Starbucks monetary policy

Starbucks has around $1.6 billion 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.

This is a pretty incredible number. Stored value card liabilities are the money that you, oh loyal Starbucks customer, use to buy coffee. What you might not realize is that these balances  simultaneously function as a loan to Starbucks. Starbucks doesn’t pay any interest on balances held in the Starbucks app or gift cards. You, the loyal customer, are providing the company with free debt.

Starbucks isn’t the only firm to get free lending from its customers. So does PayPal. That’s right, customers who hold PayPal balances are effectively acting as PayPal’s creditors. Customer loans to PayPal currently amount to over $20 billion. Like Starbucks, PayPal doesn’t pay its customers a shred of interest. But Starbucks’s gig is way better than PayPal’s. PayPal is required to store customer’s funds in a segregated account at a bank, or invest them in government bonds (see tweet below). So unfortunately for PayPal, it earns a paltry amount of interest on the funds that customers have lent it.

Here is more from JP Koning.


Best of all for Starbucks, many of those "customer lenders" will never demand all those loans be completely repaid...

I see now that Koning has addressed this as "breakage". The gift card business is pretty lucrative!

Just goes to show you that we are irrational actors!

Or that financial sector regulations shut out enough people (the "unbanked") that they are willing to accept zero or negative interest rates to save/lend directly through unregulated channels.

I doubt the unbanked and Starbucks customer demographics overlap much.

I think this has changed downtown since the whole bathroom racism incident. You may find a murder of kush heads at certain urban locations.

Starbucks is for cucks.

You can be partially unbanked. You might have checking, savings, brokerage, etc. However, you probably don't have the ability to link a Starbucks-branded card to your interest-earning account so that you earn interest until the card is used. The reason you don't have that may be because it's too costly for traditional financial institutions to set that up. So, instead, Starbucks holds the funds in its account instead of yours, allowing Starbucks to earn interest or otherwise use the funds.

One feature, of course, of regulations is that they stifle innovations --- say linking accounts to gift cards --- because the regulations are set up assuming certain already-established activities like traditional savings, checking, credit, and brokerage.

'The gift card business'

It is something a bit different, actually, and the term stored value card seems admirably accurate. Of course, the old Metrocard for the DC Metro in 1989 was also a stored value card (on paper, no less), meaning that when someone bought a card and then threw it away with 5 cents left on it, that too was 'breakage' for Metro.

Now, Metro breakage means something entirely different. Time has passed you by.

Before Metrocards, there were (NYC) subway tokens. The turn-styles remain.

For Starbux fans, "gift" cards are no-brainer birthday/Christmas gifts.

These can be seen an interest-free loans, or sales promotions, or . . .

What they call "breakage" is revenue. When a liability is not paid, it is recorded (US GAAP Accounting) as revenue.

Anecdotal. Each time we buy Heartguard (heart worm) medicine for the pooch, we get (in the mail) a $12 cash card, good for six months. I left $4 on the 2018 card. I have not used the 2019 card, yet.

It's hard to spend the exact $12 at Chik-fil-A. The residual $0.79 never is spent.

I always use those small rebate cards to buy a gift card to somewhere I know I’ll use the full amount, especially if I can load/register the gift card in the app, like CFA, Target, Walmart, etc.

No $0.79 balances left behind...

One aspect of breakage that I didn’t see the author address is that some states will come after that money as unclaimed property. The legal term is escheat.

Also, the IRS gives favorable tax treatment to the unredeemed portion of the gift card advance payment---income is recognized in the tax year the gift card is sold to the extent redeemed by the customer in that year, but not until the following tax year to the extent the card is not redeemed. Nice!

Speaking of IRS, isn't this part of the 'business model' with withholding income? IRS takes money and then gives some back months later. Those who know the loopholes can get more money back than those who don't. Meanwhile USG uses your money.

What some call "favorable" others call "rational."

Accounting: "Sell" a $10 gift card: debit/increase cash, credit/increase gift card liability -both permanent accounts. Customers spend the $10 card: debt/decrease gift card liability, credit/increase sales - temporary account which "closes" out to net income/loss at the end of the period. Uncertainty exists as to when a card will not be entirely spent. Ergo, a certain period is decided upon at the end of which the cash card liability becomes revenue both for accounting and tax purposes.

Accrual accounting is not always "rational", but I'll allow that some others might think it always is, even in this example.

Same with any gift card. It's a great model.

this post is pretty mind-blowing. Did anyone else think of Facebook's "Libra" after reading the entire article?

Libra is even more extreme; they'll control its monetary policy too! Chairman Zuckerberg has raised interest rates.

The biography of Warren Buffett describes his and Charlie Munger hunt for firms with store card value.

with negative rates soon to be everywhere this shouldn't surprise..the idea that borrowers pay interest on loans is passe...we are on our way to free money(aka MMT) for's the only way this ponzi scheme keeps going

Dude! Everywhere except the USA.

Gift cards can be viewed as forms of financial intermediation.

"They" keep pointing at the inverted (US Treasury) yield curve. But, no one mentions inversions in market loan rates. For example, the prime commercial loan rate is 5.25% while a 30-year, fixed-rate mortgage (on average) is 3.55%. Seems to "knock on its head" the traditional carry trade model.

Loan interest rates cannot go to zero, unless they can find people that will work for nothing; will never have a loan default, . . . .

I think it would be Monopoly, not free, money and slavery for every person. MMT doesn't work without totalitarian, command/control over the economy (labor, money supply, prices, wages), the ever-expanding supply of Monopoly money, and enslaving we the people.

FDR and whomever was behind his economic experimentations were early, rudimentary MMT guys. For one, they confiscated all the people's money (gold) so they could play with the currency. For another, they imposed wage and price controls. For another. they had CCC and other programs to make-work for the unemployed. ETC.

Like gyms, which assume that a lot of customers will never work-out or fade away, card-issuers assume a lot of people will lose their cards, or forget they have them, or never use them.

Perhaps but there is something of a market response here too. An entire industry exists to buy old stored value cards and in some cases one can make payments for other items/services by selling the card to an intermediary. It's also a tactic uses for anonymizing a purchase much in the same way burner phone and prepaid SIM cards does for communications.

'Starbucks isn’t the only firm to get free lending from its customers.'

Um, these 'liabilities' are not loans, they are essentially a deferred expense to be charged later, when the customer makes purchases at Starbucks. Of course Starbucks can use the cash on hand to generate further revenue, but gift cards no more represent a loan than the employees are loaning their employers money by not collecting their wages at the end of every day.

And this from the article has a simple answer - 'Why not grow the program to $5 billion, $10 billion, or $100 billion? It would be a terrific business line to get into.' Fraud is never a terrific business to get into, considering that cards represent a deferred expense, not free money.

And even with the twist of expanding the deferred expense among many companies, the answer to 'Who knows if it would be successful' is answered easily enough by saying that the blog author seems to think that such cards do not represent anything but a 'loan,' with the added benefit of providing free money through 'breakage.' Which is kind of funny, because he seems so close to understanding the actual point when writing 'The problem here is that Starbucks only sells coffee.' And because those cards represent an obligation regarding future sales of coffee, they are not a loan, they are an expense which Starbucks will need to account for and cover (unless it goes bankrupt).

One assumes that somebody much more current on American accounting will provide better information on the subject.

A "deferred expense to be charged later" is effectively a loan. Loans are also not "free money"--they also are an "expense" that a party needs to "account for and cover (unless it goes bankrupt)". You haven't described any way that these card balances differ from loans.

The schedule of salary payment is generally something agreed upfront between between employee and employer, and thus I would not consider this a loan. The parties agree that the employer is obligated to pay on a certain schedule (and any benefit the employer receives from delaying salary payment would, in theory, be baked into the market rate for salaries). However, if an employee didn't receive their salary as soon as the employer were obligated to pay it, that would effectively be a loan, too. For example, if employees could choose either to be paid daily or at the end of the month at the same salary, the employees who chose to be paid at the end of the month would be effectively making a loan to their employer--this is an equivalent situation to the Starbucks cards.

'is effectively a loan'

Depends on perspective - if I sell you a piece of equipment for 1 million dollars, and require a prepayment of 20% total before even start to manufacture it,, you can certainly say that the customer has loaned the manufacturer 200,000 dollars. Except that is not how an accountant would book it, however. Particularly as the customer has not loaned me anything - instead, I have an obligation to deliver a piece of equipment.

'You haven't described any way that these card balances differ from loans.'

Well, since you have already dismissed a deferred expense as a loan, one trusts that when an accountant shows up, you will accept that in a chart of accounts, words actually have definitions and meanings. And that misusing them can be construed as fraudulent.

'and thus I would not consider this a loan'

Yet oddly enough, salary is not a deferred expense, it is a (generally short term) liability, basically because it is a financial transaction.

'this is an equivalent situation to the Starbucks cards'

Not to an accountant. Hopefully, one will show up to describe this more accurately in a current American framework.

There are some reasons this shouldn’t be thought of as a loan. Repayment is made in goods and services and not U.S. Dollars. 1) That creates real differences in liquidity considerations since Sbucks lenders only have a claim on certain tangible goods of the firm (a subset of the firms assets), 2) Starbucks has direct control over the value of the gift card - it can raise prices on all products immediately de-valuing the cards. 3) People buy these “loans” as gifts, and those gifts often don’t get used. It’s closer to a charitable donation in someone’s honor (just as a non profit is expected to use some portion of the donation on goods and services).

So do it the other way. They delivered $1.6 billion worth of coffee and services on 30 days payment terms. What do you call that?

I deal with this all the time. Large corporations well decide to change from 30 days to 60 days. That is a way to finance their stores; their entire maintenance budget amount as a 30 day loan.

How it is accounted for is immaterial. They have $1.6 billion in cash.

'They have $1.6 billion in cash.'

A statement covered by 'Of course Starbucks can use the cash on hand to generate further revenue.' However, it is not 'free money' - that cash on hand is balanced by an obligation to provide coffee.

Of course they do. Just as someone who pays after 60 days has an obligation to pay.

You are ignoring the time factor, the flow characteristics of cash in a business. The vast majority of the cash flows in one end out the other, with some at the end being profit after taxes. The art of managing a business is to be ahead on that flow, to have cash on hand to meet the obligations of the moment. Payroll, debt payments, tax remittances. They don't correspond on a time scale with the inflows. Having $1.6 billion cash on hand is useful. You may not need short term financing because of it.

'You are ignoring the time factor, the flow characteristics of cash in a business.'

Um, I don't care about the time factor. Side Bar notes fairly succinctly why these stored value cards do not represent a loan.

They do represent cash in a basic sense, as you point out.

The point is what do you learn by calling it a loan versus something else. Starbucks is receiving cash in exchange for issuing Sbucks that are redeemable in floating price coffee. If the price of coffee floats with the U.S dollar, then no arbitrage exists and it is a zero interest loan liability on Sbucks books. If coffee prices fall relative to inflation, Sbucks holders get a return and vice versa. Fairly certain that Sbucks holders have no seniority over other lenders - no priority at all for that matter - and would have no ability to recover under a bankruptcy scenario - that is the same for private bank notes. I only add that to consider whether the term “loan” confuses more than it illuminates.

It is just a convenience fee. I would rather flash an app at the scanner than carry cash and wait for the cashier to figure out how to make change (a skill that used to be taught by the end of third grade, usually earlier). I then get discounts, in exchange for the risk - but not the certainty - of my leaving unspent money on the app. I regard it as a fair trade, or a better-than-fair trade since the discounts are certain but, with a very small amount of effort, I can make sure the balances are used up.

tomato tomahto wutevs

starbucks gets to play with $1.6 billion in cash and has no obligation except to eventually give away some amount of its products free of charge, at a rate of redemption i am sure well understood and closely tracked

and unless the entire nation decided to look under their couch cushions at the same time, it’s a cant lose proposition

This is hardly new. For years, the big advantage to American Express from traveler's checks was the free float. But this all meant a lot more when interest rates weren't tiny.

Starbucks market cap is around 60 bn USD, so this amount is probably within their daily market cap fluctuation. I don’t think the free debt of 1.6 bn is really material to them. I suspect the store cards are more about encouraging customer loyalty rather than a low cost source of debt.

You're probably right that customer loyalty is the main purpose...however, I'm sure that $1.6 billion of interest-free debt is DEFINITELY on the radar of their accountants.

Companies pay very close attention to this stuff, even when it may seem insignificant. Many companies delay the payment of any bill to the last possible moment, because they view the aggregate effect of delays even just of a few days here and there as significant to their cash flow.

When we buy gift cards it is usually when there is a discount on the card. So the face value might be $100 but it only costs $95 to purchase. Lots of gift cards work this way.
Also, we regularly get 'cash back' offers from our credit card company. Currently we get 10% cash back on gas stations and hardware stores. So even if we pay full price on the gift card, the actual cost to us is 10% less due to the cash back. We often buy gift cards to take advantage of this. The only trick is to be very careful to use them up completely, and not losing them.

Great point!

Pretty cool! Now do the federal government and income tax withholding!

The way they do it, we're getting the loan.

One will recall that GM and GE, once highly successful industrial companies, eventually became finance companies, finance producing more profits than the products they sold, to the detriment of the products they sold. I don't believe Starbucks is likely to become a finance company, but the more a side business (customer advances in this case) produces in cash flow, the more attention it gets from management and the less attention the core business gets.

Many (many) years ago I worked at a Sears store. Two things I remember (well, more than two, but these two relate to the blog post). One, "layaway" purchases were common. For those who have no experience with "layaway", the customer "purchased" an item with a "down payment" and made periodic (unscheduled) payments toward the purchase price, and when the purchase price was fully paid, the customer could take the item. I believe there was a small "layaway" charge, but nothing like the interest on Sears credit that eventually replaced "layaway". If the customer decided not to pay the full purchase price, my recollection is that Sears refunded what had been paid. If the customer disappeared, Sears kept what had been paid. As with GM and GE, Sears credit generated so much in profits that Sears too became a finance company.

My other memory about Sears is that we were paid in cash. I mean, an envelope filled (well, in my case, not filled) with cash and coins. I should mention that at the time (this was over 50 years ago) most of the employees at Sears were career employees, and that one could actually earn a living wage plus a tidy sum for retirement (Sears had a retirement plan funded with Sears stock). Also, employees were paid a (small) commission on sales. Those old enough to have shopped at Sears many years ago will recall the excellent service provided by Sears employees. The good old days.

Something else that stuck in my mind about Sears was the layout of the store. In particular, the shoe department was located at the front door of the store. I remember because every morning just before the store opened that's where the employees would meet for a manager to tell us something I don't remember. When I visit a department store today (which isn't often) I notice the store layout. An aside, the Sears store where I worked had several career employees whose only job was the store layout and displays. No, they didn't do the physical work of moving stuff, they were "designers", skilled in the art of retailing.

And that department had the best looking ladies too.

if you're paid monthly, your employer is borrowing money from you until the end of the month.

If you have 291,000 employees worldwide, as Starbucks does, and the average monthly salary is (for the sake of argument) 1500 dollars, then by the end of the month Starbucks is enjoying a 436 million dollar interest-free loan.

Then that also would be a benefit of hiring free-lancers. A regular employee usually gets paid every week or two, but free-lancers will often wait longer, say 6 to 8 weeks for pay -- and even that's from when the project is complete.

"More generally, I think this calculation demonstrates how providing financial services to a retail customer base is a great business."

Seems to be evidence of some sort of government failure. Lending to Starbucks through money markets (commercial notes, bank deposits and loans, etc.) requires going through several layers of heavily regulated intermediaries (banks, brokers, mutual funds and ETFs, etc.). Gift cards represent a direct, unregulated form of lending, which at least some people seem to prefer so much more that they are willing to accept a lower interest rate. Or, maybe regulations just shut those people out of traditional financial markets (the "unbanked"). It's like how government restrictions on gambling create opportunities for non-casino businesses to run promotional sweepstakes.

Add in customer loyalty, and also the fact that the Starbucks customer is, literally, addicted to the product, and the gift card game becomes even better.

I think that analysis, at least for SB, is incomplete. While I don't use their cards or their app personally I keep getting told by the baristas where I am a regular that I can get some additional discounts and rewards using them. If so those should count as "interest" on the loan.

While I suspect most here are largely yawning at the news flash for those that use the mobile app it seems you can link your credit card to it and get any rewards from the app and from the card so double bonus without any loan to SB at all.

Finally, some common sense on this thread.

Some people put money on these cards using credit card, so not always a benefit from avoiding a credit card fee.

Makes me think of the proliferation of payment services. Outside the US, there are dozens of mobile, electronic payment options: QR code, WeChat, LINE, etc. Some (most?) of these require keeping a balance in the system. There is fierce competition so I assume the business model is to grow the user base then extract fees from retailers, but I suspect relying on free money is always attractive.

Today's tired, recycled shtick: "Corporations are evil for.... let's see here... providing gift cards! I know they are immensely popular, but it's just another way you're being OPPRESSED, man!!"

Tyler, I suggest you set up a table outside the post office, and try to sell this angle. I know it worked great for President Lyndon LaRouche.

Evidently, Mr. LaRouche made some mistakes, but, all things considered, he has made a few food points.

"Here's a gift card. It's kind of like cash, except that you can only spend it on coffee and overpriced pastries at this one place.

Starbucks is profiting from people being too lazy to buy a real gift, or too chicken to just give cash. I can't blame them.

Standard economic analysis has giftcards are awful. Like saying you know better than them what they should spend money on. But OTOH, cash gifting defeats itself.. what's the point of giving each other fungible gifts, circularly? But the gift-giving instinct is not for homo-economicus, but homo-sapiens. Perhaps gift-cards distinguish themselves from cash enough to bridge that gap.

(I prefer disguised cash-gifts, like taking someone out to eat)

Any currency is stored value until it is used.

Got to get rid of that cash in my pocket.

Maybe I should by the new product Starbuck's is offering: StarBitCoin, the new stored value bitcoin, which is also stored value.

The interesting behavioral part of this is that the purchase of a stored value card is a commitment device not to go to Dunkin' Donuts when tempted.

I am also surprised that no one has raised reduced transaction costs as a value to both the buyer and seller: I don't have to fumble for cash, and the cashier doesn't have to give me change.

Just tap and go.

So the issue is: who should capture the value of reduced transaction costs when both parties benefit?

And, there is an externality as well: The faster you go through the line with a stored value card benefits me.

Maybe I should buy you a coffee for having a stored value card.

Or, maybe you should buy me a coffee for pointing this out.

What's even better than free (possibly never redeemed) loans is recurrent revenue. Which is why everyone wants (or demands) auto-renew.

Consider a Starbucks Club that charges $22./mo, but allows you to purchase up to $30./mo at the stores. Some customers will make a point of always using the $30., but assuming margins on most Starbucks products are high and these are items that otherwise wouldn't have been bought, how could they lose?

I always wondered how many of the dead are faithfully paying auto-renew charges before their executors get around to telling creditors that, yes, the person has died.

last month they were spotting demons now
the washington post/smith college church ladies have appointed themselves the judges of the final reckoning

I wonder how many unindicted Epstein co-conspirators will be at the funeral? I assume Tyler will be going at least.

Thiago mi amiga
you wanna watch the gov. of colorado slip in his own sophistry here
the dea fella has a position even a canadian social scientist could defend but instead of asking him about his position
polis prefers the sophistry and optics taught at his alma mater -princeton (47,000!/per anum)

Interest free debt or float, was the key to Buffett's fortune.

Nice part about gift cards is it's a way around the credit cards fees - if you don't buy the gift card with a CC.

We have a money back credit card. But they don't pay us our accumulated discount until year-end.
On the other hand the "points' we accumulate on our supermarket shopping can be spent on the next visit or delivery.

Should I view the credit card cash as interest-free loan from me to them? It seems perverse. the same sense that M0 is a "loan" to the government.

I'd see a PayPal balance more like a cash equivalent. The fact that it shows up on a balance sheet doesn't change that.

For gift cards, also keep in mind that in many cases, the cash value equivalent is purchased at a discount (e.g. bonus gift card value for cashing in credit card rewards), which offsets the lost liquidity. So not necessarily even a bad deal, depending on how quickly it's exercised.

I have somewhere between $100-200 of Starbucks money in my wallet. Part of my comfort level with that is caffeine addiction, for sure.

But still, a diversified portfolio is good, and it's merely 0% interest. As someone was trying to tell me a few days ago the "utility" of 0% interest has increased!

For Starbucks is called currency, discount coins or coupons however we name them. Al long as the discount coins are market priced, there should be no problem, the system devolves to a standard S/L set up. Inefficient, but valid over the complete depreciation cycle. I see no fraud or problem.

Paypal is another subject. They engage in monopoly pricing due to market share. For Starbucks the customer ha a choice, py cash or hold discount coins. There is no choice, often, for Paypal, especially in its early monopoly years.

The standard S/L is the tree trunk concept, depositors and borrowers observe the channel and know it is packed, and that makes it round generating the hologram effect. The Hologram effect is an extra line of symmetry about which Starbucks can reduce inventory flow volatility. That line of symmetry are their loyal customers.

Pretty soon our money will all be on a chip in our forearm or forehead, so all this will play out differently

Lot's of businesses (Amazon, etc) benefit from a similar dynamic with respect to working capital balances (i.e. customers are, in part, "funding the business" in a very significant way). Also, very capital intensive businesses that are growing (e.g. utilities) can use accelerated depreciation to bring down current year cash taxes, which results in large and persistently growing deferred tax balances which are essentially "interest free" loans from the US government (in some cases, e.g. for large utilities, running to multiple billions of dollars)

demonstrating once again that the business model is not always the business model

People who pay face value for giftcards are chumps. The actual value varies by brand, but starbucks can routinely be had for 15% off, in which case the value proposition of holding starbucks debt becomes more apparent.

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