June 17, 2024

How Starbucks Operates Like a Bank While Serving Coffee | The Economics Of | WSJ

Published May 11, 2023, 8:40 p.m. by Monica Louis

starbucks Corporation (SBUX) is a well-known coffee chain around the world with over 26,000 stores. The company has been in business since 1971 and is headquartered in Seattle, Washington. starbucks operates like a bank while serving coffee, and its business model has been controversial in the past.

starbucks is a publicly traded company, and it is not a traditional coffee chain. The company sells coffee, tea, pastries and other food items. starbucks makes money by charging customers for its products and by charging banks for the loans it provides to its customers.

In recent years, starbucks has been criticized for its business model. Some people argue that the company is exploiting customers by charging them for coffee and food items. Others argue that the company is providing a valuable service to customers by allowing them to borrow money.

The business model of starbucks has been controversial in the past, but it has been successful in terms of profits. starbucks has been able to make money by charging customers for its products and by charging banks for the loans it provides to its customers. The company has also been able to expand its business internationally.

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- [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.

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