You might not immediately associate your daily fix of Frappuccino with the world of finance, but if you look closely, there is more than meets the eye to the java giant. Starbucks made about $36 billion in revenue in 2024, and earned a profit of $3.7 billion, or about 10%.
So big brew is big business, that should be no surprise, but how does that make Starbucks a Bank? In 2011, Starbucks rolled out the ability to load money onto a virtual card via their mobile app. Purchases made with these pre-loaded dollars earned extra rewards points, which could eventually be redeemed for free drinks. According to their quarterly report from this March, through the app pre-payment system and physical gift cards, Starbucks owes almost $2 billion in coffee to its customers. (In the report they show about $1.9 billion in short term deferred revenues plus about $5.8 billion in long-term deferred revenues, but this long-term figure probably represents corporate deferrals and not coffee-debt).
Initially, that sounds like a huge liability, but Starbucks turns that liability into an asset. Because you cannot withdrawal money once it has entered the app or been loaded onto the gift card, they only need to worry about customers collecting as much coffee as they can drink. That means no FDIC, no reserve ratio, and no runs on the bank (despite the effects caffeine can have).
The company can treat this money as a 0% interest loan, and with about 10% of funds eventually being forgotten, it’s actually a negative interest loan. Plus, the rate at which stored dollars can be exchanged for coffee, (which in this case is basically the collateral) is up to Starbucks, so if input prices go up faster than they can grow the dollars customers have loaned them, they can offset that by raising their own prices. This means that the bean-counters at Starbucks are free to do lots of interesting things with those dollars in the meantime. They could earn good returns in the market, expand to new locations, pay off union organizers, maybe they’ll even open a VC fund!
The scale of the money held in the Starbucks eco-system is astounding when put in the context of other banks. The US has about 4500 banks that report to the FDIC, and Starbucks holds more in these customer deposits than about 80% of them! For comparison, the PayPal ecosystem (including Venmo) is only 8x Starbucks, holding ~$16 billion in customer deposits! As of September 2024, the Starbucks App had 33.8 million quarterly active users in the U.S., growing at 4% YoY.
It seems unlikely to me that deposits into the ecosystem will drop off very quickly, even as rates rise. Coffee spending is a strong habit and seems unlikely to respond strongly to changes compared to other goods. With the 30 year treasury rate hovering around 5%, the house (roast) always wins.
I’d love to hear from you in the comments. Thanks for reading,
-Connor, OfAllTrades
What this article forgets to mention is I normally get Starbucks Gift Cards at a 15-20% discount. It is money I would have spent normally at the Starbucks store except at a discount with GCs. It is a direct cannibalization and opportunity cost to Starbucks.
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