Starbucks: One of the Largest USA Bank

Hi readers! You are reading the article in the series "successful businesses with amazing strategies", and the business we will be discussing today is known by many. Whether you need a warm cup of coffee to stay awake during long work hours or a deliciously flavoured frappuccino to brighten up the mood, Starbucks never disappoints. Starbucks, the world's largest coffeehouse chain, has significantly influenced Americans to adopt quality coffee behaviour. Quality is the one thing that Starbucks can't be defeated in. From the selection of coffee beans to the creation of menus, they always perform beyond expectation.

Starbucks changed the way Americans drink coffee today. They did it so flawlessly that around half of the Starbucks stores, which would be more than 15,000, are situated in the USA alone. Yes, Starbucks has more than 37,000 stores worldwide catering to people of varying religions, languages, and tastes, keeping customer satisfaction at the utmost level. Compared with other coffee brands, Starbucks sells the most expensive coffee, but they also deliver the best quality. Every Starbucks store is custom designed by keeping the local history and style in mind, giving them a unique edge over other cafe businesses.

Their stores are aesthetically furnished and are designed by keeping the location's speciality in mind. Just look at some of these stores from around the globe. Aren't they enough to please a tired individual's eyes? They sure did mine! 

It might be hard to believe, but the yummy hot and cold drinks, micro ground instant coffee, teas, juices, frappuccinos, etc., are not the only thing Starbucks specialises in. Actually, the coffeehouse chain side gigs as a bank. Nope, there is no typo done by yours truly. I will explain everything in depth below, but first, check out another interesting fact about Starbucks. 👇
This company is filled with surprises, I am telling you!

Starbucks Coffee Culture

As per historical records, coffee was discovered in 800 AD by a goat herder in Ethiopia. The goat herder noticed his goats were filled with energy on certain days after eating berries from what was later found to be a coffee plant. And so, from its discovery, coffee changed its form many times and is now available in colourful drinks and syrupy refreshments.

Amidst all this is Starbucks, the king in the coffee business, whose name is enough to paint the white cup in people's minds with the "twin-tailed siren" logo.

Opening a business is not a big feat, as even now, billions of people are either taking over a family business or starting something from scratch. Everyone is an entrepreneur in their own way. But to complete the journey of being one of the thousands of competitors in the sector to gaining the largest market share, one must be distinguishable. And that's what Starbucks did when it came into the coffee-importing business in 1971, and it is still doing it with outstanding success. Just look at the numbers representing the annual revenue for the past 5 years.

The numbers are rising steadily with around 8-11% increase Y-o-Y. Apart from its most earning countries, USA and China, Starbucks is preaching its vision of quality coffee habits to other nations as well. In India, Starbucks Corporation has partnered with Tata Consumer Products with a 50:50 joint venture named Tata Starbucks Private Limited. There are 327 Starbucks stores in India, with the most stores (around 33%) in Maharashtra.

For more on Tata Consumer Products' share price and financials, visit Tata Consumer Products Ltd.

It all started when entrepreneurs from Seattle, Jerry Baldwin, Gordon Bowker, and Zev Siegl, witnessed the decline in coffee consumption in America. The competitors then started to utilise bad quality coffee beans to get the largest market share. This brought dissatisfaction in consumer’s minds regarding coffee hence decreasing the coffee consumption as a whole. Starbucks saw the gap the competitors made for good quality coffee and designed their business model around it. Starbucks opened the first store in 1971 at Pike Place Market, Seattle. Unlike their competitors, Starbucks never compromised with the quality of coffee beans and always provided the best coffee beans to consumers. This led to the reawakening of Americans' habit of consuming quality coffee, allowing Starbucks to rise forward in business.

Continuing with top quality was possible for Starbucks by maintaining good relations with coffee growers from across the world. They used Arabica coffee beans for their coffee, which allowed high roasting temperatures giving the beverage a rich flavour. Arabica beans usually come from Ethiopia, Kenya, Sumatra, and Costa Rica.

Starbucks Financials

Starbucks Corporation, the company behind the coffeehouse chain Starbucks, has been making impressive hikes year-over-year despite all odds. The arrival of the pandemic brought many businesses to their knees, but Starbucks' morale didn't go down. The usage of the Starbucks mobile app increased, allowing safe delivery of coffee and other items from the menu without much hassle.

The revenue for the year 2020 saw a slight decline as compared to 2019 ($23,518 in 2020 to $26,509 billion in 2019), but Starbucks Corporation came back stronger than ever in 2021 as it crossed the all-time high $30,000 billion mark. For 2022, the total net revenue of Starbucks is $32,250.3 million.

Starbucks Corporation generates revenue from company-operated and licensed stores, store value cards, loyalty programs, and other revenue, which includes sales of packaged coffee, tea and a variety of ready-to-drink beverages.

As per the quarterly report for the second quarter of FY23, among the 37,222 stores, 51% are company-operated, and 49% are licensed. Starbucks CEO Laxman Narasimhan stated the Q2 reports with positive remarks in these words, "Our strong third-quarter results point to all-around momentum in the business, and reflect the significant progress we are making against our Reinvention Plan. Our results were also amplified by the distinctive competitive advantages that set us apart in the market."

Mind Boggling Strategies: Starbucks’ Success Secret

Maintaining the quality and class of a simple beverage like coffee surely played a big role in Starbucks' success, but that's not all. The strategy they devised to move their operations ahead was also noteworthy. Starbucks' multi-domestic strategy is based on low global integration and high local responsiveness. Simply put, Starbucks believes in taking things slow when penetrating various cities in a nation. It focuses more on catering to locals' needs for coffee consumption. Their menu, branch structure, and other schemes are designed based on the locals' requirements to make long-term consumers.

They establish wholly-owned units, joint-venture, and licensing stores in various nations based on the best route possible. In India, the JV between Tata and Starbucks is working great for both, as the FY23 results showcase a net sale of ₹‎1,087 crore with revenue growth of 71% over FY22.

Starbucks, over the years, either adapted or discovered many strategies to boost its business, making a name for itself. Here are some of the best ones:

Howard Schultz

It's not the name of a new marketing strategy. Howard Schultz is the ex-CEO of Starbucks who authored several strategies for Starbucks turning the company into the giant coffeehouse chain it is today. Schultz resigned recently from the CEO position in 2022, handing the reins to Laxman Narasimhan, ex-CEO of Reckitt and CCO of PepsiCo.

Howard joined Starbucks as an employee in 1982 and soon realised that the coffee retailing company could do much more. He visited Italy and got inspiration after seeing people interacting at coffee bars. He tried to persuade owners to expand into the cafe business. Starbucks was doing great as a coffee retailer as it was successfully making a name for itself for providing the best quality coffee beans. Thus, the management then didn't want to take unnecessary risks and rejected Howard's idea.

Undeterred, Howard left and opened his cafe business, "II Giornale", which was a big success. Later, he bought the coffee importing business and renamed all II Giornale cafes as Starbucks. This transformation worked wonders for the company, giving factors like quality control, audience penetration, and brand reputation a big boost. Over the years, Schultz directed the company flawlessly, making many contributions to the corporation.
 

Starbucks Reserve

Started in 2010, Starbucks Reserve is a three-type program subdivided into "Starbucks Reserve Roastery", "Reserve Bar", and the "Reserve Store". It was initiated with the coffeehouse chain's motive to compete with high-end coffee retailers like Stumptown Coffee Roasters and Blue Bottle Coffee. The roasteries provide a full-package experience for consumers to enjoy high-quality coffee leisurely.

Roasteries include sections for viewing coffee roasting and brewing, cocktail bars, coffee bars, and scenic spots to enjoy one's beverage in peace. High-quality coffee beans and other products are also transported from these roasteries to stores in different regions. Starbucks has six operational roasteries in Seattle, Shanghai, Milan, New York City, Tokyo, and Chicago. These locations have more expensive pricing than other Starbucks stores as they provide a rare, high-quality product line to consumers. Plus, your eyes get to enjoy the beauty of inspiring artwork, which is pretty pricey.

Starbucks as a Bank

Remember how I discussed earlier about Starbucks moonlighting as a bank? Starbucks is not your usual bank where you can safely deposit your money and expect certain returns or from where you can get loans and other financial products. They are not legal banks, either. Starbucks just utilises the money stored by customers in the "My Starbucks Rewards” loyalty program. The rewards program, initiated in 2009, allows customers to earn points on every purchase they make at Starbucks via a mobile app. For example, in Indian Starbucks stores, three tiers are available under the My Starbucks Rewards program.

1. Welcome Tier
2. Green Tier
3. Gold Tier

These tiers provide certain benefits for customers based on the kind of card one registers for. Benefits like "Free Birthday Beverage" and "Free Size Upgrade" are available at all three tiers. Other advantages like "Free Tall Size Drink" or "Free Beverage Customisation" are available in specific tiers. For every rupee/dollar you pay via the app, you receive 1 star* on your card. You can also add money to your Starbucks card to pay ahead of time. Customers are allowed to use multiple balances to pay for their orders at Starbucks. The points or stars can be redeemed for free drinks, food, and merchandise.

Now, businesses use subscription or reward programs to increase their sales and form long-term customers, then what makes Starbucks so different here? The thing is, Starbucks gets much more out of its rewards program than just loyal customers or better revenue. Firstly, Starbucks gets the power of data by analysing its customers' spending habits. This way, they can target certain customers with customised advertising, as many do on social media platforms. This also allows Starbucks to develop products based on different locations, customising the menu as per local preferences.

Another benefit the "My Starbucks Rewards" program gives the company is not well-known and definitely not common. Customers deposit a particular amount in their Starbucks card to redeem benefits like free drinks, attracting customers with the possibility of many rewards. (Who doesn’t love free stuff?) But, what people don't know is that Starbucks utilises the amount it receives via this reward program and invests it in short-term, low-risk ventures.

Now, since the investments for these ventures don't give much return (around 0.05%), one may think that Starbucks does not earn much from this smart investment scheme. But this notion will take a detour when you look at the number of members the Starbucks rewards program has. As per their recent quarterly reports, for the 90-day active membership, the Starbucks rewards program saw a 15% hike Y-o-Y from 28.7 million in 2022 to 31.4 million in 2023.

Let's take the example from the story "Crow and the Pitcher". Suppose a crow personifying a customer fills the pitcher with rocks ($1 or more). Just imagine how much 31.4 million crows will fill and the return Starbucks would earn by investing those 31.4 million rocks or more. Plus, Starbucks doesn't need to pay any interest to the members as they have no idea their favourite coffee provider is using their money to make profits. They are only interested in getting the water from the pitcher (the free drinks and upgrades) and are not paying any attention to the precious rocks (money) being dropped in Starbucks' lap.  
 
As per sources, around $10 billion in revenue comes from these loyalty programs alone for Starbucks. The funniest thing is if Starbucks was a traditional bank, then it would be included in the top 2% of the US banks based on deposits.

Premium Pricing, Premium Brand

Starbucks adapted the multi-domestic strategy, which allowed them to understand the public's demands and devise their plans accordingly. They wanted to make coffee a premium product for which people would be ready to pay a hefty price. By developing a classy brand reputation, Starbucks succeeded in gaining a customer base from middle and upper-class society. They never planned to go beneath that set mark as they were not ready to compromise their services' quality.

Based on the location and the nation, the price for a cup of coffee from Starbucks differs. A cappuccino in Paris costs $3.70, whereas, in New York, it would be $2.94. The size and type of coffee also play a big role in pricing.

Catering to Social Norms

The one big problem foreign companies face while entering the global market is facing difficulty in finding common ground with the citizens' habits and their companies' policies. To avoid this issue, Starbucks penetrates the new environment by creating a mixed-up surrounding.

Take China, for example. After America, China is the country with the most number of Starbucks stores. Most people prefer to drink tea there, so Starbucks included several items with green tea as an ingredient. Slowly, they started introducing their specialities to the cafes as citizens there began to get acquainted with Starbucks' quality and atmosphere. Providing big seating, keeping in mind the Chinese culture of sitting in big groups, also helped make Starbucks a popular coffeehouse in China.

Partners

Under Howard Schultz's supervision, baristas and other staff members hired were chosen by keeping Starbucks' quality requirements and standards. They are called the company's "partners" and are given benefit packages as well as other advantages. Full health insurance coverage along with the famous "Bean Stock program". This program awarded employees with 12-14% of Starbucks stock options. The amount was calculated based on the annual base pay of the employees, aka the partners.  
The incentives and other benefits give employees peace of mind and satisfaction helping Starbucks maintain their standard. Starbucks' employee retention rate is much higher than its competitors. After all, Starbucks' partners are the face of the company.
For Starbucks, the philosophy of "Happy Staff, Great Sales" is the way to go. I think other companies could learn a thing or two from Starbucks in this area.

The Bottom Line

If Starbucks were to become a legal bank, then it would be one of the largest banks in the USA because of its market capitalisation of $115.42 billion. Starbucks' rewards program is recognised as one of the most successful loyalty programs, and it plays a major role in Starbucks' annual revenue. As per CEO Laxman, Starbucks is thinking of starting a drive-thru in its stores to attract more customers. Possibilities for success are many as Starbucks can shift from the cafe business to the banking sector with the number of loyal customers they have.
 

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