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A Tall Order for Starbucks: Balancing Product Expansion and Brand Equity

Updated: Mar 31, 2021


The Starbucks Corporation (NASDAQ:SBUX), a global roaster, marketer, and retailer of specialty coffee and accessories, operates in 65 countries through North America, Asia Pacific, Europe, the Middle East, Africa, and Latin America (MarketLine, 2015). Headquartered in Seattle, Washington, Starbucks employed approximately 191,000 people in 2014 (Starbucks, 2014). Within the last year, Starbucks added 1,600 stores, bringing total number of locations to 21,366 (Starbucks, n.d.). The company recorded total net revenues of $16.4 billion in fiscal year 2014, up 11% from $14.9 billion in fiscal year 2013 (Starbucks, 2014; MarketLine, 2015). Operating income increased to $3.1 billion in 2014, compared to an operating loss of $325.4 million in 2013 (Starbucks, 2014; MarketLine, 2015). The coffee giant’s segments include company-operated and licensed stores; non-reportable segments include Teavana, Seattle’s Best Coffee, Evolution Fresh, and Digital Ventures (Starbucks, 2015). Starbucks’ main competitors are McDonald’s, Dunkin Donuts, Panera Bread Company, and Tim Horton’s (Seaford, Culp & Brooks, 2012). The iconic coffee retailer has evolved into a one-stop-shop for everything coffee, but the rapid product diversification strategy has some executives wondering if trouble was brewing with brand strength and equity (Seaford et al., 2012).

In 2007, then-former Starbucks CEO Howard Schultz sent a memo to executives, titled “The Commoditization of the Starbucks Experience,” questioning the company’s increase in product diversification and addition of a drive-through service (Seaford et al., 2012, p. 53). Schultz stated product expansion weakened brand image and, although profitable in the short-term, threated long-term brand equity (Seaford et al., 2012). Schultz, who served as CEO from 1987 to 2000, returned as CEO in 2008 after a dramatic drop in Starbuck’s stock prices (Seaford et al., 2012). Since 1987, Starbucks’s strategy aimed to mirror Italian coffee houses and serve as a place for conversation and sense of community—a “third place” between work and home (Seaford et al., 2012, p. 40; Starbucks, n.d.). Despite a sales increase in 2008 from new products, it was clear that Starbucks leadership needed to decide if brand diversification was watering down the brand (Seaford et al., 2012).

Mission, Vision, and Values Statements

Before delving into the mind of Starbucks, it is prudent to consider the company’s mission and value statements. Starbuck’s mission statement is to inspire and nurture the human spirit—one person, one cup, and one neighborhood at a time (Panmore, 2015). The vision statement is: to establish Starbucks as the premier purveyor of the finest coffee in the world while maintaining uncompromising principles through growth (Panmore, 2015). Starbucks considers partners, coffee, and customer loyalty as core strengths and competencies (Starbucks, 2014). The retailer’s value statements include: creating a culture of warmth and belonging; acting with courage; challenging the status quo; finding new ways to grow; being present; connecting with transparency, dignity and respect; delivering best results; accountability; and driving performance through the lens of humanity (Starbucks, n.d.).

Key Issues

Seaford et al. (2012) offer a case synopsis detailing the marketing, branding, and positioning implications of Starbuck leaders’ issues with product diversification. Beginning with the company’s origin in the early 1970s, the authors discuss history, details, and market conditions that prompted Starbucks to expanded products offerings and change retail strategies. After reading the article, one can distill key issues that expand the discussion of commoditization and brand strength. Ranked in order of importance, they include: increasing competition; expanded product offerings; licensing and joint ventures; and store design changes.

Increased Competition

Riding on the tails of Starbucks’ success, competitors developed their own coffee drinks. Adamy (2008) stated that McDonald’s, in 2001, revamped the McCafé concept, offering espresso-based drinks, teas, and pastries (as cited in Seaford et al., 2012). McDonald’s went a step further and announced it would install coffee bars within stores with baristas serving drinks priced between $1.99 and $3.29 (compared to Starbucks versions ranging from $2.65 to $4.15) (Seaford et al., 2012; Adamy, 2008). Dunkin Donuts pursued an aggressive growth strategy that shifted focus on coffee. By 2006, Dunkin Donuts was a top retailer of by-the-cup coffee, selling 2.7 million coffees per day (Seaford et al., 2012). Rather than match Starbucks with upscale coffee drinks, Dunkin Donuts offered free WIFI and played music in stories—adding to the personality and potential to steal business (Seaford et al., 2012). The Panera Bread Company serves high-end coffee drinks and free WIFI in addition to café-style sandwiches, soups, salads and pastries. Panera offers free refills on brewed coffee. Each of these competitors, and several regional and local café chains, began to blur the differentiation between Starbucks’ once-perceived superiority (Seaford et al., 2012). Starbucks executives began seeking new ways to increase revenues as competition intensified (Seaford et al., 2012).

Expanded Product Offerings

In the risk factor section of the Starbucks Annual Report, there is a entry about brand value and success; Starbuck’s success depends substantially on the value of brands. The failure to preserve brand value could negatively impact financial results (Starbucks, 2014). This statement accentuates the important link between commoditization and brand strength and borrows a concept from the Ansoff Matrix—diversification is the riskiest of growth strategies (Rothaermel, 2015). Candies, sandwiches, pastries, and a for-pay wireless Internet joined an accelerated product expansion that started in 2000—additions aimed to drive food sales while luring lost customers back to enjoy the third place atmosphere (Seaford et al., 2012). Starbucks executives modeled the expanded menu after a partnership with food distributor Sodexho, which operated Starbucks stores on U.S. naval bases (Seaford et al., 2012). Fueled by the success of hot food and alcohol-based drinks offered at Starbucks in Japan, Starbucks began a gradual release of noncore products: books; music CDs; home espresso machines, coffee brewers and grinders, coffee mugs and accessories; gift items; baked pastries; bottled Starbucks Frappucino®, Starbucks DoubleShot® espresso drinks, iced coffee drinks, whole bean coffees, premium ice creams, Ethos Water and Tazo® Teas (Seaford et al., 2012). Many of these items were sold both in-store and in grocery stores (Seaford et al., 2012). As Shultz referenced in his company-wide memo, some executives were wondering if Starbucks was sacrificing short-term profitability for long-term brand erosion (Seaford, 2012).

Licensing and Joint Ventures

The announcement of strategic marketing alliances is a significant event with possible ramifications for a firm’s risk (Swaminathan & Thomaz, 2015). In addition to the arrangement with Sodexho, Starbucks entered licensing relationships with Dreyer’s Ice Cream and Hyatt Hotels. The former sold Starbucks-branded ice cream and the latter partnered with Starbucks to offer room service coffee, served in a French press pot, as well as in Hyatt Hotel restaurants (Seaford et al., 2012). Research suggests that strategic alliances contribute to reduced risk; uncertainties are shared across firms (Swaminathan & Thomaz, 2015). Licensing sales proved successful and lucrative; sales from licensing boasted margins near 100 percent contribution; however, the peripheral market penetration of Starbucks-branded products may have led to brand weakness and the beginning of “cookie cutter” criticism (Seaford et al., 2012). In 2014, there were more than 1 million places outside a Starbucks retail store where customers could find Starbucks products (Starbucks Newsroom, 2014). Starbucks leaders acknowledge that successful execution of strategies and initiatives are subject to customers’ acceptance of products (Starbucks newsroom, 2014).

Store Design Changes

From the beginning, Shultz was adamant that Starbucks should blend coffee with elegance and style—dare to achieve the impossible and defy the odds with innovation (Seaford et al., 2014). Of the critical issues listed by Seaford et al. (2012), store design may seem the most esoteric, but it merits concern as described by Shultz in his commoditization memo. Schultz laments the loss of the “romance and theater” when the company switched from manual to automatic espresso machines (Seaford et al., 2012, p. 53). Besides affecting the atmosphere, the new machines physically blocked the visual line of site, preventing customers from watching the intimate experience of baristas preparing their drinks (Seaford et al., 2012). Further criticisms included nonintuitive retail merchandising that did not match the company’s potential for selling accessories and the lifestyle (Seaford et al., 2012). The sensory experience of baristas grinding beans was lost when the company moved to bagged coffee, resulting in the loss of what Shultz describes as a fundamental, non-verbal signal in a traditional Starbucks—the aroma of fresh coffee (Seaford et al., 2014). Schultz said he understands the need for streamlining to gain efficiencies of scale and to ensure return on investments, but sacrificing tradition transformed Starbucks into a sterile, passionless business (Seaford et al., 2014).

Expanded Products Defined

The most critical take-away from the Seaford et al. (2012) study is the problematic relationship between product expansion and brand dilution. Product expansion touches every panel of a Starbucks’ SWOT analysis. As a strength, product variety builds a strong customer connection through value-added services (MarketLine, 2015). However, product recalls from third-party vendors weaken consumer confidence. Recent recalls include: Sweet Sam’s Black & White Mini Cookies (undeclared ingredient on packaging); bulk celery (possible E. coli contamination); holiday Panini sandwich (possible E. coli contamination); and bagels (quality issues); (FDA, 2015; Food Safety News, 2015; Tech Times, 2015; ABC, 2015). However, expanded products could create opportunities, such as tapping the office coffee marketplace, growing key Asian markets, and the pursuing the mobile-commerce market (MarketLine, 2015). The link between product expansion and threats is clear: competition calls for ongoing evaluation of strategies.

Starbucks is active in several products markets and many countries simultaneously—characteristics of a product-market diversification strategy (Rothaermel, 2015). Product diversification concerns the scope of market and industries, and effects how firms buy, create, and sell differentiation (Hitt, Hoskisson, & Ireland, 2015). Corporate executives pursue diversification to gain and sustain competitive advantage and to shift investments to markets where the highest returns are possible (Rothaermel, 2015; Hitt et al., 2015). Benefits of product diversification include economies of scope, core competency utilization, competitor dominance, vertical integration, and efficient internal capital allocation (Hitt et al., 2015). Low performance, uncertain cash flow future, risk reduction, tangible and intangible resource allocation, and shareholders’ expectations are neutral, unpredictable factors with diversification (Hitt et al., 2015). The advance of globalization makes product diversification an even more prominent international marketing strategic initiative for firms worldwide to expand into global markets (Qiu, 2014). Elsas, Hackenthal, and Holzhauser (2010) state product diversification reduces risk in the face of market uncertainty.

However, positive effects of product diversification in the global marketplace are not guaranteed (Qui, 2014). Also not guaranteed was the reaction from Starbucks baristas, who expressed concerns that the strategy changes felt like fast-food techniques (Seaford et al., 2012). In the forefront, product expansion created a revenues bump: merchandising sales positively correlated with customer traffic; sandwich and food sales were strong and drive-through sales contributed to a majority of store revenue as opposed to in-store sales (Seaford et al., 2012). Thorough analysis revealed food sales offered lower contribution margins than coffee—decreasing profit margins consistently—and same store sales had grown by1% by the final quarter of 2007 (Seaford et al., 2012).

Alternative Solutions

Despite the dominance of global product diversification, having too much on the menu could dilute Starbucks’ upscale reputation. Diversification, however, could prove successful if Starbucks considered alternative solutions to off-set the negative effects of product expansion:

Servitization strategies

Starbucks should blend their expanded products concept into service innovation—finding ways to rethink their offerings and replace one-time product sales with ongoing, value-creating relationships (Baines, Bigdeli, Bustinza, & Elliot, 2015). This business model shift is known as servitization—the development of a service offering for the customer while adopting new technology and a widespread organizational transformation (Baines et al., 2015). Rather than risk brand equity, Starbucks can diversify with purpose; the goal of a differentiation strategy is to increase the perceived value of brand, goods and services by focusing on solutions while attempting to nullify competitors (Rothaermel, 2015; Solovic, 2014). Starbucks could pursue servitization through an enhanced online commerce initiative. Starbucks operates a robust website, launched in 1998, with product information, menu descriptions, and lifestyle-related items for sale (Seaford et al., 2012). Adding servitization strategies to could fortify expansion by bundling products with added-value services (online content, instruction, and interaction).

Brand Integration

Brand integration shifts the focus from product placement to product integration—an evolution driven by the need for brands to be more meaningful to consumers (Gianatasio, 2014). Offering an immersive integration, brand integration fuses brands and content—making products an intrinsic part of the drama, excitement and storyline of prime-time programs and theatrical films (Gianatasio, 2014). Integration offers firms a direct, soft-sell channel to consumers (Gianatasio, 2014). If the threat for Starbucks is the integrity and strength of the brand, the company could score an emotional win while building alliances (Gianatasio, 2014). University of Southern California Professor Mathew Curtis explained brands use integrations to ensure their messaging follows consumers and spurs engagement across Internet, social media and various media formats (as cited in Gianatasio, 2014). Effective integrations range from sponsored segments to promotions on network, cable, and original content providers (Netflix, Amazon, and Hulu). Coffee is a universal product that defies age limitations. Starbucks executives could partner and creative lifestyle connections in all demographics—18-34, 35-49, 50-64, 65-plus—through strategic partnerships with appropriate networks and programming (Gianatasio, 2014; Trac Media, n.d.).

For example, a character on “Teen Wolf,” “Pretty Little Liars,” or “Empire” could carry a Frappuccino during a scene. Francis and Claire Underwood could conspire in a darkly lit kitchen with two Starbucks-branded travel mugs on the marble counter. Leroy Jethro Gibbs, known on CBS’s NCIS as a coffee fan, could brainstorm a murder motive while holding a Starbucks to-go cup. Coffee may not exist in the world of “The Walking Dead,” but a clever integration might find a character pining for Starbucks in a nostalgic way.

Amy Wigler, senior vice president at Viacom, stated that integrations, when executed well, elevate both the brand and the show (as cited in Gianatasio, 2014). Wigler said in the process, Starbucks marketing executives could amass accurate data through media engagement—creating a catalyst wherein brands, viewers, and content providers buy-in to the credibility of the show and the product by investing in the storyline (as cited in Gianatasio, 2014).

Judy Austin, associate professor of communication at Boston University, stated that in a show like Bravo’s Top Chef, integration allows viewers to "see brands in action" and think about how they might use products in their own lives (as cited in Gianatasio, 2014). Starbucks could create dedicated sections in physical and online stores to capitalize on the placement and build on engagement—topping it off with robust social media hype (Facebook posts, live tweeting during the show, or behind-the-scenes Instagram pictures). Overall, brand integration would shield the Starbucks brand from atrophy by creating a different, psychologically pleasing complexion to off-set product expansion.

Measure brand value

Measuring brand value can give executives an accurate way of evaluating past marketing expenditures and help quantify the expected benefit of future marketing (King & Newman, 2015). Brands embody a core promise of delivering values and benefits (King & Newman, 2015). The most recognizable brands are meaningful (meet the individual’s expectations and needs), different (unique and trend-setting), and salient (they come to the consumer’s mind as the brand of choice). Better still, good brands increase both sales and margins, thereby increasing profits (King & Newman, 2015). Brands create value in two ways: increasing sales volume when consumers choose to buy a well-known brand over a lesser-known brand and increasing margins (King & Newman, 2015). Brands not only increase sales volume, but margins as well, because the owner of the branded product can command a higher price for an essentially similar product or service (King & Newman, 2015). But brand values aren’t static—they require constant care, support and monitoring (King & Newman, 2015). Without a strong and continuing marketing effort, the value of a brand is likely to remain low (King & Newman, 2015). Starbucks should take a time-out to measure its brand. Executives should measure brand value before every major marketing program. Periodically, the company should perform a formal brand evaluation study (King & Newman, 2015). This will either confirm the original projections or illustrate where the company went off track (King & Newman, 2015).

Selected Solution

Of the solutions presented, the most effective approach is a servitization strategy. Rather than costs, firms seeking competitive advantage often fund and develop value-added features that differentiate a product (Hitt et al., 2015). In bundling services and goods, firms must address organizational structure and its position on the value chain; service innovation requires comprehensive transformation (Baines et al., 2015). Differentiating products upstream in the value chain often allow firms to extend their reach down the entire value chain (Baines et al., 2015). Firms that pursue a servitization model may achieve higher customer satisfaction by following stages to realize services as opportunities than accentuate their products (Baines et al., 2015).Servitization promotes intense customer relationships as a business-model change from selling goods to selling an integrated combination of goods and services (Baines et al., 2015). A key element of servitization is customer intimacy (Baines et al., 2015). Starbucks could go beyond simply offering products to providing bundled, branded packages and services to deliver a defined outcome for the customer (Baines et all, 2015).

Implementation and Recommendations

Corporate culture changes when senior executives acknowledge that a firm cannot continue operations within the status quo (Stroh & Paul, 2013). Rather than clutter Starbucks cafés with mugs, coffeemakers, bottled water, tea infusers, mints, chocolates, and a deli case of food, the company should consider moving all store-level retail to the online store. Starbucks could adopt the model and create a lifestyle brand with Starbucks-related merchandise available for delivery. This would increase exclusivity and demand—make customers thirsty not only for coffee, but for the merchandise—and drive sales towards a model that requires less overhead costs. Less inventory means more space for tables, which equates to more space for customers to spend time (and possible buy a second or third drink) in their “third place” (Seaford et all, 2012, p. 40). Amazon offers Amazon Prime, a guaranteed two-day shipping option as a membership, complete with added value of streaming, Netflix-like content. Starbucks could offer the same—“Starbucks Prima” (building off the word “premiere” in Italian)—and offer guaranteed shipment of coffee beans, accessories, mugs, makers, and minutiae within a timeframe determined by executives as deliverable and profitable.

Starbucks Prima could benefit from sales of Keurig-licensed K-Cups; Dunkin Donuts, Maxwell House, and Cott (Javarama) all reported K-cup sales increases in 2015 (LaMonica, 2015). The existing Starbucks Digital Network currently offers content while customers are connected to WIFI in stores (Starbucks, n.d.). Expanding this network to offer out-of-store value—streaming content created through new partnerships with filmmakers, movie studios, televisions production companies, networks, audio book companies, podcasts, and independent artists—could create enough value to merit a paid, monthly or annual subscription. Additional membership benefits could include instructional YouTube-style videos on brewing coffee and espresso and creating “latte art.” Starbucks managers or baristas could explain various types of coffee and the regions in which they are grown. A health and fitness area could offer information about “skinny” Starbucks ordering solutions as well as provide general exercise and lifestyle tips.

As evidenced by the MyStarbucksRewards program, a mobile app that enables customers to earn “stars” for purchases towards free drinks, exclusivity is a branding aspect of Starbucks customers. Starbucks Prima could offer a members-only feel by linking purchases with MyStarbucksRewards: offering further “stars” for purchases; adding streaming content; creating brand interaction inside and outside of stores; and expedited shipping—carefully controlling supply and demand. Better yet, Starbucks Prima could add differentiation against coffee-industry competitors who offer the threat of substitutes (Rothaermel, 2015). The Prima model would enable Starbucks to expand products further, perhaps branching into t-shirts, windbreakers, hats, scarfs, mittens, headphones—a wealth of items that would look cluttered on shelves and prove costly as overhead, but could feature prestigiously on a website.

Finally, creating a Starbucks Prima mobile app would tie everything together: one could make purchases online, maybe even have them delivered to the store for an additional fee. A new, fresh Prima logo would add visual and psychological excitement to the new project. Product diversification strategists often suggest offering integrated solutions, finding out what’s next, and following growth trends (Solovic, 2014). Starbucks Prima would sate these criteria.


In 2087, disappointing financial performance and plummeting stock prices had Starbucks executives whipped into a froth. Starbucks leaders justified low performance as a sign of a weakened economy (Seaford et al., 2012). The prevailing thought process was that customers, in a slowing economy, would not spend discretionary income—especially on a $5 specialty coffee drink (Seaford et al., 2012). However, Starbucks’ own research indicated good news and bad: the company was now losing business to customers, however it was suffering from brand dilution and oversaturation (Seaford et al., 2012). It was a turning point for Starbucks leaders, as they pondered the strategy of trading long-term competitive advantage for the immediacy of short-term profitability. Expanding joint venture and store-level decisions—packaged beans and new espresso machines—subtracted from the company’s original theater, romance, and community positioning. But through brand-related, strategic solutions, Starbucks could have its pastries and eat them too. In particular, rebranding the online presence through servitization could refocus expanded products into a bundled, service-approach model and enable the company to maintain brand equity and customer loyalty. Whether executives chose first place market position or third-place brand positioning, overcoming the stigma of commoditization would be a tall order.


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