Starbucks could use a CIO

Every six months someone resurfaces the internet’s favorite business coffee story: Is Starbucks really a bank? (My favorite edition of this question is Trung Phan’s X thread from 2022.) The TL;DR is that Starbucks runs a first-class rewards program that incentivizes customers to preload their Starbucks accounts with cash in exchange for stars that can be redeemed for free food, drinks, and merch. Customers earn 2 Stars per $1 spent with loaded funds on their app, versus 1 Star per dollar spent with cash, credit, or debit cards through their app.

This money stored in customers’ accounts appears as a liability on Starbucks’ balance sheet as “stored value cards and loyalty program” within deferred revenue.

Stored value capital is essentially an interest-free loan from the customer to the business that can only be exchanged for coffee (and other Starbucks products), and it can’t be redeemed for cash.

This program has been a hit, and, according to Starbucks’ most recent 10-Q, they currently have $2.2 billion (!!) in stored value cash on their balance sheet. As if this weren’t a good enough deal for Starbucks, a portion of this stored value goes unspent each year, which Starbucks recognizes as “breakage revenue.”

The success of Starbucks’ Rewards program poses an interesting question: why doesn’t the coffee chain launch an investing arm to manage these funds?

This model of investing excess capital has existed for years in the insurance industry. Insurance companies invest their float, which is the difference between premiums paid by customers and claims paid to customers, across different assets to increase their returns. Most insurers invest in low-risk bonds with durations that match their liabilities (auto insurers invest in shorter duration bonds, life insurers invest in longer duration bonds), but insurers don’t have to limit their investments to the bond market.

Take Berkshire Hathaway: in Berkshire’s 2009 annual shareholder letter, Warren Buffett noted that their float had grown from $16 million in 1967 to $62 billion in 2009, giving them billions of interest-free money to invest, which Berkshire has actively deployed in public markets.

Starbucks’ reward system has created a “float” with a guaranteed profit in the form of “breakage revenue.” Unlike insurers, who need to account for the risk that claims could outpace premiums collected in a given year, Starbucks’ Rewards outflows will never cost more than their inflows because money stored in their rewards program can only be redeemed for Starbucks’ products. Put simply, the coffee chain will never owe more than it has received from customers. Even better, Starbucks accurately forecasts how much money won’t be redeemed through its breakage revenue, meaning that the company knows how much of its stored value is pure profit.

So why not invest that $2 billion, or at least its estimated breakage revenue each year, and compound it over time?