The Bank of Starbucks
The biggest bank that you have never heard of
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Dear friends,
In the past, I wrote a newsletter about how Mcdonald’s was actually in the Real Estate business and not fast food business.
In this newsletter, I am going to talk about how Starbucks operates one of the largest banks in the world.
Howard Schultz has announced that he is coming back as the Starbucks CEO for the 3rd time in 2022.
If you didn’t know, Howard Schultz is the founder/CEO of Starbucks and served this role from 1986 to 2000. Schultz became the Chairman of the Board in 2000, but over the next 8 years, Starbucks over-expanded and business started lagging.
In 2008, Starbucks was in dire straits and Howard Schultz took the job over as CEO again. He quickly launched a program that made Starbucks a bank. Today, that bank has 24 million members and $1.6 Billion in deposits.
One of the main focuses that Howard Schultz had in 2008 was the gift card. The reloadable card was launched in 2001 and was popular. However, the recession of 2008 led to customers to cut spending across their budgets.
Schultz decided to launch an innovative rewards program that started with free Wi-Fi and refills.
However, in 2010 Starbucks launched their mobile app that was a game changer for the company and their rewards program. The app was available in 9,000 USA locations and was instantly America’s largest combined mobile payments and loyalty program.
By 2011, 1 in 4 Starbucks transactions (25%) were done via the revamped Starbucks Card program.
In 2022, Starbucks Rewards now has 24 million members, and they are showing record active users. From the year 2001-2011, customers spent a total of $10 billion on their re-loadable cards. Today, customers load or re-load $10 Billion+ per year on the card program aka 45% of the chain’s entire sales.
One of the main psychology factors of the program is that it is habit forming for the customers. This allows them to happily keep the card loaded with money for future orders.
Anything that isn't spent is kept on Starbucks balance sheet as stored card value. Since 2016, that value has exceeded $1B at the end of every fiscal year.
This is where it gets interesting:
For Starbucks: Stored card value is effectively a "bank deposit.” It’s recorded as a liability and Starbucks can use the funds immediately for the business.
To put Starbuck's $1B+ in stored value in context, consider that 85% of US banks have *less* than $1B in assets (the study didn't break down the deposit liability).
While not an apples-to-apple comparison, Starbucks card “deposits” are clearly a very material amount.
Even better, Starbucks records a % of the stored value that's unlikely to be used as revenue.
This is called "breakage.” There used to be 3 ways to estimate breakage. But after accounting rule changes in 2014, companies now use a method based on historical redemption patterns.
Since 2014, Starbucks has recognized $822m in breakage revenue!
In 2021, breakage was ~10% of stored card value. Take out processing fees and Starbucks was effectively paid $165m to hold $1.6B in customer cards.
This is literally the equivalent to free money.
Starbucks isn't the only retailer with a Card program. But when you compare breakage revenue takes, it's clear that the coffee chain operates on another level.
Wanna know Howard Schultz’s plans to save Starbucks this time?
NFTs
I hope everyone has a great rest of the week!
If you have any questions, feedback, or just wanna say hey, email me at mattallenletter@gmail.com
Matt Allen
Founder/CEO BeanInvest
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Very helpful information !