Starbucks’ most profitable consumers don’t get the company’s coffee, or anything else for that matter.
“Breakage,” or funds from unused gift cards, has soared in recent years. Since 2019, the total amount of breakage revenue has increased 51%, based on data from the Seattle-based coffee giant’s annual report. By contrast, total revenue is up just 22% over that same period.
Between corporate and licensed locations, Starbucks recorded $212.7 million worth of unspent money on gift cards as revenue in the company’s recently completed 2022 fiscal year. In short: people more or less gave the world’s largest coffee chain more than $200 million in free money last year.
This has started to attract some scrutiny. Last month, a labor coalition called Strategic Organizing Center (SOC) sent a letter to the SEC arguing that Starbucks should report this revenue quarterly—something Starbucks had done until 2018. That’s also when it started recording breakage as revenue, rather than income.
By changing the reporting of its breakage, SOC argues that Starbucks has been able to hide the impact that revenue has on its profitability. The coalition argues that the company would not have met investors’ expectations for earnings in both 2019 and 2021 but for that breakage earnings. The group says that this masks the company’s true performance.
We are skeptical that SOC, a coalition of labor unions, is truly concerned about whether Wall Street is getting a true picture of Starbucks’ performance versus consensus analyst expectations. And Starbucks in 2019 agreed to provide more disclosure about its breakage revenue after some questions from the SEC. Still, the breakage does indeed have an impact on the company’s profitability.
And it illustrates once again Starbucks’ remarkable ability to generate a profit. The company in recent years has profited off of consumers’ growing willingness to order cold beverages with profitable add-ons—drinks they create and then boast about on social media, providing the coffee giant with loads of free marketing.
Gift cards have long been a remarkable source of income for the company. Customers stored $13.5 billion on their Starbucks gift cards last year and there was $1.5 billion stored on those cards as of the end of the company’s fiscal year, Oct. 2.
“When a customer wants to give a meaningful, everyday gift, they’re choosing Starbucks,” CMO Brady Brewer told investors in September, according to a transcript on the financial services site Sentieo/AlphaSense. “Starbucks is one of the most gifted brands in the world, so much so that last December, Starbucks sold more gift cards than Apple, Google, Home Depot and Target, combined.”
But, as others have indicated, these gift cards are like giving the company an interest-free loan. In most cases, that loan encourages people to spend even more than they would otherwise at the chain. Typically, consumers spend more than the value of the card.
Yet, considering breakage—and the growing amount of it that the company is recording—that loan actually carries negative interest. So it’s like customers are paying Starbucks for the right to give the company money.