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  • If you've ever ordered something at Starbucks, you've probably loaded one of these.

  • Starbucks, between October and December, said something like $3 billion of value is loaded onto these cards.

  • I mean, that's a lot of money.

  • 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.

  • So, how important is Starbucks' mobile app and gift cards to its bottomline?

  • 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.

  • 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.

  • Today, Starbucks says they make more than 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, it can be very complicated.

  • The company's early investment in espresso has transformed to many different signature drinks, from the creation of the frappucino to the launch of the 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 has 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.

  • In part due to the company's Seattle founding, technology has played a large role in the chain's 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, you know, using the Starbucks app, they're mobile ordering, and they're hooked into that Starbucks unique proprietary system.

  • 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-thru 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.

  • These alternate pick-up options are becoming increasingly important to the company's bottom line.

  • 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 café.

  • 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.

  • 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.

  • Starbucks has long touted its internal culture, which it says is built on a strong relationship between management and employees.

  • The workers at its 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.

  • That relationship may look different going forward for some Starbucks locations after two of three Buffalo stores voted in favor of unionization.

  • 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 correlating 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 workersthey who support the unionthey want a more direct relationship with the company.

  • In a statement to the "Wall Street Journal", Starbucks said, "Starbucks' successpast, present, and futureis 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.

If you've ever ordered something at Starbucks, you've probably loaded one of these.

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

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    Elise Chuang posted on 2022/04/15
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