Starbucks Has Been Borrowing Money from Its Mobile Customers - Here's How
Imagine a customer loyalty program generating for the company hosting it, both significant revenue and interest-free funding.
This is how a financial expert at The Motley Fool says in 2019, Starbucks earned $141 million in passive income, plus 10 percent interest from unused card balances — a benefit called “breakage” — from its mobile app customer base.
The app transforms Starbucks smartphone patrons into “a very generous lending partner,” according to Inc. Magazine.
Some customers are already aware of the domino effect of Starbucks’ breakage income.
Exactly. The total that’ll basically go unused for various reasons. $150m that’ll perpetually be accumulating interest.
— Seth Sandler (@SethSandler) November 3, 2020
According to a CNBC report, U.S. retailers collectively reap about $3 billion annually off of orphaned gift cards.
Investor Neil Patel reported in The Motley Fool, Starbucks’ smartphone customers are required to feed funds into the app to create “basically a digital version of a Starbucks gift card.”
Additionally, when buying a regular Starbucks gift card, funds are pre-loaded before the card’s activation, Patel said.
Both scenarios are a win for Starbucks, Patel added, with the coffeehouse corporation garnering in the first three months of 2020 over $1.4 billion on “store value card liability and current portion of deferred revenue.”
Bryan Hinmon, a financial analyst, said the breakage income funds Starbucks’ advertising budget.
Starbucks $SBUX realized revenue from stored value breakage of $134m (on average) each of the last three years.
That interest free loan from customers paid for more than half of its annual advertising spend ($263m).
— Bryan Hinmon, CFA (@BryanHinmon) March 31, 2020
“Consumers love Starbucks so much that they’re willing to make a deposit to redeem coffee at an unknown future date and time,” Patel said.
“Starbucks is essentially gaining access to an interest-free line of credit, one that equates to roughly 4% of the company’s total liabilities,” he continued.
Others viewed Starbucks’ financing strategies as only a short-term gain, stating customers may ghost the Starbucks, in lieu of refilling their cards.
The problem with breakage is it’s a short term win (free money!) long term loss (zombie customers!) those customers are unlikely to ever spend an additional dollar with Starbucks until they spend the money already in there. This was a big problem for us at Groupon.
— Ryan Denehy (@DenehyXXL) September 29, 2020
Patel said a conventional financial institution doesn’t have the same freedom as Starbucks, with proceeds from app and gift card purchases equipping Starbucks to “reinvest directly back into the business on expansion opportunities” and lower its “working capital needs.”
Breakage is another silver lining for Starbucks, Patel said, because gift card balances never expire.
With prepaid customers on the rise since 2014, according to Patel, breakage accounts for earnings “rising at a 10% clip annually.”
“Based on the current liability balance of $1.4 billion at the end of Q2 2020, previously mentioned, Starbucks actually earns interest at a rate of approximately 10% (meaning it borrows at an effective rate of negative 10%),” Patel explained.
One more layer in Starbucks’ income is within its loyalty program, where participants can accrue two “stars” for every dollar spent via mobile app or traditional gift card, to redeem free items.
One of the program’s newer features connects customers’ “credit card, debit card, or mobile wallet” payment methods to their rewards accounts, Inc. Magazine’s Justin Bariso reported.
However, using the linked or outside payment sources only qualifies a customer to earn one star per dollar, Bariso said.
Customers reward benefits are not guaranteed.
i just spent $40 at starbucks and forgot to scan my rewards to earn the bonus stars???♀️
— Jane? (@bubblyjjane) November 6, 2020
I haven’t ordered on the Starbucks app since Feb. So all of my stars and rewards expired ? at least today I get my free birthday drink. ❤️?
— Carli Bartlett (@carlijayne7) November 7, 2020
Regardless, Bariso admitted to purchasing Starbucks’ gift cards and called the app “one of the most popular mobile apps in the world.”
He said it has “over 3.5 million ratings in the Apple app store alone, and an average rating of 4.8 out of 5 stars.”
“Is there a chance that some of my friends never cashed in on those cards?” Bariso asked. “Sure. But have I gained back multifold through rewards I’ve gained through the app? Definitely.”
“In the end, Starbucks’ strategy is genius because it gives the company access to cash flow and produces extra revenue,” Bariso said, summing up the benefits. “It also generously rewards customer loyalty, so customers don’t get offended if they leave a little unspent cash on a gift card somewhere.”
Truth and Accuracy
We are committed to truth and accuracy in all of our journalism. Read our editorial standards.
