When it comes to coffee, Iām sure the first brand many people would think of is Starbucks. Whether you are a coffee lover or not, this is theĀ top-of-mind awarenessĀ that Starbucks commands ā a sign of how powerful its brand is around the world.
With over 34,000 stores globally, Starbucks is easily the largest coffee chain on the planet. At the same time, I discovered, when doing my research, that Starbucks also operates like a bank. Yet the company has never explicitly mentioned any plans to enter the banking industry in the past.
So how is Starbucks āsecretly a bankā? Letās first recap how a bank works.
How does a bank work?
Put simply, a bank is a financial institution that offers individuals, corporations, and other banks a secure place to store their funds. The bank pays an interest on these funds deposited by customers (interest expense).
To profit, the bank then loans these funds to other customers at a higher interest (interest income) and earns a spread. Alternatively, banks can utilise funds to invest in the equity, bond, or property markets for dividends or capital gains. This is categorised as non-interest income for banks.
A bankās business model.
In terms of financial statements, as customer deposits do not belong to the bank, they are classified under the liabilities portion of the balance sheet as deposits of non-bank customers (retail and high net worth individuals), and deposits and balances of banks (interbank lending). Hereās OCBC Bank as an example:
Source:Ā OCBC 2021 annual reportSubsequently, when the bank uses the funds for investment purposes, these investments are classified under the asset portion of the balance sheet, such as:
- Government treasury bills and securities
- Placement with and loans to bank (interbank lending)
- Loans to customers
- Debt and equity securities, debt derivative receivables
- Investment property
Source:Ā OCBC 2021 annual report
According toĀ Starbucksā Q3 2022 report, there are 27.4 million active Starbucks Rewards members in the U.S. alone. This is almost double theĀ 14.2 millionĀ members at the end of 2017. The company revealed in a 2016 conference call that Starbucks Rewards membersĀ spend three times as much as non-members. Fast forward to 2022, itās not surprising that Starbucks rewards members now compriseĀ 53% of revenueĀ in U.S. company-operated stores.
Within the customer loyalty space, Starbucks has consistently been credited with having one of the best rewards programs with a loyal customer following. Because of the companyās reputation, customers are not afraid to keep money in their Starbucks account, knowing that they can use it anytime. In fact, in its Q3 2022 earnings report, Starbucks reported that it had US$1.7 billion loaded on Starbucks accounts/gift cards waiting to be spent in its stores.
Source: Starbucks
Source:Ā StatistaHowever, unlike a bank which needs to pay interest on customer deposits, Starbucks does not. As such, Starbucks members effectively provide the company with a US$1.7-billion loan at zero percent interest.
Additionally, Starbucks earns a profit from breakage ā the amount that is unused from gift cards every year. This amounted to aroundĀ US$164.5 millionĀ in 2021 or around 10% of all stored value balances. So not only does Starbucks get an āinterest-free loanā from its members, but it also earns a roughly 10% return based on breakage!
Whatās even better is that as opposed to a bank where customers can withdraw money anytime, Starbucks members can only withdrawĀ coffee. This essentially locks in customers the moment they transfer funds into their Starbucks Rewards account, providing guaranteed revenue for Starbucks.
That said, Starbucks hasnāt mentioned any ambitious plans to utilise these funds and has largely used it for working capital, which leaves a lot of untapped potential for the company. Starbucks could potentially loan these funds to earn higher interest income, make long-term investments, or even expand its own mobile payment system beyond its own stores.
In fact, this potential has createdĀ fears in some banks, as expressed by Hana Financial Group chairman, Kim Jung-tai:
āTechnologies have allowed coffee companies like Starbucks to be our rivals. It will be fine to call Starbucks an unregulated bank, not a mere coffee company.ā
The fifth perspective
While Starbucks is undoubtedly a coffee chain, it also operates like a bank due to its loyalty programme and customer deposits. Because of its global scale and digital infrastructure, there are potential fintech opportunities that Starbucks could explore, but it remains to be seen whether the company will embrace that future. But if it over does so, it could allow Starbucks to unlock additional revenue streams and expand into markets outside of coffee.
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