Why Starbucks Operates Like a Bank | WSJ The Economics Of

Summary

Starbucks, a global coffee giant, has seen its prepaid card and mobile app transactions soar, amassing billions in upfront revenue. The company's evolution from a small Seattle cafe to a market leader is marked by its embrace of technology, diverse beverage offerings, and a strong company culture that emphasizes direct relationships with employees, referred to as partners. Despite challenges like unionization efforts, Starbucks remains committed to its core values and customer experience, adapting to changing consumer behaviors and expanding its reach through drive-thrus and mobile orders.

Takeaways

• 💳 Starbucks gift cards hold significant value, with around $3 billion loaded onto them between October and December.
• 🏦 If Starbucks were a bank, it would be the 385th largest in the U.S. based on the value on its gift cards.
• 💰 Starbucks uses the money from gift cards as upfront revenue before any products are purchased.
• 📈 Many gift cards go unused, which becomes a liability if not redeemed.
• 📱 The Starbucks mobile app and gift cards are crucial to the company's financial success.
• 🌐 Starbucks has grown from a small Seattle cafe to a global coffee giant, with only McDonald's being larger in market cap.
• ☕ The company's early focus on espresso and the coffee house culture has led to a wide variety of complex beverages.
• 🍵 Cold beverages, including the popular pumpkin spice latte, have become increasingly important to Starbucks' revenue.
• 📲 Mobile orders accounted for nearly a quarter of all Starbucks transactions in the U.S. by the end of 2021.
• 🚗 Drive-thrus and mobile orders have become vital for Starbucks, especially during the pandemic.
• 🤝 Starbucks emphasizes maintaining a connection with its customers and partners (employees), even in drive-thrus and mobile orders.

Q & A

How much value is loaded onto Starbucks gift cards between October and December?

Between October and December, approximately $3 billion of value is loaded onto Starbucks gift cards.

What would be Starbucks' ranking among U.S. banks if it were one?

If Starbucks were a bank, it would rank as the 385th largest in the country based on the value loaded onto its gift cards.

How does Starbucks use the money from gift cards before they are redeemed?

Starbucks uses the money from gift cards upfront as revenue, even before a single product is purchased.

What is the importance of Starbucks' mobile app and gift cards to its financial success?

The mobile app and gift cards are crucial to Starbucks' bottom line, with mobile orders accounting for nearly a quarter of all transactions in the US by the end of 2021.

How has Starbucks evolved since its founding in 1971?

Starbucks has grown from a small cafe in Seattle to a global coffee giant, becoming the second-largest in market cap after McDonald's in the restaurant industry.

What role did Howard Schultz play in the expansion of Starbucks?

Howard Schultz, the then marketing director, bought the company in 1987 and began expanding Starbucks outside of Seattle, introducing espresso to Americans.

How many different varieties of drinks does Starbucks claim to make today?

Starbucks claims to make more than 170,000 different varieties of drinks.

What is the significance of the Pumpkin Spice Latte in Starbucks' history?

The Pumpkin Spice Latte became a global phenomenon and played a significant role in Starbucks' success, despite initial uncertainty about its popularity.

How has technology influenced Starbucks' growth and operations?

Technology has played a large role in Starbucks' growth, particularly through the introduction of its mobile app in 2009, which has become a key part of the company's digital strategy.

What is the impact of mobile payments on Starbucks' business priorities?

Mobile payments have shifted Starbucks' business priorities, with a focus on mobile orders and alternate pickup options, which became especially important during the pandemic.

How does Starbucks maintain its commitment to customer connection in drive-thru and mobile app experiences?

Starbucks is committed to maintaining a connection between its baristas and customers, even in drive-thru and mobile app experiences, by tracking customer connection scores and ensuring a consistent experience.

What is Starbucks' stance on unionization among its employees?

Starbucks believes in a direct relationship with its employees, referred to as partners, and has expressed a preference for this relationship over unionization, which it views as an intermediary.

Outlines

00:00

💳 Starbucks' Billion-Dollar Gift Card Business

This paragraph discusses the significant value loaded onto Starbucks gift cards, which amounts to around $3 billion between October and December. It highlights that this would make Starbucks the 385th largest bank in the country if it were one. The narrator explains that Starbucks can use this money upfront as revenue, even before any products are sold. The paragraph also touches on the importance of the company's mobile app and gift cards to its financial success, and how technology has been a key factor in Starbucks' growth and evolution. The history of Starbucks is briefly recounted, from its humble beginnings in Seattle to becoming a global coffee giant, with a focus on its expansion and the introduction of espresso to the American market.

05:00

📱 The Role of Technology and Mobile Payments in Starbucks' Success

This paragraph emphasizes the role of technology, particularly the Starbucks mobile app, in the company's success. The app, launched in 2009, is described as a digital flywheel that has significantly increased mobile orders, which accounted for nearly a quarter of all transactions in the US by the end of 2021. The use of virtual gift cards and the prevalence of Starbucks cards in transactions are also mentioned, with the company holding about $2.4 billion in cash uploaded by customers. The paragraph also discusses how Starbucks uses the data collected from these transactions to understand its customers better. The impact of mobile payments on the company's business priorities, especially during the pandemic, is also highlighted, with a focus on drive-thru and mobile order services.

Keywords

💡Starbucks

Starbucks is a globally recognized coffeehouse chain that originated in Seattle. It is known for its extensive menu, including espresso-based drinks, and has become synonymous with the coffee house culture. In the video, Starbucks' growth and business model, including its use of gift cards and mobile app, are central to the narrative.

💡Gift Cards

Gift cards are prepaid cards that customers can load with money to be used later for purchases. In the context of the video, Starbucks' gift cards are a significant source of revenue, with billions of dollars loaded onto them, providing the company with upfront revenue before any products are sold.

💡Mobile App

The Starbucks mobile app is a digital platform that allows customers to order and pay for their drinks remotely. It is highlighted in the video as a key component of Starbucks' digital strategy, with mobile orders accounting for a significant portion of transactions in the US.

💡Espresso

Espresso is a type of coffee made by forcing a small amount of nearly boiling water under high pressure through finely ground, compacted coffee. In the video, Starbucks' early investment in espresso led to the creation of various signature drinks, including the Frappuccino and the Pumpkin Spice Latte, which have become popular worldwide.

💡Cold Beverages

Cold beverages, such as iced coffees and nitro cold brews, have gained importance in Starbucks' revenue. The video mentions that these drinks have become more significant over time, with Starbucks introducing new cold options to maintain customer interest and sales.

💡Drive-Thru

A drive-thru is a service designed for customers to order and receive products without leaving their vehicles. The video emphasizes the increasing importance of drive-thrus in Starbucks' business, especially during the pandemic, as they allow for contactless service and convenience.

💡Technology

Technology plays a crucial role in Starbucks' operations, as discussed in the video. It includes the use of the mobile app, digital ordering, and data collection, which helps the company to understand customer preferences and optimize its services.

💡Partners

In Starbucks' culture, employees are referred to as 'partners,' reflecting the company's ideology of a strong relationship between management and staff. The video mentions that partners receive shares in the company through a program called Beanstalk, which is central to Starbucks' internal culture.

💡Unionization

Unionization refers to the process by which workers come together to form a union to negotiate better working conditions and benefits. The video discusses the unionization efforts at some Starbucks locations, particularly in Buffalo, and the company's response to maintaining a direct relationship with its workers without a union.

💡Customer Connection

Customer connection refers to the relationship and rapport between Starbucks' employees and customers. The video mentions that Starbucks is committed to creating a connection between baristas and customers, even in drive-thru or mobile app interactions, and they track customer satisfaction through 'customer connection scores.'

Highlights

Starbucks has approximately $3 billion of value loaded onto gift cards between October and December.

If Starbucks were a bank, it would be the 385th largest in the country based on gift card value.

Starbucks receives revenue upfront from gift cards before any products are purchased.

Many gift cards are never used, which remains a liability for Starbucks.

Starbucks' mobile app and gift cards are crucial to its financial success.

The first Starbucks opened in Seattle in 1971 and has grown into a global coffee giant.

Only McDonald's has a larger market cap than Starbucks in the restaurant industry.

Howard Schultz's acquisition of Starbucks in 1987 marked the beginning of its rapid expansion.

Starbucks introduced espresso to Americans, leading to over 170,000 different drink varieties.

The company's early investment in espresso led to the creation of signature drinks like the Frappuccino and Pumpkin Spice Latte.

Cold beverages have become increasingly important to Starbucks' revenue.

Starbucks' mobile app, launched in 2009, has been a digital catalyst for the company's growth.

Mobile orders accounted for nearly a quarter of all Starbucks transactions in the US by the end of 2021.

Starbucks holds about $2.4 billion in cash from customers' preloaded cards, exceeding many American banks' deposits.

The company's commitment to its values, including customer connection scores, is central to its operations.

Starbucks' drive-thru and mobile order options have become increasingly important to its bottom line.

The company's internal culture, including its partnership with employees, is a key aspect of its identity.

Starbucks faces challenges with unionization efforts in some locations.

Starbucks remains committed to its mission and values, emphasizing partnership without a union.

Transcripts

(dramatic music)

(liquid hissing)

- [Narrator] If you've ever ordered something at Starbucks,

you've probably loaded one of these.

- Starbucks, between October and December

has had something like $3 billion of value

is loaded onto these cards.

I mean, that's a lot of money.

- [Narrator] So much money in fact,

that if Starbucks was a bank,

it would rank as the 385th biggest in the country.

And it's money that Starbucks gets to use upfront as revenue

before a single product is even purchased.

- Eventually it is a liability if someone chooses to use it,

and you will find that

in lots of gift card programs,

they're plenty of people who never use it.

- [Narrator] So how important is Starbucks' mobile app

and gift cards to its bottom line?

And what role does technology play

in its continued evolution?

This is the economics of Starbucks.

In 1971, the first Starbucks,

a small unassuming cafe opened in Seattle's downtown.

Fast forward 50 years, and that store is still in operation,

but Starbucks is a global coffee giant.

- Only McDonald's is bigger than Starbucks

when it comes to market caps.

So they are really a powerhouse

when it comes to really the whole restaurant industry.

- [Narrator] In its early years of operation

Starbucks expanded slowly and only within Seattle.

It wasn't until 1987 when the original owners

sold the company to its then marketing director,

Howard Schultz,

that the Starbucks that we know today took root.

Schultz began expanding Starbucks outside of the city

and introduced Americans to what was then a little known

Italian drink, the espresso.

- They were really founded on this coffee house culture

that they make each beverage by hand according to order.

As Starbucks has grown,

that has gotten more complicated.

- [Narrator] Today, Starbucks says they make more than

a 170,000 different varieties of drinks.

- These beverages can be very complex.

They can take a while.

They can take many different ingredients.

And so it's good for Starbucks.

And that these tend to be higher price beverages,

but for workers, the baristas, they can be very complicated.

- [Narrator] The company's early investment in espresso

has transformed to many different signature drinks

from the creation of the frappucino

to the launch with a pumpkin spice latte.

- Pumpkin spice latte, high five it.

- They really didn't know

that it would take off like it did,

but clearly it is formed quite a phenomenon

all around the world really.

- We introduced pumpkin to spice, us here, Starbucks.

- One additional thing in Starbucks evolution is

cold beverages have become much more important

to the company, whether it's just an iced coffee

or a nitro iced coffee,

or all these cold foam and cold brewed.

Increasingly this is so important to their revenue,

the company has gone through periods where frappuccino sales

have softened, but they've come up with more cold drinks

to keep people interested and keep people ordering.

- [Narrator] In part due to the company's Seattle founding

technology has played a large role in the change dominance.

- A key moment of that was the founding of its mobile app

in 2009, which was very early

for one of these kinds of apps.

And they really saw this as a digital flywheel.

- At the end of 2021, mobile orders accounted for nearly

a quarter of all Starbucks transactions in the US.

Many of those purchased

through a virtual Starbucks gift card,

which was previously the only way

a customer could order on their phone.

Today, a little under one half or 44% of all transactions

at Starbucks are done with a Starbucks card.

In fact, so many Starbucks customers use a Starbucks card

or the Starbucks mobile app to purchase items

that Starbucks says it holds about $2.4 billion in cash

that was uploaded by customers to be used later.

That number exceeds the deposits at many American banks.

- Starbucks also gets a lot of data from that.

They own a lot of that data in a way that many companies

don't because they have created this whole ecosystem

where people are using the Starbucks app,

they're mobile ordering, and they're hooked into that

Starbucks unique proprietary system.

- [Narrator] As mobile payments rise,

Starbucks' business priorities have shifted.

Prior to the pandemic, approximately 80% of US Starbucks

transactions were on the go,

either as drive-through or mobile order.

- Starbucks started in cities,

but really has spread all around the country,

including the suburbs.

And a lot of that is through drive-thrus.

- [Narrator] These alternate pickup options

are becoming increasingly important

to the company's bottom line.

- [Woman] Especially during the pandemic.

I mean, these stores have been a lifeline to Starbucks

because they kept running and people could easily queue up

and go and not have to enter an actual cafe.

- [Narrator] Starbucks has long said that

"It remains committed to a set of values

established early in the company's existence."

- Starbucks is very committed to trying to create

a connection between its baristas and its customers,

even in its drive-thru.

They talk about this on earnings calls

that there are these customer connection scores.

They want to make sure that everyone is feeling good

about their Starbucks experience,

which is getting increasingly challenging

when you're ordering through a drive-thru or a mobile app.

You're trying to get in and out.

- [Narrator] Starbucks says, "Those values also appear

in the manner in which their stores are designed."

- The items you will find in the store,

they really choreograph that down to where the basket

of water is placed into a store.

They want this all to feel very similar.

- [Narrator] Starbucks has long touted its internal culture,

which it says is built on a strong relationship

between management and employees.

- The workers at it's stores are not called workers

or baristas they are called partners.

And this is very central to the company's ideology.

Part of that is that all these partners

do get shares in the company, it's called Beanstalk.

- [Narrator] That relationship may look different

going forward for some Starbucks locations.

After two of three Buffalo stores voted

in favor of unionization.

- [Narrator] Since then, Starbucks has thrown

a huge amount of energy and resources into this issue.

And executives have traveled to Buffalo extensively

to meet with workers, to try to understand their concerns

(indistinct) to the company.

They want to maintain this direct relationship

with their workers, they call unions an intermediary.

They do not want that relationship to be severed.

But according to these workers, they who support the union,

they want a more direct relationship with the company.

- [Narrator] In a statement to the "Wall Street Journal"

Starbucks said, "Starbucks's success past, present,

and future is built on how we partner together,

always with our mission and values at our core.

From the beginning, we've been clear in our belief

that we are better together as partners

without a union between us at Starbucks.

And that conviction has not changed."

- They are the world's biggest coffee chain.

They are very dominant when it comes to coffee sales,

and they are really synonymous with the coffee house culture

in a lot of ways, but they do face increasing pressures.

(upbeat music)