Should Starbucks make the $40 million investment in labor in the stores?
The proposal to invest $40 million investment was based on a customer poll result where the customers recommended “speed-of-service” as the most desirable improvement. However, there are several factors that negate this proposition:
(a) As was identified by Alling [p.4], a problem store can be identified by an inexperienced store manager or barista. Additional investment in labor means more hands in help but not necessarily the best hand since the new employees may take more time to serve.
(b) The poll result [Exhibit 11] is based on a survey of Starbuck’s 2002 customer base. This contradicts the customer snapshot [Exhibit 7] which indicates improvement in service, cleanliness and the product quality, and most importantly average wait times. Poll may not indicate actual customer behavior.
(c) The $40 million assumes all the investment is in the North American Stores with an average wage of $9 per hour. However, if there is an international component in the investment, the average wage will be different than $9/hr.
(d) Net income for FY2002 is $215.1 millions. With a least growth of 5%, the Net Income for the next year would be $226 millions even without the investment. With this investment, the store operating expense would increase by $40 million (and the Net income to decrease by the same amount). To have equivalent Net income of $226 millions, the % growth in sales should be 29%. More information is required to determine whether improved “speed-of-service” can translate into 29% growth.
With these data, I would not recommend the investment.
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