In April, I wrote a blog titled 'How McDonald’s REALLY makes money' and it went down really well. So I thought I’d write a similar blog but this time focusing on clever ways Starbucks makes money.
Clearly, Starbucks makes a lot of money from selling coffee, as well as food and mugs etc. However, that’s not the piece that I find the most interesting.
The piece that most people don’t know is that Starbucks makes a lot of money from their Starbucks Card.
For those that don’t know, the Starbucks Card (which is also an app) allows you to store money which can be used for paying for your Starbucks coffee. You get extra reward points if you pay using your card. The more points you have, the more free drinks you get. It is estimated that 41% of people in the US and Canada use a Starbucks Card to pay for their Starbucks coffee.
How does Starbucks make money from the Starbucks Card?
There are two ways they make a lot of money from this card.
1. Investing the money people put on the card
The money people put on the card can’t easily be taken away, it has to be used for buying coffee. So Starbucks can use this money to do whatever it wants - this means it can invest this money and make a return before the money is spent on coffee.
At the moment, there is around US$1.6 billion ($1,600,000,000) of money sitting on their cards around the world. This is more money than most banks have!
Let’s say that Starbucks invests this money (before it is spent) and gets a return of 3% per year - that’s $48 million per year they make from people using the Starbucks Card. This is similar to how banks make money, as banks use the money in our savings accounts to invest (or provide loans) to generate revenue.
As they open more restaurants, using the money from the Starbucks Cards, they will increase their number of customers. This will increase the number of people using Starbucks cards and they make even more money. According to the company reports, the amount on Starbucks cards increased by $200 million from 2020 to 2021.
2. Forgotten money is theirs to keep
Lots of people forget they have money on their cards and will never use it. I have to admit, I am one of those people. When we were living in Hong Kong, I had a Starbucks Card and I’m pretty sure I had a few Hong Kong dollars still on the card when we left.
Starbucks assumes that each year around 10% of all the money on the Starbucks Cards won’t be spent on coffee. This is known as ‘breakage’.
This means that Starbucks gets to keep 10% of the $1.6 billion currently held on the Starbuck cards. That’s $160 million per year of ‘free money’ from these cards.
The two points above mean that Starbucks is essentially part coffee shop and part bank.
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Key money lessons for kids
Why did I tell this to my kids? I told my daughters how Starbucks makes money, via the Starbucks card, as I want them to understand the power of working smart, as well as working hard. Starbucks has used its brand to create new revenue streams without creating a lot of new work.
Like Starbucks, I also want my kids to grow up earning money in many different ways and not just relying on a single source of income (salary from a job).
The other lesson is the power of small amounts. The amount on each Starbucks card is probably quite small and hence why people, like me, have money on there that is going to be used. However, when you add up all these small amounts, the total can become very large. I encourage my daughters to not take the small amounts of money they get or have for granted. Whilst $1 or £1 might not seem like a lot, over the course of your life, if you keep those small amounts and look after them, they can make a massive difference.
Imagine if everyone looked after the small amounts of money and gave them to charity? Those small pieces would soon add up and make a big difference.
Bonus: Some clever marketing tricks Starbucks uses
Whilst I was researching this blog, I discovered some of the clever ways that Starbucks helps grow its business which I thought I’d share with you.
Have you ever noticed that Starbucks often spells people’s names wrong on cups? Rumour has it that this is done on purpose (not all the time). A wrong name starts a conversation “I was in Starbucks and they wrote my name as Bill, not Will”. Some people even put photos of the wrong name on social media. For Starbucks, the conversations and social media photos mean it is getting free advertising. Clever!
Also, Starbucks never puts currency symbols on the menu. Research has shown that we are less likely to spend if we see the currency symbols (as it feels like real money). So by avoiding the currency symbols and getting people to use cards or a phone to pay, it feels less like they are spending and hence they spend more. Clever!
QUIZ: Do you know how McDonalds makes most of their money? Find the answer here
The next time you go to Starbucks with your kids, share with them how they use the Starbucks Card to make money. Help them appreciate that there are many different ways in which companies and people can make money.
Thanks for reading!
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Note: This blog is for education and interest only. I’m not providing a stock recommendation. As you’ll know from other blogs about investing, I believe in owning lots of companies via a low-cost investment fund, rather than trying to pick individual companies.