Three Longs & Three Shorts

Starbucks, monetary superpower

Author: John Paul Koning
Source: jpkoning blogspot (

At Marcellus, our endeavour is to find unusual promoters/companies who look at the industry they operate in very differently from others and change the entire contours of the industry in their favour. Whether it is Asian Paints (who focused on supply chain optimisation when the rest focused on product) or HDFC Bank (who focused on the liabilities franchise when others were focusing on growing assets), these unusual companies continuously elevate entry barriers around their businesses which make it difficult to surmount for competitors and allows them to consistently compound their earnings for long periods of time. In this blog, John Paul Koning talks about one such global franchise – Starbucks, the wordl’s largest coffee chain and how it thought out of the box to raise interest free loan from its customers.
John refers to Starbucks Annual Report to show that it has USD 1.6bn in stored value card liabilities outstanding. This represents the sum of all physical gift cards held in customer’s wallets as well as the digital value of electronic balances held in the Starbucks Mobile App. It amounts to ~6% of all of the company’s liabilities with zero interest payout. By launching physical gift cards and mobile app, Starbucks not only gets interest free loan from its loyal customers but have locked down future revenue as well. Starbucks can use the money in higher-yielding opportunities like funding its operations and expansion.
On the top of providing interest free loan via pre-paid cards to Starbucks, many customers forget to use the card which results in windfall gains for Starbucks. “Each year Starbucks recognizes that a portion of its stored value liabilities will be permanently lost. This is known as breakage. Starbucks recognizes this amount as profit. In 2018 the company recognized $155 million in breakage, around 10% of all stored value balances. Wow! Starbucks already pays just 0% on its debts to customers, but add in breakage and that equates to a roughly -10% interest rate!”
No other retailer in US has been as successful as Starbucks to raise money via gift cards. Walmart’s annual sales are 20x larger than Starbucks sales (~$500b vs $25b). But Walmart only has $1.9 billion in unredeemed gift card balances, not much more than Starbucks. Starbucks is really good at harvesting seigniorage and it is also one of its secret sauce of success.