A business practice worth understanding as Pumpkin Spiced Latte season begins
The Starbucks rewards programme is one of the most successful in the world, effectively functioning as a $1.642.9 billion loan for the popular coffee franchise.
Coffee lovers are incentivised to load up their mobile account or physical gift cards with cash, which enables them to collect stars which can be redeemed for further drinks.
The genius of the loyalty scheme is that it’s packaged as a convenient way for coffee drinkers to get more out of their caffeine addiction, when actually it’s a way for Starbucks to get more out of their loyal customers.
When you borrow money from a bank or private loan provider, you need to pay interest in addition to returning the original sum borrowed.
But Starbucks doesn’t pay its customers interest for the money they put on their accounts, which means the money from stored value card liabilities (the sum of all physical gift cards and the digital value of balances on the Starbucks mobile app) is effectively money the company has borrowed at a 0% interest rate.
When you factor in the fact that Starbucks also makes money from unredeemed balances, with $155 million brought in every year, they are effectively benefitting from a negative interest rate of roughly -10%!
How many times have you had a store gift card that you’ve forgotten about altogether, or only partially used before it expired? If every customer leaves a few dollars on a card languishing in a drawer somewhere then that adds up to big bucks for the store who gets the money after the expiry date, without having to lift a finger.
Add in the data that Starbucks collects about its customers purchase habits which they can use to create new products in the future, and it’s clear how much more favourable their rewards programme is for the coffee chain than the customer.
Borrowing cash at a negative interest rate certainly sounds like savvy business practice. So why isn’t everyone doing it?
Well, some companies such as PayPal do — it receives about $20B in loans from its customers — and it pays no interest. But it has to keep money in reserve in case its customers all withdraw their cash at once. It’s unlikely, but imagine if you went to your bank and requested to withdraw the funds in your account and they turned around and said, “Sorry, we’ve spent it all!”
You’d be outraged — and rightly so, which is why PayPal doesn’t have as much flexibility as Starbucks. All Starbucks has to do is ensure that it always has enough coffee to meet the potential demand of the users who have pre-loaded their apps.
It’s unlikely that demand for coffee will outstrip supply in our lifetime. That is, unless the Amazon rainforest continues burning at its current rate. In which case the white girls of Instagram will have to find something other than Pumpkin Spiced Lattes to adorn their feeds with this fall…