The World Invested $4 Billion in Starbucks Gift Cards Last Year

There has long been this misperception that the value generated in any business, especially from basic offerings, is in the product. But as many analysts have long understood, it is frequently the services wrapped around the product that are the most profitable.

Back in the 1970s, when McDonalds was really beginning to take off, company insiders often referred, with a knowing smile, to the 'real estate sandwich.' You couldn't find it on the menu, but it was definitely a feature of the balance sheet and income statement. What they were talking about was the substantial income the company made from scouting likely locations for new stores, buying the land - and then selling or leasing it to franchisees.

Fast forward to the present day and we find, as the following article explains, that 30 percent of Starbucks transactions are represented by the sale of cash cards, either for personal use or as gifts to friends, loved ones and associates.

Starbucks makes some money on these transactions but it also locks in future sales - though it gets to invest that money for itself before the customer gets around to purchasing something - and it assures customer loyalty. These are all factors that serve to reduce uncertainty, which lowers the company's cost of capital and raises its estimation in the eyes of investors.

Much attention has been focused on Google Wallet and the other electronic financing mechanisms that banks, merchants and anyone else who can think up a reason to do so are trying to create that offering. It's a nice business, and it is increasingly going to be a source of competitive financial and operational advantage. JL

Roberto Feldman reports in Quartz:

Starbucks cards now represent more than 30%, or nearly a third of the company’s transactions in the US,

 

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The numbers: Impressive. Starbucks reported quarterly profit of $813 million, marking a near-30% jump from the same period last year. Revenue for the quarter soared to a record $4.2 billion. The company’s global comparable sales grew by 5% on the heels of a 4% spike in customer traffic.
The takeaway: Starbucks is firing on all cylinders. The company has found wild success not only with its traditional coffee sales, but also with its broadened menu of options, and even online offerings. “Holiday 2013 was the first in which many traditional brick and mortar retailers experienced in-store foot traffic give way to online shopping in a major way,” CEO Howard Schultz said in a statement. And the company has high expectations for 2014; it plans to open over 1,000 new stores globally next year. “Our continued ability to execute at this level gives us the confidence to reaffirm our aggressive growth targets for fiscal 2014,” CFO Troy Alstead told investors today.
What’s interesting: The success of Starbucks gift cards is staggering. Starbucks customers loaded $1.4 billion onto Starbucks Cards this past quarter. Some $4 billion was put onto cards last year, and 10% of American adults received a Starbucks gift card over the holidays