When someone says Starbucks, it is usually the coffee that comes into one’s mind. But little do we know that this billion-dollar company also works as an unregulated bank. When entering a Starbucks coffee shop, the aromatic smell of coffee beans welcomes you and you are enticed to buy a drink. And when you order a coffee, you may have come across the Starbucks loyalty and gift cards. It is the money that Starbucks can use upfront as revenue before a single product is also purchased. It is quite interesting to see that with these cards and along with its mobile app, the coffee giant was able to raise a sum of $3 billion from October to December 2020, alone! Now that’s a lot of money we are talking about. And if Starbucks was a bank, it would’ve ranked 385th in the US. Alas! Right?
History of Starbucks
The first Starbucks store was started in the year 1971 in Seattle and was a mere coffee beans seller company started by Jerry Baldwin, Zev Siegl, and Gordon Bowker. As the company started growing, the owners hired Howard Schultz as the Director of Retail Operations and Marketing. Soon, after the company was purchased by Schultz along with his investors, and from there- began the journey of the real day Starbucks. Within years of its takeover, Starbucks expanded and also filed paperwork to go public in 1992. The cash flushed in and the growth took off tremendously as by 1996, Starbucks opened its 1000th store and doubled it to nearly 2500 by the next three years, which was unbelievable.
The modern-day Starbucks has more than 1,70,000 different varieties of drinks that they offer to their customers every day. Over the years, the Starbucks drinks have been more complicated and complex. These drinks require different ingredients and can take a while to be prepared. It is also good for Starbucks, as its beverages tend to be at higher prices. Even though it is priced high, the loyal customers still return back for their caffeine needs. Firstly, it is pretty convenient to just grab a coffee, rather than making one for themselves. Besides, Starbucks is a global brand and people are convinced by its popularity to get a coffee. Secondly, the coffeehouses are set up in prime locations and hence, the rent is pretty high. The baristas also have to be paid for their service as they are very well trained for their tasks. And lastly, it is no doubt that Starbucks does use quality products to make its coffee, which is why it is so expensive!
The Onset of “The Bank”
Technology has touched every aspect of our lives and is creating dominance in every industry. The year of 2009 was a key moment for Starbucks as it launched its first app. It was very early for a business to have such an app, but the administration at Starbucks was thrilled to have already started a digital pathway for its company. Over the years, the customers at Starbucks, especially the regular ones have opted to pay digitally through their app, rather than cash or cards. Such payments; sometimes, also fetch them additional discounts or rewards. A whopping of 41% of the customers use the Starbucks app for payment, and according to sources- the amount is nearly $1.5 billion in all of the SB accounts combined, worldwide. That’s a massive amount of funds for Starbucks to use it anytime they want. More than 3,900 banks in the US have a total asset of $1 billion and Starbucks not being a bank can easily take advantage of the dormant money lying within itself.
No wise investor will let such a massive amount of money lie idle, and will continuously seek to expand the money already in hand. As a result, the money in the Starbucks account is used to work on the future endeavours of the company. And every time a customer deposits money into his/her account, they are directly lending the amount to Starbucks, that too with 0% interest. However, the customer’s withdraw the money only when purchasing a coffee, Starbucks can easily get around several financial laws that otherwise all financial institutions have to comply with.
Starbucks also has a lot of data in hand with itself. Many companies don’t even have access to such massive data that Starbucks has. They get people hooked up to their apps and have created their own proprietary system.
Breakage Income
Have you ever got a gift card from a friend and you keep it in to use it later? Eventually, you forget that the card even existed or you just don’t want to buy anything from the store. Well-yes, that is the income of the company. If a customer doesn’t use the deposited money due to any reason it is called breakage income. The gift card purchases and the deposits in the mobile app account for huge income for Starbucks. As per Medium, Starbucks’ annual report found breakage income are $125 million, $155.9 million, and $104.6 million in FY 2019, 2018, and 2017, respectively.
The Starbucks reward system was an idea which came out of the box. This led many customers to use its app as they would earn certain incentives from every order that they make. This alone has led to brand growth even during economic setbacks. As per Medium, the CEO of South Korea’s third-largest financial group had stated that Starbucks is an unregulated bank, and not just a mere coffee company. Many industry experts believe that Starbucks could get into asset management through its prepaid cards, currency exchange, and loans. Another Bank official was quoted saying that Starbucks is a fintech firm.
Well, but only time can tell what Starbucks is planning to do with all the money under its control. The company has seen it all and is still progressing like never before. Recently, Starbucks in its annual results showed an annual revenue rise of 75% in the Indian market. The coffee chain along with its Indian partner Tata is showing robust performance and targeting outlet growth via smaller stores. Tata Starbucks made an annual income of Rs. 12,425 crores for the fiscal year ended on the 31st March, 2022.
In conclusion, it isn’t the first time we are seeing a large company pave its way in the finance industry, but if Starbucks makes it move, the future of banking will be something new. Till then, have a great day to all the coffee lovers out there!
Written by: J Shree Nidhi
Edited by: Kushi Mayur