Starbucks’ AI Coffee Makers: A Productivity Case Study

Automation could allow baristas to be paid more and still net higher profits for company

Published: Tuesday, August 29, 2023 - 12:03

Starbucks’ implementation of artificial intelligence coffee makers¹ offers a simple and ideal case study that can illustrate the synergy between efficiency, wages, profits, and inflation. Even if we don’t know the actual cost figures, we can use some hypothetical numbers to demonstrate how higher efficiency enables higher wages, higher profits, and lower prices.

Although pressure to increase wages is generally linked to inflation,² this paradigm assumes the higher wages aren’t driven by higher productivity. When workers become more productive, their product or service becomes cheaper rather than more expensive, and this is deflationary.

Harrington Emerson³ pointed this out more than 100 years ago: “Fewer men should work less hard, receive higher wages, and deliver a cheaper product.” This single sentence is also a major selling point for the quality and manufacturing professions. Waste in industry is equally unhealthy for the economy. Waste is something for which we must pay, which puts money into circulation, but for which we receive no value. Waste is the root of all evils related to a nation’s economy—and it’s the job of quality and manufacturing professionals to eradicate this waste from supply chains.

Consumers have direct control over other forms of waste, such as premium prices for fancy brand names, celebrity endorsements, junk fees, and extended warranties. With regard to capital equipment, although the same principle applies to any asset, Henry Ford wrote, “They are worth only what we can do with them.”⁴

As but one example, I recently had to pick out frames for new sunglasses. I selected the Sam’s Club Member’s Mark brand, which is the generic store brand, over fancy designer labels because the eyeglass frame is worth only what it can do, namely, hold the lenses in place. A designer brand costs more but doesn’t do a better job, and the price difference is pure waste. The seller receives money without delivering genuine value or utility, which adds to the velocity of money but not to the supply of genuine goods and services.

Quality professionals can help educate consumers to demand value for their money, and this will help fight inflation. But the real work must take place on the shop floor, where waste can constitute at least 75 percent of the labor costs.

Materials and energy also can be wasted, and Brad Marley⁵ quotes Armstrong International’s Patricia Provot as saying, “As much as 80% of the energy that is used in a manufacturing facility gets dumped before it can be recouped and used elsewhere.”

This is a very strong selling point for the ISO 50001:2018 standard for energy management systems. But let’s return to the Starbucks example to illustrate the role of labor efficiency.

Automation at Starbucks

Regarding Starbuck’s Siren automated system, the original reference says, “Starbucks claims that baristas using the machine will be able to [make drinks in] less time and fewer steps, making a grande mocha Frappucinno in 36 seconds rather than 87 seconds.”

This is roughly a 140% productivity improvement. The price of a grande mocha Frappuccino is currently $4.45.⁶ Assume the baristas earn $15 an hour (the figure varies widely). Add 7.65% for the employer’s Social Security and Medicare taxes to get $16.15 an hour.

Also assume there’s a setup time of 13 seconds between orders, i.e., the barista needs this much time to receive and understand the customer’s order. In the absence of automation, it takes 100 seconds to fill the order, so the barista can fill 36 per hour. The labor cost is therefore 45 cents per drink.

When automation is present, it takes 49 seconds (again assuming 13 seconds to know what the customer wants) to fill the order, so 73 can be filled every hour. Assume the barista’s pay is increased to $20 an hour, which with employment taxes comes to $21.53 or 29.5 cents per drink.

This seems to leave room for a price reduction of only 15 cents per drink. But also suppose Starbucks accepts a lower profit margin, let’s say 33 percent less, which it can do because it’s now selling more than twice as many per hour. The lower price means more can be sold, which keeps the baristas employed—at a higher wage—while the company earns higher profits as well.

Incidentally, I don’t know Starbucks’ markup, or the portion of the item price that must cover ingredients, equipment, utilities, and the cost of owning or renting the store. The takeaway is the principle rather than the exact numbers.

The same exercise can be done with Frank Gilbreth’s non-stooping scaffold, which allowed masons to lay 350 rather than 125 bricks per hour, and with less physical effort. The labor cost per brick could be reduced, but as the masons were now 180% more productive, their hourly pay could be increased. The builder could accept a lower profit margin per brick, while again making more profit per hour because 180% more bricks could be laid. The masons were kept employed because the lower prices encouraged more construction.

Both examples illustrate Emerson’s simple statement, “Fewer men should work less hard, receive higher wages, and deliver a cheaper product.”

A square deal for all

This model’s success requires a square deal for all stakeholders or relevant interested parties. Starbucks can’t, for example, continue to pay the baristas only $15 an hour (again, this is the number assumed in the example, the actual figure varies) and expect them to buy into automation. Frederick Winslow Taylor told us this more than 100 years ago: “After a workman has had the price per piece of the work he is doing lowered two or three times as a result of his having worked harder and increased his output, he is likely entirely to lose sight of his employer’s side of the case and become imbued with a grim determination to have no more cuts if soldiering [i.e., marking time, deliberately limiting productivity] will prevent it.”⁷

Nor can the baristas expect to be paid 45 cents per drink, or $32.85 an hour, including the employer’s share of Social Security and Medicare, due to the productivity improvement. Starbucks can’t keep the same per-unit markup, either, because some of the benefits must be shared with customers to increase sales volume. If the price remains the same, the company might be able to save money by laying off half the baristas—thus proving the Luddites right with the consequences depicted by Taylor—but it will forego the opportunity to sell more than twice the current volume.

Henry Ford could have probably similarly kept car prices high and maintained only a small workforce to build cars with his moving assembly line. We know, however, that he reduced prices until the middle class could afford cars, which is why the automotive industry and its suppliers employ eight million Americans for relatively high wages.⁸

The key takeaway regarding efficiency and productivity improvements is therefore as follows:
• The worker’s piece rate can and must be reduced, but the reduction must be such that the worker gets paid more per hour because he or she is making far more units.
• The employer’s profit margin per piece must similarly be reduced, but the reduction must be calculated so the employer earns more per employee per hour.
• The difference must be reflected in lower prices to support the higher sales volume to keep all the workers employed.

Summary

Starbucks’ deployment of automated coffee makers (and the referenced article cites automation in other restaurants as well) should be beneficial to all stakeholders. Higher efficiency can deliver lower prices to increase sales volume and keep the workers employed, and at higher wages because their labor is no longer being expended on inefficient or nonvalue-adding activities. The employer can accept a lower profit margin per unit but earn more per employee-hour because more items are being sold.

Labor shortage-driven wage increases are indeed inflationary because the velocity of money increases without a commensurate increase in the quantity of goods and services. Efficiency-driven wage increases, in conjunction with price reductions, counteract inflation by making goods and services less expensive. The manufacturing and quality professions are ideally situated to help make this happen.

References
1. Rhone, Kailyn. “U.S. fast-food chains add automation to boost speed.” yahoo!finance. Aug. 2, 2023.
2. Casselman, Ben. “Wages Continue to Grow, Good for Workers But a Worry for the Fed.” The New York Times. April 28, 2023.
3. Emerson, Harrington. “Efficiency as a Basis for Operation and Wages.” The Engineering Magazine, 1909.
4. Ford, Henry; and Crowther, Samuel. Moving Forward. Doubleday, Doran, & Co., 1930. p. 25.
5. Marley, Brad. “The Impact of Data and Analytics on Sustainable Manufacturing.” Smart Manufacturing, June 20, 2023. pp. 25–29.
6. Fast Food. “Starbucks Menu Prices (Updated: August 2023).” Fast Food.
7. Taylor, Frederick Winslow. The Principles of Scientific Management. Harper Brothers, 1911.
8. Hill, Kim; Cooper, Adam; and Menk, Debra. “Contribution of the Automotive Industry to the Economies of All Fifty States and the United States.” Center for Automotive Research.

About The Author

William A. Levinson

William A. Levinson, P.E., FASQ, CQE, CMQOE, is the principal of Levinson Productivity Systems P.C. and the author of the book The Expanded and Annotated My Life and Work: Henry Ford’s Universal Code for World-Class Success (Productivity Press, 2013).