People know Starbucks as the place that sells coffee. Bit it comes as a surprise to many when they find out that the company is also a mini bank. Starbucks gift cards have given it a unique position among retailers.
Being in demand and happily given as gifts to loved ones, these gift cards turned Starbucks into an unexpected financial powerhouse.
According to the Q3 earnings of the company, it is now sitting on $1.77 billion worth of unredeemed gift cards. This figure is up 9% from the same period last year.
More than just a cheaper way to borrow
Starbucks isn’t the first company that uses is customers as creditors. Here’s how it works. Companies offer their customers mobile apps or gift cards where they can load money to use at a later point.
The whole point of this is to give users the convenience to pay for their coffee with ease. And it works. This is why people load balances onto their cards knowing fully well they won’t be spending them immediately.
But this convenience brings much more to the company in the form of interest-free money. Some companies like PayPal can keep a lot of customers money without having to pay them any interest. But they can’t spend it as they need to keep it as reserve.
Other companies like Walmart have a similar amount of unredeemed gift cards as Starbucks.
But the fact that it does over 20 times as much sales as Walmart means the effect of this interest-free money is minimal.
For Starbucks though, things are different. We can consider it an interest-free loan. But things get interesting because the company has to pay it back in the form of Coffee, not money.
On top of that, its unredeemed balance increases every year. Last year, it brought in $196.1 million in revenue from unredeemed gift cards.
As this value increases, Starbucks has realized these balances may never be redeemed. Hence, it is not a business secret anymore. The company declares it openly, but the balance keeps increasing.
Starbucks does an exceptional job of bringing in unredeemed gift card revenue. But the main line of its business, selling coffee, isn’t going that well.
Disappointing Q3 earnings
The company reported its Q3 earnings last evening and it’s doing a poor job of selling coffee. It reported a 2% reduction in North America revenue and a 3% reduction in global revenues.
This is the company’s second consecutive quarter of declining sales. As consumers struggle to deal with inflation, it seems they’re cutting down on Coffee.
Think of it this way. McDonald’s reported declining sales after offering a $5 meal deal to its customers. How then can Starbucks expect people to come to its stores and pay $6 for an ice coffee?
It is a question that the management is struggling to answer, especially in the presence of rivals who are taking away market share. Analyst RJ Hottovy says:
Your more cost-conscious consumer, they’re finding other places or just doing things at home. There’s also more competition from some of the drive-thru coffee chains, like a Dutch Bros
The stock has had a tough year so far down 17% YTD. Its troubles aren’t going away anytime soon, irrespective of how many people forget to redeem their gift card balances.
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