors in 19921. Howard Schultz initially saw the power of consumer behavior early on when he realized Starbucks began to be a social gathering mecca for people instead of just an espresso stand. When Schultz first noticed the ‘seismic change in consumer behavior,’ he adopted a free-Wi-Fi service and mobile payment service and noticed that Starbucks began to attract people as if it was a third home for coffee enthusiasts.

Although he jokes about not getting rent from consumers, it allowed Starbucks to create an online-experience in their ‘3rd home’ which was unique to the coffee scene in the United States. With scheduled deliveries and privatized ad networking, Starbucks was maximizing its profits and allowing an experience for coffee enthusiasts that did not make them feel locked-into paying. This shift in consumer behavior was in response to the cultural need for a place between home and work. As social beings, humans thrive for an excuse to hang out and socialize or participate in a community environment.

This amazing experience that Starbucks supplied needed to be fine-tuned like any business plan. Like any business, Starbucks had challenges, such as their management of spending. In an interview entitled Business Brilliant, Schultz said that too much was focused on the customer instead of the infrastructure. To improve this, Schultz developed a unique experience in the store with the paired pastry-drinks and released free Wi-Fi for customers. In addition to free-Wi-Fi, mobile payments allowed consumers to avoid lines and continue their private work in the confines of the lounge.

Soon Starbucks was thriving and announced that “the opening of 150 new stores in five years significantly exceeded the 1987 business plan’s objective of 125”[3]. Like every company, Starbucks faced unique issues in their business which slowed down growth initially which in effect slowed down growth in the long run. Schultz attributed the biggest hold-back in the long run to not investing in the supply chain, technology or manufacturing. Although Starbucks was marketing their franchise extremely well, they did not invest ahead of the growth curve and the infrastructures became under-par.

In the Business Brilliant, Schultz candidly admitted that Starbucks “solely accelerated growth of the company. ” Moreover, Schultz said the issue was that Starbucks “needed competency well beyond the size of the company and needed the kind of capability they didn’t have. ” Since their infrastructure’s efficiency in the short run was hindered by technological limitations coupled with access to capital, the entire store chains needed to be shut down. Schultz defined the event as a need to redesign their image and retrain their employees.

Starbucks was losing grip on the customers and their loyalty because the experience of Starbucks was losing its unique features. All of these internal and external issues that Starbucks was facing were all connected with values and company image according to Schultz. Schultz was so specific with the Starbucks experience that when he smelt burning cheese in a store he decided to ask the workers and they told him “So what, profits are up! ” Soon after this, Schultz decided to close down and retrain all stores and employees. He sent out a press release admitting that Starbucks was misrepresenting itself.

Although no one had accused or criticized Starbuck’s prior to his declaration, it was a bold move which negatively impacted the financial strength of the Company. However, the action proved loyal to the consumer and enhanced brand loyalty for Starbuck-addicts. This root issue of misrepresentation in the Starbuck’s experience and the company vision was so significant to Schultz that he needed rework his company from the ground up. This road block of ‘conserving the core businesses’ and ‘pushing for relevant innovation’ made Schultz tweak and adjust the Starbucks experience constantly but effectively.

While Schultz attributes the root issue for Starbucks to be company image and adapting core values, could it be possible that the vision and image were not correctly portrayed because of unwise funding? Schultz does admit the funding issues contributed to the core issue of misrepresentation of company image and values, but he does not see the two issues in separate environments. Schultz assigns the core issue to misrepresentation and the surface symptoms to be funding. However, more funding or a different funding plan with more focus in infrastructure would have changed the outcome.

The core issue was funding and the symptoms of the core issues were misrepresentation because of resource allocation. While their short term fixed costs of infrastructure and labor were solved, their reserved and recurring allocation towards the upgrades of their infrastructure lacked significantly. If properly funded before and seen ahead of the curve, their growth could have been anticipated. This is evident through the need to shut down and retrain employees. It’s clear that the total fixed and variable costs exceeded their revenue initially.

Like all companies, there was a start-up curve but when the curve was dealt with, resource allocation was not the focus. The best plan of action ideally would start with addressing resource allocation. Starbucks was able to stay in business and have great growth so it’s clear the management was able to properly allocate their average variable costs and fixed costs for the most part. Nevertheless, it would have been best if the costs were optimized and revenue was set aside for changes in infrastructure. Funding should have been directed at things which would have produced stability in the long run.

This would have lowered their total costs and properly funded their infrastructures for the long run and short run. Schultz should have looked at the management immediately after buying out the company and properly hired people with skills that would be able to guide Starbucks through significant growth. Investment in infrastructure to avoid long-term costs would have saved Starbucks from funding issues at later times. In addition to optimizing their infrastructure for the long run, Starbucks needed to invest more in manufacturing and supply chain for the success in the long run.

For example, Starbucks should have initially allocated more funding towards small upgrades in their infrastructure such as ovens versus microwaves to avoid unpleasant scents in the customer’s experience. This also connects to Schultz’s emphasis on hiring employees and affiliates based on similar values. If the decision to hire those employees would have initially been more focused on similar values in addition to management skills, the variable costs to upgrade the infrastructure in the long run would have been lower because the management would have been more motivated to deal with the issue before the CEO had to see the symptoms.

Finally, the management of Starbucks needed to choose their employee’s more wisely from the start. If Schultz would have chosen his employee’s based on the similarity of their values and the company vision, little issues such as smell in the customer’s experience would have been dealt with more efficiently. This connects to optimizing their infrastructure but focuses on the employees instead of the technology. It’s important to treat both with separate solutions because Schultz reminded us that the employees can only work with the assets they are provided with.

This small change in the focus of the start-up of the company could benefit the image of Starbucks very efficiently and in a cost-productive way. Schultz jokes about not getting rent from Starbucks admirers yet he also notes that the potential to plug into the social media of the internet and create the environment was more beneficial than the issue of customers hanging out inside the store. The evolving Starbucks experience caused consumers to have incredible brand loyalty over alternatives such as Pete’s Coffee and Tea and Tullies.

Yet the quick and agile response of technology was exactly what Starbucks needed to put it ahead of the ‘growth curve’ in social media while its competitors struggled behind. Schultz’s solutions were effective in the short run but he still realized his long run potential was limited by resource allocation. The problem with Starbucks and consumers was not the shift in demand for coffee consumers but it was resource allocation and initial planning. Howard Schultz’s plan of action was headed in the right direction apart from the minor mix-up between the surface symptoms and the core issue.

In addition to new work practices, Schultz integrated new management and had to let go many of the people he knew were limited to the knowledge of the short-term. This new resource allocation towards what Schultz called ‘the backside’ of the company, allowed the company to finally resolve its funding and allocation issues. The new plan of action consisted of hiring new employees and investing in infrastructure to anticipate growth and new forms of technology; the poor management habits of the past from would not hinder Starbucks in the future.

Similar to my suggested plan of action, Schultz’s initiative consisted of new employee’s, new technology and investing in the short term. If Schultz’s would have put more funding towards infrastructure to bring stability in the long run, he would have been able to manage the shift in consumer behavior and maintain profit without the need to close down the stores for retraining. The issue for Starbucks is not losing customers but how to accurately represent the company’s values. Moreover, if the employees were chosen correctly and the infrastructure was properly optimized, Schultz plan would have worked perfectly.

All in all, every company in any industry is going to face challenges and have limited resources to meet them in an efficient manner. Howard Schultz used the resources he had to best manage Starbucks and handled the big issues he had efficiently and creatively. The future of Starbucks all depends on its management and commitment to adhering to the company vision and values. After experiencing the 2000-2008 period, one can see that the values will inevitably shift with changes in management. 4] The future of Starbucks is highly dependent on how long Howard Schultz continues to be an active part of the company and in shaping its vision. If affiliates and employees are chosen intelligently and have values matched properly with the company’s mission, Starbucks’s vision should be passed down effectively through each generation of new management. Nevertheless, the rise and fall of competitors in a market is inevitable and time will tell if Starbucks will eventually be surpassed by a competitor. Starbucks will be a primary educational focus for many business programs.

It is one of the best managed franchises in history and will remain one of the most successful for a long period of time. Like any business, Schultz received criticism for extreme responses yet these responses excelled the growth of the company. Much like my suggestions, Schultz acted quickly and made extreme changes which were crucial to repairing the infrastructure. Unlike most companies, Starbucks’s major focus is promoting the company image and values instead of putting profits first. Works Cited I. Schiff, Lewis. “Starbucks CEO Howard Schultz Coming to NYC. Inc. com. INC, 18 Mar. 2011. Web. 25 Mar. 2013. II. “Starbucks Corporation History. ” History of Starbucks Corporation – FundingUniverse. Funding Universe, n. d. Web. 25 Mar. 2013. III. McGraw Hill. “Starbucks Corporation. ” Starbucks Case Study. MHHE. com, n. d. Web. 25 Mar. 2013. ———————– [1] Funding Universe, Starbucks Corporate History [2] McGraw Hill, Starbucks Case Study, Starbucks Corporate History [3] McGraw Hill, Starbucks Case Study, Starbucks Corporate History [4] Funding Universe, Starbucks Corporation History