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FINANCE
Please answer the questions below. Use either the Bloomberg
terminals located at the Feliciano School of Business or other
reputable sources such as the SEC website, finance.yahoo.com,
Compustat, morningstar.com or Wall Street Journal etc. for the
financial data you use in your answers. You need to provide the
references regarding the financial data you use to support your
answers at the end of the finance portion of the term paper.
Questions: 1. Expanding the number of stores in a foreign
market, such as the expansion plan launched by Starbucks in
China (announced in 2018), is a major capital budgeting project.
A project of this scale requires coordinated planning across all
functions of a business that you are studying in your Integrated
Core classes. Choose and discuss three items on the income
statement and balance sheet (a total of six items) that you think
this new undertaking will effect. Explain why you chose those
particular items, and how the marketing, management and
operations decisions of the company will affect them.
2. Choose and calculate three ratios for Starbucks for the last
two years. Make sure to select ratios that you think that
expanding into a new market will effect, and explain your
reasoning. Identify a competitor of Starbucks and contrast these
three ratios for the two companies. Explain why you selected
this competitor. Describe how the decisions made by
management, marketing and operations functions of the
company can impact, and hopefully improve, the components of
firm operations that these financial ratios measure.
3. Explain how the financial decisions regarding opening a new
store are related to management, marketing or operations
decisions that the company must make (or has made)?
Marketing:
Listed below you will find some WEAKNESSES and THREATS
for Starbucks, read them carefully then proceed to answer the
questions that follow:
Starbuck Weakness:
1) Customers not willing to wait in long lines at stores during
morning rush hour and lunch hour.
2) Coffee dominant business with a poor reputation for
creativity around new product and companion product
development.
3) Too dependent on word of mouth to create brand awareness.
Starbucks Threats:
1) Better value offered by local coffee house shops and
national companies like Dunkin Donuts and McDonalds
McCafe.
2) Downturn in the economy can decrease customer traffic and
spending.
• • • • • PART I : MARKETING ASSIGNMENT QUESTIONS
1). Assume you are the Vice President of Marketing for
Starbucks. Select 1 Weakness and 1 Threat from the list
provided above, and explain how you would recommend taking
that selected weakness and turning it into a strength and the
selected threat and turning it into an opportunity.
Part 2: Provide 2 explanations as follows:
2a) Explain how the weakness turned into a new strength would
impact the disciplines of Marketing, Finance, Management and
Operations.
2b) Explain how the threat turned into a new opportunity would
impact the disciplines of Marketing, Finance, Management and
Operations.
9-504-016
R E V : O C T O B E R 5 , 2 0 1 8
Professors Youngme Moon and John Quelch prepared this case.
It was reviewed and approved before publication by a company
designate.
Funding for the development of this case was provided by
Harvard Business School and not by the company. HBS cases
are developed solely as
the basis for class discussion. Cases are not intended to serve as
endorsements, sources of primary data, or illustrations of
effective or ineffective
management.
Copyright © 2003, 2018 President and Fellows of Harvard
College. To order copies or request permission to reproduce
materials, call 1-800-545-
7685, write Harvard Business School Publishing, Boston, MA
02163, or go to www.hbsp.harvard.edu. This publication may
not be digitized,
photocopied, or otherwise reproduced, posted, or transmitted,
without the permission of Harvard Business School.
Y O U N G M E M O O N
J O H N Q U E L C H
Starbucks: Delivering Customer Service
In late 2002, Christine Day, Starbucks’ senior vice president of
administration in North America, sat
in the seventh-floor conference room of Starbucks’ Seattle
headquarters and reached for her second
cup of toffee-nut latte. The handcrafted beverage—a buttery,
toffee-nut flavored espresso concoction
topped with whipped cream and toffee sprinkles—had become a
regular afternoon indulgence for Day
ever since its introduction earlier that year.
As she waited for her colleagues to join her, Day reflected on
the company’s recent performance.
While other retailers were still reeling from the post-9/11
recession, Starbucks was enjoying its 11th
consecutive year of 5% or higher comparable store sales growth,
prompting its founder and chairman,
Howard Schultz, to declare: “I think we’ve demonstrated that
we are close to a recession-proof
product.”1
Day, however, was not feeling nearly as sanguine, in part
because Starbucks’ most recent market
research had revealed some unexpected findings. “We’ve
always taken great pride in our retail
service,” said Day, “but according to the data, we’re not always
meeting our customers’ expectations
in the area of customer satisfaction.”
As a result of these concerns, Day and her associates had come
up with a plan to invest an additional
$40 million annually in the company’s 4,500 stores, which
would allow each store to add the equivalent
of 20 hours of labor a week. “The idea is to improve speed-of-
service and thereby increase customer
satisfaction,” said Day.
In two days, Day was due to make a final recommendation to
both Schultz and Orin Smith,
Starbucks’ CEO, about whether the company should move
forward with the plan. “The investment is
the EPS [earnings per share] equivalent of almost seven cents a
share,” said Day. In preparation for
her meeting with Schultz and Smith, Day had asked one of her
associates to help her think through the
implications of the plan. Day noted, “The real question is, do
we believe what our customers are telling
1 Jake Batsell, “A Grande Decade for Starbucks,” The Seattle
Times, June 26, 2002.
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2020.
504-016 Starbucks: Delivering Customer Service
2
us about what constitutes ‘excellent’ customer service? And if
we deliver it, what will the impact be
on our sales and profitability?”
Company Background
The story of how Howard Schultz managed to transform a
commodity into an upscale cultural
phenomenon has become the stuff of legends. In 1971, three
coffee fanatics—Gerald Baldwin, Gordon
Bowker, and Ziev Siegl—opened a small coffee shop in
Seattle’s Pike Place Market. The shop
specialized in selling whole arabica beans to a niche market of
coffee purists.
In 1982, Schultz joined the Starbucks marketing team; shortly
thereafter, he traveled to Italy, where
he became fascinated with Milan’s coffee culture, in particular,
the role the neighborhood espresso bars
played in Italians’ everyday social lives. Upon his return, the
inspired Schultz convinced the company
to set up an espresso bar in the corner of its only downtown
Seattle shop. As Schultz explained, the
bar became the prototype for his long-term vision:
The idea was to create a chain of coffeehouses that would
become America’s “third
place.” At the time, most Americans had two places in their
lives—home and work. But
I believed that people needed another place, a place where they
could go to relax and
enjoy others, or just be by themselves. I envisioned a place that
would be separate from
home or work, a place that would mean different things to
different people.
A few years later, Schultz got his chance when Starbucks’
founders agreed to sell him the company.
As soon as Schultz took over, he immediately began opening
new stores. The stores sold whole beans
and premium-priced coffee beverages by the cup and catered
primarily to affluent, well-educated,
white-collar patrons (skewed female) between the ages of 25
and 44. By 1992, the company had 140
such stores in the Northwest and Chicago and was successfully
competing against other small-scale
coffee chains such as Gloria Jean’s Coffee Bean and Barnie’s
Coffee & Tea.
That same year, Schultz decided to take the company public.
As he recalled, many Wall Street types
were dubious about the idea: “They’d say, ‘You mean, you’re
going to sell coffee for a dollar in a paper
cup, with Italian names that no one in America can say? At a
time in America when no one’s drinking
coffee? And I can get coffee at the local coffee shop or
doughnut shop for 50 cents? Are you kidding
me?’”2
Ignoring the skeptics, Schultz forged ahead with the public
offering, raising $25 million in the
process. The proceeds allowed Starbucks to open more stores
across the nation.
By 2002, Schultz had unequivocally established Starbucks as
the dominant specialty-coffee brand
in North America. Sales had climbed at a compound annual
growth rate (CAGR) of 40% since the
company had gone public, and net earnings had risen at a CAGR
of 50%. The company was now
serving 20 million unique customers in well over 5,000 stores
around the globe and was opening on
average three new stores a day. (See Exhibits 1–3 for company
financials and store growth over time.)
What made Starbucks’ success even more impressive was that
the company had spent almost
nothing on advertising to achieve it. North American marketing
primarily consisted of point-of-sale
2 Batsell.
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2020.
Starbucks: Delivering Customer Service 504-016
3
materials and local-store marketing and was far less than the
industry average. (Most fast-food chains
had marketing budgets in the 3%–6% range.)
For his part, Schultz remained as chairman and chief global
strategist in control of the company,
handing over day-to-day operations in 2002 to CEO Orin Smith,
a Harvard MBA (1967) who had joined
the company in 1990.
The Starbucks Value Proposition
Starbucks’ brand strategy was best captured by its “live coffee”
mantra, a phrase that reflected the
importance the company attached to keeping the national coffee
culture alive. From a retail
perspective, this meant creating an “experience” around the
consumption of coffee, an experience that
people could weave into the fabric of their everyday lives.
There were three components to this experiential branding
strategy. The first component was the
coffee itself. Starbucks prided itself on offering what it
believed to be the highest-quality coffee in the
world, sourced from the Africa, Central and South America, and
Asia-Pacific regions. To enforce its
exacting coffee standards, Starbucks controlled as much of the
supply chain as possible—it worked
directly with growers in various countries of origin to purchase
green coffee beans, it oversaw the
custom-roasting process for the company’s various blends and
single-origin coffees, and it controlled
distribution to retail stores around the world.
The second brand component was service, or what the company
sometimes referred to as “customer
intimacy.” “Our goal is to create an uplifting experience every
time you walk through our door,”
explained Jim Alling, Starbucks’ senior vice president of North
American retail. “Our most loyal
customers visit us as often as 18 times a month, so it could be
something as simple as recognizing you
and knowing your drink or customizing your drink just the way
you like it.”
The third brand component was atmosphere. “People come for
the coffee,” explained Day, “but
the ambience is what makes them want to stay.” For that
reason, most Starbucks had seating areas to
encourage lounging and layouts that were designed to provide
an upscale yet inviting environment
for those who wanted to linger. “What we have built has
universal appeal,” remarked Schultz. “It’s
based on the human spirit, it’s based on a sense of community,
the need for people to come together.”3
Channels of Distribution
Almost all of Starbucks’ locations in North America were
company-operated stores located in high-
traffic, high-visibility settings such as retail centers, office
buildings, and university campuses.4 In
addition to selling whole-bean coffees, these stores sold rich-
brewed coffees, Italian-style espresso
drinks, cold-blended beverages, and premium teas. Product
mixes tended to vary depending on a
store’s size and location, but most stores offered a variety of
pastries, sodas, and juices, along with
coffee-related accessories and equipment, music CDs, games,
and seasonal novelty items. (About 500
stores even carried a selection of sandwiches and salads.)
3 Batsell.
4 Starbucks had recently begun experimenting with drive-
throughs. Less than 10% of its stores had drive-throughs, but in
these
stores, the drive-throughs accounted for 50% of all business.
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2020.
504-016 Starbucks: Delivering Customer Service
4
Beverages accounted for the largest percentage of sales in these
stores (77%); this represented a
change from 10 years earlier, when about half of store revenues
had come from sales of whole-bean
coffees. (See Exhibit 4 for retail sales mix by product type; see
Exhibit 5 for a typical menu board and
price list.)
Starbucks also sold coffee products through non-company-
operated retail channels; these so-called
“Specialty Operations” accounted for 15% of net revenues.
About 27% of these revenues came from
North American food-service accounts, that is, sales of whole-
bean and ground coffees to hotels,
airlines, restaurants, and the like. Another 18% came from
domestic retail store licenses that, in North
America, were only granted when there was no other way to
achieve access to desirable retail space
(e.g., in airports).
The remaining 55% of specialty revenues came from a variety
of sources, including international
licensed stores, grocery stores and warehouse clubs (Kraft
Foods handled marketing and distribution
for Starbucks in this channel), and online and mail-order sales.
Starbucks also had a joint venture with
Pepsi-Cola to distribute bottled Frappuccino beverages in North
America, as well as a partnership with
Dreyer’s Grand Ice Cream to develop and distribute a line of
premium ice creams.
Day explained the company’s broad distribution strategy:
Our philosophy is pretty straightforward—we want to reach
customers where they
work, travel, shop, and dine. In order to do this, we sometimes
have to establish
relationships with third parties that share our values and
commitment to quality. This is
a particularly effective way to reach newcomers with our brand.
It’s a lot less intimidating
to buy Starbucks at a grocery store than it is to walk into one of
our coffeehouses for the
first time. In fact, about 40% of our new coffeehouse customers
have already tried the
Starbucks brand before they walk through our doors. Even
something like ice cream has
become an important trial vehicle for us.
Starbucks Partners
All Starbucks employees were called “partners.” The company
employed 60,000 partners
worldwide, about 50,000 in North America. Most were hourly-
wage employees (called baristas) who
worked in Starbucks retail stores. Alling remarked, “From day
one, Howard has made clear his belief
that partner satisfaction leads to customer satisfaction. This
belief is part of Howard’s DNA, and
because it’s been pounded into each and every one of us, it’s
become part of our DNA too.”
The company had a generous policy of giving health insurance
and stock options to even the most
entry-level partners, most of whom were between the ages of 17
and 23. Partly as a result of this,
Starbucks’ partner satisfaction rate consistently hovered in the
80% to 90% range, well above the
industry norm,5 and the company had recently been ranked 47th
in the Fortune magazine list of best
places to work, quite an accomplishment for a company with so
many hourly-wage workers.
In addition, Starbucks had one of the lowest employee turnover
rates in the industry—just 70%,
compared with fast-food industry averages as high as 300%.
The rate was even lower for managers,
and as Alling noted, the company was always looking for ways
to bring turnover down further:
“Whenever we have a problem store, we almost always find
either an inexperienced store manager or
inexperienced baristas. Manager stability is key—it not only
decreases partner turnover, but it also
5 Industrywide, employee satisfaction rates tended to be in the
50% to 60% range. Source: Starbucks, 2000.
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2020.
Starbucks: Delivering Customer Service 504-016
5
enables the store to do a much better job of recognizing regular
customers and providing personalized
service. So our goal is to make the position a lifetime job.”
To this end, the company encouraged promotion from within its
own ranks. About 70% of the
company’s store managers were ex-baristas, and about 60% of
its district managers were ex-store
managers. In fact, upon being hired, all senior executives had
to train and succeed as baristas before
being allowed to assume their positions in corporate
headquarters.
Delivering on Service
When a partner was hired to work in one of Starbucks’ North
American retail stores, he or she had
to undergo two types of training. The first type focused on
“hard skills” such as learning how to use
the cash register and learning how to mix drinks. Most
Starbucks beverages were handcrafted, and to
ensure product quality, there was a prespecified process
associated with each drink. Making an
espresso beverage, for example, required seven specific steps.
The other type of training focused on “soft skills.” Alling
explained:
In our training manual, we explicitly teach partners to connect
with customers—to
enthusiastically welcome them to the store, to establish eye
contact, to smile, and to try to
remember their names and orders if they’re regulars. We also
encourage partners to
create conversations with customers using questions that require
more than a yes or no
answer. So for example, “I noticed you were looking at the
menu board—what types of
beverages do you typically enjoy?” is a good question for a
partner to ask.
Starbucks’ “Just Say Yes” policy empowered partners to
provide the best service possible, even if it
required going beyond company rules. “This means that if a
customer spills a drink and asks for a
refill, we’ll give it to him,” said Day. “Or if a customer doesn’t
have cash and wants to pay with a check
(which we aren’t supposed to accept), then we’ll give her a
sample drink for free. The last thing we
want to do is win the argument and lose the customer.”
Most barista turnover occurred within the first 90 days of
employment; if a barista lasted beyond
that, there was a high probability that he or she would stay for
three years or more. “Our training ends
up being a self-selection process,” Alling said. Indeed, the
ability to balance hard and soft skills
required a particular type of person, and Alling believed the
challenges had only grown over time:
Back in the days when we sold mostly beans, every customer
who walked in the door
was a coffee connoisseur, and it was easy for baristas to engage
in chitchat while ringing
up a bag. Those days are long gone. Today, almost every
customer orders a handcrafted
beverage. If the line is stretching out the door and everyone’s
clamoring for their coffee
fix, it’s not that easy to strike up a conversation with a
customer.
The complexity of the barista’s job had also increased over
time; making a venti tazoberry and crème,
for instance, required 10 different steps. “It used to be that a
barista could make every variation of
drink we offered in half a day,” Day observed. “Nowadays,
given our product proliferation, it would
take 16 days of eight-hour shifts. There are literally hundreds
of combinations of drinks in our
portfolio.”
This job complexity was compounded by the fact that almost
half of Starbucks’ customers
customized their drinks. According to Day, this created a
tension between product quality and
customer focus for Starbucks:
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2020.
504-016 Starbucks: Delivering Customer Service
6
On the one hand, we train baristas to make beverages to our
preestablished quality
standards—this means enforcing a consistent process that
baristas can master. On the
other hand, if a customer comes in and wants it their way—extra
vanilla, for instance—
what should we do? Our heaviest users are always the most
demanding. Of course, every
time we customize, we slow down the service for everyone else.
We also put a lot of strain
on our baristas, who are already dealing with an extraordinary
number of sophisticated
drinks.
One obvious solution to the problem was to hire more baristas
to share the workload; however, the
company had been extremely reluctant to do this in recent years,
particularly given the economic
downturn. Labor was already the company’s largest expense
item in North America (see Exhibit 3),
and Starbucks stores tended to be located in urban areas with
high wage rates. Instead, the company
had focused on increasing barista efficiency by removing all
non-value-added tasks, simplifying the
beverage production process, and tinkering with the facility
design to eliminate bottlenecks.
In addition, the company had recently begun installing
automated espresso machines in its North
American cafés. The verismo machines, which decreased the
number of steps required to make an
espresso beverage, reduced waste, improved consistency, and
had generated an overwhelmingly
positive customer and barista response.
Measuring Service Performance
Starbucks tracked service performance using a variety of
metrics, including monthly status reports
and self-reported checklists. The company’s most prominent
measurement tool was a mystery shopper
program called the “Customer Snapshot.” Under this program,
every store was visited by an
anonymous mystery shopper three times a quarter. Upon
completing the visit, the shopper would rate
the store on four “Basic Service” criteria:
• Service—Did the register partner verbally greet the customer?
Did the barista and register
partner make eye contact with the customer? Say thank you?
• Cleanliness—Was the store clean? The counters? The tables?
The restrooms?
• Product quality—Was the order filled accurately? Was the
temperature of the drink within
range? Was the beverage properly presented?
• Speed of service—How long did the customer have to wait?
The company’s goal was to serve
a customer within three minutes, from back-of-the-line to drink-
in-hand. This benchmark was
based on market research which indicated that the three-minute
standard was a key component
in how current Starbucks customers defined “excellent service.”
In addition to Basic Service, stores were also rated on
“Legendary Service,” which was defined as
“behavior that created a memorable experience for a customer,
that inspired a customer to return often
and tell a friend.” Legendary Service scores were based on
secret shopper observations of service
attributes such as partners initiating conversations with
customers, partners recognizing customers by
name or drink order, and partners being responsive to service
problems.
During 2002, the company’s Customer Snapshot scores had
increased across all stores (see
Exhibit 7), leading Day to comment, “The Snapshot is not a
perfect measurement tool, but we believe
it does a good job of measuring trends over the course of a
quarter. In order for a store to do well on
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2020.
Starbucks: Delivering Customer Service 504-016
7
the Snapshot, it needs to have sustainable processes in place
that create a well-established pattern of
doing things right so that it gets ‘caught’ doing things right.”
Competition
In the United States, Starbucks competed against a variety of
small-scale specialty coffee chains,
most of which were regionally concentrated. Each tried to
differentiate itself from Starbucks in a
different way. For example, Minneapolis-based Caribou Coffee,
which operated more than 200 stores
in nine states, differentiated itself on store environment. Rather
than offer an upscale, pseudo-
European atmosphere, its strategy was to simulate the look and
feel of an Alaskan lodge, with knotty-
pine cabinetry, fireplaces, and soft seating. Another example
was California-based Peet’s Coffee & Tea,
which operated about 70 stores in five states. More than 60% of
Peet’s revenues came from the sale of
whole beans. Peet’s strategy was to build a super-premium
brand by offering the freshest coffee on
the market. One of the ways it delivered on this promise was by
“roasting to order,” that is, by hand
roasting small batches of coffee at its California plant and
making sure that all of its coffee shipped
within 24 hours of roasting.
Starbucks also competed against thousands of independent
specialty coffee shops. Some of these
independent coffee shops offered a wide range of food and
beverages, including beer, wine, and liquor;
others offered satellite televisions or Internet-connected
computers. Still others differentiated
themselves by delivering highly personalized service to an
eclectic clientele.
Finally, Starbucks competed against donut and bagel chains
such as Dunkin Donuts, which
operated over 3,700 stores in 38 states. Dunkin Donuts
attributed half of its sales to coffee and in recent
years had begun offering flavored coffee and noncoffee
alternatives, such as Dunkaccino (a coffee and
chocolate combination available with various toppings) and
Vanilla Chai (a combination of tea, vanilla,
honey, and spices).
Caffeinating the World
The company’s overall objective was to establish Starbucks as
the “most recognized and respected
brand in the world.”6 This ambitious goal required an
aggressive growth strategy, and in 2002, the
two biggest drivers of company growth were retail expansion
and product innovation.
Retail Expansion
Starbucks already owned close to one-third of America’s coffee
bars, more than its next five biggest
competitors combined. (By comparison, the U.S.’s second-
largest player, Diedrich Coffee, operated
fewer than 400 stores.) However, the company had plans to
open 525 company-operated and 225
licensed North American stores in 2003, and Schultz believed
that there was no reason North America
could not eventually expand to at least 10,000 stores. As he put
it, “These are still the early days of the
company’s growth."7
The company’s optimistic growth plans were based on a number
of considerations:
6 Starbucks 2002 Annual Report.
7 Dina ElBoghdady, “Pouring It On: The Starbucks Strategy?
Locations, Locations, Locations,” The Washington Post, August
25,
2002.
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Escobar in Marketing 300 Integrated Core taught by JOHN
CAVALIERE, Montclair State University from Aug 2019 to Feb
2020.
504-016 Starbucks: Delivering Customer Service
8
• First, coffee consumption was on the rise in the United States,
following years of decline. More
than 109 million people (about half of the U.S. population) now
drank coffee every day, and an
additional 52 million drank it on occasion. The market’s
biggest growth appeared to be among
drinkers of specialty coffee,8 and it was estimated that about
one-third of all U.S. coffee
consumption took place outside of the home, in places such as
offices, restaurants, and coffee
shops. (See Exhibit 6.)
• Second, there were still eight states in the United States
without a single company-operated
Starbucks; in fact, the company was only in 150 of the roughly
300 metropolitan statistical areas
in the nation.
• Third, the company believed it was far from reaching
saturation levels in many existing
markets. In the Southeast, for example, there was only one
store for every 110,000 people
(compared with one store for every 20,000 people in the Pacific
Northwest). More generally,
only seven states had more than 100 Starbucks locations.
Starbucks’ strategy for expanding its retail business was to open
stores in new markets while
geographically clustering stores in existing markets. Although
the latter often resulted in significant
cannibalization, the company believed that this was more than
offset by the total incremental sales
associated with the increased store concentration. As Schultz
readily conceded, “We self-cannibalize
at least a third of our stores every day.”9
When it came to selecting new retail sites, the company
considered a number of criteria, including
the extent to which the demographics of the area matched the
profile of the typical Starbucks drinker,
the level of coffee consumption in the area, the nature and
intensity of competition in the local market,
and the availability of attractive real estate. Once a decision
was made to move forward with a site,
the company was capable of designing, permitting, constructing,
and opening a new store within 16
weeks. A new store typically averaged about $610,000 in sales
during its first year; same-store sales
(comps) were strongest in the first three years and then
continued to comp positively, consistent with
the company average.
Starbucks’ international expansion plans were equally
ambitious. Starbucks already operated over
300 company-owned stores in the United Kingdom, Australia,
and Thailand, in addition to about 900
licensed stores in various countries in Asia, Europe, the Middle
East, Africa, and Latin America. (Its
largest international market was Japan, with close to 400
stores.) The company’s goal was to ultimately
have 15,000 international stores.
Product Innovation
The second big driver of company growth was product
innovation. Internally, this was considered
one of the most significant factors in comparable store sales
growth, particularly since Starbucks’ prices
had remained relatively stable in recent years. New products
were launched on a regular basis; for
example, Starbucks introduced at least one new hot beverage
every holiday season.
The new product development process generally operated on a
12- to 18-month cycle, during which
the internal research and development (R&D) team tinkered
with product formulations, ran focus
8 National Coffee Association.
9 ElBoghdady.
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Starbucks: Delivering Customer Service 504-016
9
groups, and conducted in-store experiments and market tests.
Aside from consumer acceptance,
whether a product made it to market depended on a number of
factors, including the extent to which
the drink fit into the “ergonomic flow” of operations and the
speed with which the beverage could be
handcrafted. Most importantly, the success of a new beverage
depended on partner acceptance.
“We’ve learned that no matter how great a drink it is, if our
partners aren’t excited about it, it won’t
sell,” said Alling.
In recent years, the company’s most successful innovation had
been the 1995 introduction of a coffee
and non-coffee-based line of Frappuccino beverages, which had
driven same-store sales primarily by
boosting traffic during nonpeak hours. The bottled version of
the beverage (distributed by PepsiCo)
had become a $400 million10 franchise; it had managed to
capture 90% of the ready-to-drink coffee
category, in large part due to its appeal to non-coffee-drinking
20-somethings.
Service Innovation
In terms of nonproduct innovation, Starbucks’ stored-value card
(SVC) had been launched in
November 2001. This prepaid, swipeable smart card—which
Schultz referred to as “the most
significant product introduction since Frappuccino”11—could
be used to pay for transactions in any
company-operated store in North America. Early indications of
the SVC’s appeal were very positive:
After less than one year on the market, about 6 million cards
had been issued, and initial activations
and reloads had already reached $160 million in sales. In
surveys, the company had learned that
cardholders tended to visit Starbucks twice as often as cash
customers and tended to experience
reduced transaction times.
Day remarked, “We’ve found that a lot of the cards are being
given away as gifts, and many of those
gift recipients are being introduced to our brand for the first
time. Not to mention the fact that the
cards allow us to collect all kinds of customer-transaction data,
data that we haven’t even begun to do
anything with yet.”
The company’s latest service innovation was its T-Mobile
HotSpot wireless Internet service,
introduced in August 2002. The service offered high-speed
access to the Internet in selected Starbucks
stores in the United States and Europe, starting at $49.99 a
month.
Starbucks’ Market Research: Trouble Brewing?
Interestingly, although Starbucks was considered one of the
world’s most effective marketing
organizations, it lacked a strategic marketing group. In fact, the
company had no chief marketing
officer, and its marketing department functioned as three
separate groups—a market research group
that gathered and analyzed market data requested by the various
business units, a category group that
developed new products and managed the menu and margins,
and a marketing group that developed
the quarterly promotional plans.
This organizational structure forced all of Starbucks’ senior
executives to assume marketing-related
responsibilities. As Day pointed out, “Marketing is everywhere
at Starbucks—it just doesn’t
necessarily show up in a line item called ‘marketing.’ Everyone
has to get involved in a collaborative
marketing effort.” However, the organizational structure also
meant that market- and customer-
10 Refers to sales at retail. Actual revenue contribution was
much lower due to the joint-venture structure.
11 Stanley Holmes, “Starbucks’ Card Smarts,” BusinessWeek,
March 18, 2002.
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504-016 Starbucks: Delivering Customer Service
10
related trends could sometimes be overlooked. “We tend to be
great at measuring things, at collecting
market data,” Day noted, “but we are not very disciplined when
it comes to using this data to drive
decision making.” She continued:
This is exactly what started to happen a few years ago. We had
evidence coming in
from market research that contradicted some of the fundamental
assumptions we had
about our brand and our customers. The problem was that this
evidence was all over the
place—no one was really looking at the “big picture.” As a
result, it took awhile before
we started to take notice.
Starbucks’ Brand Meaning
Once the team did take notice, it discovered several things.
First, despite Starbucks’ overwhelming
presence and convenience, there was very little image or
product differentiation between Starbucks
and the smaller coffee chains (other than Starbucks’ ubiquity) in
the minds of specialty coffeehouse
customers. There was significant differentiation, however,
between Starbucks and the independent
specialty coffeehouses (see Table A below).
Table A Qualitative Brand Meaning: Independents vs.
Starbucks
Independents:
• Social and inclusive
• Diverse and intellectual
• Artsy and funky
• Liberal and free-spirited
• Lingering encouraged
• Particularly appealing to younger coffeehouse customers
• Somewhat intimidating to older, more mainstream coffeehouse
customers
Starbucks:
• Everywhere—the trend
• Good coffee on the run
• Place to meet and move on
• Convenience oriented; on the way to work
• Accessible and consistent
Source: Starbucks, based on qualitative interviews with
specialty-coffeehouse customers.
More generally, the market research team discovered that
Starbucks’ brand image had some rough
edges. The number of respondents who strongly agreed with the
statement “Starbucks cares primarily
about making money” was up from 53% in 2000 to 61% in 2001,
while the number of respondents who
strongly agreed with the statement “Starbucks cares primarily
about building more stores” was up
from 48% to 55%. Day noted, “It’s become apparent that we
need to ask ourselves, ‘Are we focusing
on the right things? Are we clearly communicating our value
and values to our customers, instead of
just our growth plans?’” (see Table B below).
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Starbucks: Delivering Customer Service 504-016
11
Table B The Top Five Attributes Consumers Associate with the
Starbucks Brand
• Known for specialty/gourmet coffee (54% strongly agree)
• Widely available (43% strongly agree)
• Corporate (42% strongly agree)
• Trendy (41% strongly agree)
• Always feel welcome at Starbucks (39% strongly agree)
Source: Starbucks, based on 2002 survey.
The Changing Customer
The market research team also discovered that Starbucks’
customer base was evolving. Starbucks’
newer customers tended to be younger, less well-educated, and
in a lower income bracket than
Starbucks’ more established customers. In addition, they
visited the stores less frequently and had
very different perceptions of the Starbucks brand compared to
more established customers (see Exhibit
8).
In short, the team learned that Starbucks’ historical customer
profile—the affluent, well-educated,
white-collar female between the ages of 24 and 44—had
expanded.
Customer Behavior
With respect to customer behavior, the market research team
discovered that, regardless of the
market—urban versus rural, new versus established—customers
tended to use the stores the same
way. The team also learned that, although the company’s most
frequent customers averaged 18 visits
a month, the typical customer visited just five times a month
(see Figure A below).
Figure A Customer Visit Frequency
Source: Starbucks, 2002.
42%
11%
37%
27%
21%
62%
0%
20%
40%
60%
80%
100%
% of Total
Starbucks
Customer Base
% of All
Starbucks
Transactions
Customer visits 8+ times/month
Customer visits 3-7 times/month
Customer visits 1-2 times/month
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504-016 Starbucks: Delivering Customer Service
12
Measuring and Driving Customer Satisfaction
Finally, the team discovered that, despite its high Customer
Snapshot scores, Starbucks was not
meeting expectations in terms of customer satisfaction. The
satisfaction scores were considered critical
because the team also had evidence of a direct link between
satisfaction level and customer loyalty (see
Exhibit 9 for customer satisfaction data).
While customer satisfaction was driven by a number of different
factors (see Exhibit 10), Day
believed that the customer satisfaction gap could primarily be
attributed to a service gap between
Starbucks scores on key attributes and customer expectations.
When Starbucks had polled its
customers to determine what it could do to make them feel more
like valued customers,
“improvements to service”—in particular, speed-of-service—
had been mentioned most frequently (see
Exhibit 11 for more information).
Rediscovering the Starbucks Customer
Responding to the market research findings posed a difficult
management challenge. The most
controversial proposal was the one on the table before Day—it
involved relaxing the labor-hour
controls in the stores to add an additional 20 hours of labor, per
week, per store, at a cost of an extra
$40 million per year. Not surprisingly, the plan was being met
with significant internal resistance.
“Our CFO is understandably concerned about the potential
impact on our bottom line,” said Day.
“Each $6 million in profit contribution translates into a penny a
share. But my argument is that if we
move away from seeing labor as an expense to seeing it as a
customer-oriented investment, we’ll see a
positive return.” She continued:
We need to bring service time down to the three-minute level in
all of our stores,
regardless of the time of day. If we do this, we’ll not only
increase customer satisfaction
and build stronger long-term relationships with our customers,
we’ll also improve our
customer throughput. The goal is to move each store closer to
the $20,000 level in terms
of weekly sales, and I think that this plan will help us get there.
In two days, Day was scheduled to make a final
recommendation to Howard Schultz and Orin
Smith about whether the company should roll out the $40
million plan. In preparation for this meeting,
Day had asked Alling to help her think through the implications
of the plan one final time. She mused:
We’ve been operating with the assumption that we do customer
service well. But the
reality is, we’ve started to lose sight of the consumer. It’s
amazing that this could happen
to a company like us—after all, we’ve become one of the most
prominent consumer
brands in the world. For all of our focus on building the brand
and introducing new
products, we’ve simply stopped talking about the customer.
We’ve lost the connection
between satisfying our customers and growing the business.
Alling’s response was simple: “We know that both Howard and
Orin are totally committed to
satisfying our retail customers. Our challenge is to tie customer
satisfaction to the bottom line. What
evidence do we have?”
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Starbucks: Delivering Customer Service 504-016
13
Exhibit 1 Starbucks' Financials, FY 1998 to FY 2002 ($ in
millions)
FY 1998 FY 1999 FY 2000 FY 2001 FY 2002
Revenue
Co-Owned North American 1,076.8 1,375.0 1,734.9 2,086.4
2,583.8
Co-Owned Int’l (UK, Thailand, Australia) 25.8 48.4 88.7 143.2
209.1
Total Company-Operated Retail 1,102.6 1,423.4 1,823.6 2,229.6
2,792.9
Specialty Operations 206.1 263.4 354.0 419.4 496.0
Net Revenues 1,308.7 1,686.8 2,177.6 2,649.0 3,288.9
Cost of Goods Sold 578.5 747.6 961.9 1,112.8 1,350.0
Gross Profit 730.2 939.2 1,215.7 1,536.2 1,938.9
Joint-Venture Incomea 1.0 3.2 20.3 28.6 35.8
Expenses:
Store Operating Expense 418.5 543.6 704.9 875.5 1,121.1
Other Operating Expense 44.5 54.6 78.4 93.3 127.2
Depreciation & Amortization Expense 72.5 97.8 130.2 163.5
205.6
General & Admin Expense 77.6 89.7 110.2 151.4 202.1
Operating Expenses 613.1 785.7 1,023.8 1,283.7 1,656.0
Operating Profit 109.2 156.7 212.3 281.1 310.0
Net Income 68.4 101.7 94.5 181.2 215.1
% Change in Monthly Comparable Store Salesb
North America 5% 6% 9% 5% 7%
Consolidated 5% 6% 9% 5% 6%
Source: Adapted from company reports and Lehman Brothers,
November 5, 2002.
aIncludes income from various joint ventures, including
Starbucks’ partnership with the Pepsi-Cola Company to develop
and
distribute Frappuccino and with Dreyer’s Grand Ice Cream to
develop and distribute premium ice creams.
bIncludes only company-operated stores open 13 months or
longer.
Exhibit 2 Starbucks' Store Growth
FY 1998 FY 1999 FY 2000 FY 2001 FY 2002
Total North America 1,755 2,217 2,976 3,780 4,574
Company-Operated 1,622 2,038 2,446 2,971 3,496
Licensed Storesa 133 179 530 809 1,078
Total International 131 281 525 929 1,312
Company-Operated 66 97 173 295 384
Licensed Stores 65 184 352 634 928
Total Stores 1,886 2,498 3,501 4,709 5,886
Source: Company reports.
aIncludes kiosks located in grocery stores, bookstores, hotels,
airports, and so on.
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504-016 Starbucks: Delivering Customer Service
14
Exhibit 3 Additional Data, North American Company-Operated
Stores (FY2002)
Average
Average hourly rate with shift supervisors and hourly partners $
9.00
Total labor hours per week, average store 360
Average weekly store volume $15,400
Average ticket $ 3.85
Average daily customer count, per store 570
Source: Company reports.
Exhibit 4 Product Mix, North American Company-Operated
Stores (FY2002)
Percent of Sales
Retail Product Mix
Coffee Beverages 77%
Food Items 13%
Whole-Bean Coffees 6%
Equipment & Accessories 4%
Source: Company reports.
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Starbucks: Delivering Customer Service 504-016
15
Exhibit 5 Typical Menu Board and Price List for North
American Company-Owned Store
Espresso Traditions Tall Grande Venti Brewed Coffee Tall
Grande Venti
Classic Favorites Coffee of the Day 1.40 1.60 1.70
Toffee Nut Latte 2.95 3.50 3.80 Decaf of the Day 1.40 1.60
1.70
Vanilla Latte 2.85 3.40 3.70
Caffe Latte 2.55 3.10 3.40 Cold Beverages Tall Grande Venti
Cappuccino 2.55 3.10 3.40 Iced Caffe Latte 2.55 3.10 3.50
Caramel Macchiato 2.80 3.40 3.65 Iced Caramel Macchiato
2.80 3.40 3.80
White Chocolate Mocha 3.20 3.75 4.00 Iced Caffe Americano
1.75 2.05 3.40
Caffe Mocha 2.75 3.30 3.55
Caffe Americano 1.75 2.05 2.40 Coffee Alternatives Tall
Grande Venti
Toffee Nut Crème 2.45 2.70 2.95
Espresso Solo Doppio Vanilla Crème 2.20 2.45 2.70
Espresso 1.45 1.75 Caramel Apple Cider 2.45 2.70 2.95
Hot Chocolate 2.20 2.45 2.70
Extras Tazo Hot Tea 1.15 1.65 1.65
Additional Espresso Shot .55 Tazo Chai 2.70 3.10 3.35
Add flavored syrup .30
Organic milk & soy available upon request Whole Beans: Bold
½ lb 1 lb
Our most intriguing and exotic coffees
Gold Coast Blend 5.70 10.95
French Roast 5.20 9.95
Sumatra 5.30 10.15
Decaf Sumatra 5.60 10.65
Ethiopia Sidame 5.20 9.95
Arabian Mocha Sanani 8.30 15.95
Frappuccino Tall Grande Venti Kenya 5.30 10.15
Ice Blended Beverages Italian Roast 5.20 9.95
Coffee 2.65 3.15 3.65 Sulawesi 6.10 11.65
Mocha 2.90 3.40 3.90
Caramel Frappuccino 3.15 3.65 4.15 Whole Beans: Smooth ½
lb 1 lb
Mocha Coconut 3.15 3.65 4.15 Richer, more flavorful coffees
(limited offering) Espresso Roast 5.20 9.95
Decaf Espresso Roast 5.60 10.65
Crème Frappuccino Tall Grande Venti Yukon Blend 5.20 9.95
Ice Blended Crème Café Verona 5.20 9.95
Toffee Nut Crème 3.15 3.65 4.15 Guatemala Antigua 5.30
10.15
Vanilla Crème 2.65 3.15 3.65 Arabian Mocha Java 6.30 11.95
Coconut Crème 3.15 3.65 4.15 Decaf Mocha Java/SWP 6.50
12.45
Tazo Tea Frappuccino Tall Grande Venti Whole Beans: Mild
½ lb 1 lb
Ice Blended Teas The perfect introduction to Starbucks
coffees
Tazo Citrus 2.90 3.40 3.90 Breakfast Blend 5.20 9.95
Tazoberry 2.90 3.40 3.90 Lightnote Blend 5.20 9.95
Tazo Chai Crème 3.15 3.65 4.15 Decaf Lightnote Blend 5.60
10.65
Colombia Narino 5.50 10.45
House Blend 5.20 9.95
Decaf House Blend 5.60 10.65
Fair Trade Coffee 5.95 11.45
Source: Starbucks location: Harvard Square, Cambridge,
Massachusetts, February 2003.
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504-016 Starbucks: Delivering Customer Service
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Exhibit 6 Total U.S. Retail Coffee Market (includes both in-
home and out-of-home consumption)
Other estimatesa for the U.S. retail coffee market in 2002:
• In the home, specialty coffeeb was estimated to be a $3.2
billion business, of which Starbucks
was estimated to have a 4% share.
• In the food-service channel, specialty coffee was estimated to
be a $5 billion business, of which
Starbucks was estimated to have a 5% share.
• In grocery stores, Starbucks was estimated to have a 7.3%
share in the ground-coffee category
and a 21.7% share in the whole-beans category.
• It was estimated that over the next several years, the overall
retail market would grow less than
1% per annum, but growth in the specialty-coffee category
would be strong, with compound
annual growth rate (CAGR) of 9% to 10%.
• Starbucks’ U.S. business was projected to grow at a CAGR of
approximately 20% top-line
revenue growth.
Source: Adapted from company reports and Lehman Brothers,
November 5, 2002.
aThe value of the retail coffee market was difficult to estimate
given the highly fragmented and loosely monitored nature of the
market (i.e., specialty coffeehouses, restaurants, delis, kiosks,
street carts, grocery and convenience stores, vending machines,
etc.).
bSpecialty coffee includes espresso, cappuccino, latte, café
mocha, iced/ice-blended coffee, gourmet coffee (premium whole
bean
or ground), and blended coffee.
Specialty
Coffee
27%
Traditiona
l Coffee
73%
2000 - $21 billion
Specialty
Coffee
31%
Tradition
al Coffee
69%
2002E - $21.5 billion
Specialty
Coffee
41%
Tradition
al Coffee
59%
2005E - $22 billion
v) Starbuc
ks Share
i) Starbuc
ks Share
iii) Starbuc
ks Share
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Starbucks: Delivering Customer Service 504-016
17
Exhibit 7 Customer Snapshot Scores (North American stores)
Source: Company information.
90
91
92
93
94
95
Q3 01 Q4 01 Q1 02 Q2 02 Q3 02
Service
89
90
91
92
93
94
Q3 01 Q4 01 Q1 02 Q2 02 Q3 02
Cleanliness
90
91
92
93
94
95
Q3 01 Q4 01 Q1 02 Q2 02 Q3 02
Product Quality
3.00
3.20
3.40
3.60
3.80
4.00
Q3 01 Q4 01 Q1 02 Q2 02 Q3 02
Average Wait Time
(in minutes.seconds)
0%
20%
40%
60%
80%
100%
Q4 01 Q1 02 Q2 02 Q3 02
Legendary Service Scores
1 or 2 star 3 star 4 star 5 star
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504-016 Starbucks: Delivering Customer Service
18
Exhibit 8 Starbucks’ Customer Retention Information
% of Starbucks’ customers who first started visiting Starbucks .
. .
In the past year 27%
1–2 years ago 20%
2–5 years ago 30%
5 or more years ago 23%
Source: Starbucks, 2002. Based on a sample of Starbucks’ 2002
customer base.
New Customers
(first visited
in past year)
Established Customers
(first visited
5+ years ago)
Percent female 45% 49%
Average Age 36 40
Percent with College Degree + 37% 63%
Average income $65,000 $81,000
Average # cups of coffee/week
(includes at home and away from home) 15 19
Attitudes toward Starbucks:
High-quality brand 34% 51%
Brand I trust 30% 50%
For someone like me 15% 40%
Worth paying more for 8% 32%
Known for specialty coffee 44% 60%
Known as the coffee expert 31% 45%
Best-tasting coffee 20% 31%
Highest-quality coffee 26% 41%
Overall opinion of Starbucks 25% 44%
Source: Starbucks, 2002. “Attitudes toward Starbucks”
measured according to the percent of customers who agreed
with the
above statements.
Exhibit 9 Starbucks’ Customer Behavior, by Satisfaction Level
Unsatisfied
Customer
Satisfied
Customer
Highly Satisfied
Customer
Number of Starbucks Visits/Month 3.9 4.3 7.2
Average Ticket Size/Visit $3.88 $4.06 $4.42
Average Customer Life (Years) 1.1 4.4 8.3
Source: Self-reported customer activity from Starbucks survey,
2002.
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2020.
Starbucks: Delivering Customer Service 504-016
19
Exhibit 10 Importance Rankings of Key Attributes in Creating
Customer Satisfaction
To be read: 83% of Starbucks’ customers rate a clean store as
being highly important (90+ on a 100-point
scale) in creating customer satisfaction.
Source: Self-reported customer activity from Starbucks survey,
2002.
5%
13%
16%
17%
17%
20%
30%
34%
37%
39%
50%
60%
60%
65%
65%
67%
72%
73%
75%
77%
83%
0% 20% 40% 60% 80% 100%
Selection of merchandise
New, innovative beverages
Selection of whole beans
Selection of noncoffee beverages
Highest-quality pastry, desserts
Highest-quality tea
Involved in the community
Best ice-blended drinks
Place to relax, meet friends
Knowledgeable staff
Pleasant atmosphere/ambience
Best espresso drinks
Freshest coffee
Appropriate prices
Fast service
Highest-quality coffee
Coffee taste/flavor
Friendly staff
Treated as a valuable customer
Convenient
Clean store
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20
Exhibit 11 Factors Driving “Valued Customer” Perceptions
How could Starbucks make you feel more like a valued
customer? % Responses
Improvements to Service (total) 34%
Friendlier, more attentive staff 19%
Faster, more efficient service 10%
Personal treatment (remember my name, remember my order)
4%
More knowledgeable staff 4%
Better service 2%
Offer Better Prices/Incentive Programs (total) 31%
Free cup after x number of visits 19%
Reduce prices 11%
Offer promotions, specials 3%
Other (total) 21%
Better quality/Variety of products 9%
Improve atmosphere 8%
Community outreach/Charity 2%
More stores/More convenient locations 2%
Don’t Know/Already Satisfied 28%
Source: Starbucks, 2002. Based on a survey of Starbucks’ 2002
customer base, including highly satisfied,
satisfied, and unsatisfied customers.
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2020.
Starbucks: Delivering Customer ServiceCompany
BackgroundThe Starbucks Value PropositionChannels of
DistributionStarbucks PartnersDelivering on ServiceMeasuring
Service PerformanceCompetitionCaffeinating the WorldRetail
ExpansionProduct InnovationService InnovationStarbucks’
Market Research: Trouble Brewing?Starbucks’ Brand
MeaningTable AQualitative Brand Meaning: Independents vs.
StarbucksTable BThe Top Five Attributes Consumers Associate
with the Starbucks BrandThe Changing CustomerCustomer
BehaviorFigure ACustomer Visit FrequencyMeasuring and
Driving Customer SatisfactionRediscovering the Starbucks
CustomerExhibit 1Starbucks' Financials, FY 1998 to FY 2002 ($
in millions)Exhibit 2Starbucks' Store GrowthExhibit 3
Additional Data, North American Company-Operated Stores
(FY2002)Exhibit 4 Product Mix, North American Company-
Operated Stores (FY2002)Exhibit 5Typical Menu Board and
Price List for North American Company-Owned StoreExhibit
6Total U.S. Retail Coffee Market (includes both in-home and
out-of-home consumption)Exhibit 7Customer Snapshot Scores
(North American stores)Exhibit 8Starbucks’ Customer
Retention InformationExhibit 9Starbucks’ Customer Behavior,
by Satisfaction LevelExhibit 10Importance Rankings of Key
Attributes in Creating Customer SatisfactionTo be read: 83% of
Starbucks’ customers rate a clean store as being highly
important (90+ on a 100-point scale) in creating customer
satisfaction.Exhibit 11Factors Driving “Valued Customer”
Perceptionsi) Starbucks Share of Specialty Coffee Marketii)
42% (estimate)iii) Starbucks Share of Specialty Coffee
Marketiv) 50% (estimate)v) Starbucks Share of Specialty Coffee
Marketvi) 38%
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/HRV (Za stvaranje Adobe PDF dokumenata najpogodnijih za
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Stvoreni PDF dokumenti mogu se otvoriti Acrobat i Adobe
Reader 5.0 i kasnijim verzijama.)
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/NLD (Gebruik deze instellingen om Adobe PDF-documenten
te maken die zijn geoptimaliseerd voor prepress-afdrukken van
hoge kwaliteit. De gemaakte PDF-documenten kunnen worden
geopend met Acrobat en Adobe Reader 5.0 en hoger.)
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