Surprising right?
The proposition that Starbucks was selling coffee and McDonald’s was selling burgers up until yesterday and now suddenly they have turned into something completely different.
But this is not true.
Starbus is a bank and McDonald’s is a real estate business for a long time while we were busy munching burgers and slurping coffees.
If you truly believe that these companies are making their billions just by selling coffees and burgers to their customers, then you are in for a surprise my friend and a big one at that.
The marketing campaign of Starbucks and Mcdonald’s is designed to advertise coffees and burgers. Because the other aspects of the business exist atop the millions of customers they have accumulated through their public persona.
The fact that people are not aware of the other side of their business is not just some coincidence. It is part of a meticulously crafted strategy to build a multi-faceted model of revenue.
A point to be acknowledged is that we do not mean Starbucks is a bank in a conventional sense, but the deposits with Starbucks are greater than some of the biggest banks on wall street.
Similarly, McDonald’s might not have the structure of a real estate business but owns more real estate than most the real estate companies in the world.
These secondary businesses were the aftermath of their efforts to create a brand and accumulate a huge customer base and then leverage their customer base to create something more than the sum of their parts.
What’s interesting about Starbucks and McDonald’s is that they are beating companies from other sectors in their own game without even consciously trying to beat them. It’s like winning a race they weren’t even a part of.
And that’s what makes it worth the attention we spared on the topic. So let us dig deeper and find out more about our favorite brands and their secret shenanigans.
Starbucks
Before leaning into the banking arm of the company, let’s know the company a little more by analyzing its origin and history.
Origin and History
When Starbucks was born, it was nothing like the coffee chain it is today. It was a company that sold its customers high-quality coffee beans and tea leaves. Jerry Baldwin, Gordon Bowker, and Zev Siegl, three friends from the University of San Fransisco who were passionate about coffee and tea, started Starbucks in 1971 inspired by Alfred Peet.
Alfred Peet was an entrepreneur who imported high-quality Arabic coffee seeds into America and sold them at his store Alfred Coffee and Tea in Berkeley, California.
The three friends were taught about coffee roasting techniques by Alfred that helped them roast their coffee beans and experiment with other ingredients to devise new flavors.
It wasn’t until 1982 when Howard Schultz, a sales executive from a Swedish company that supplied drip coffee makers to Starbucks joined the company as Head of Marketing when Starbucks began to change.
Howard Schultz visited Milan in 1983 to attend the International Housewares Show on behalf of the company. When he noticed the flourishing coffee stores of Italy, he was inspired by the idea and proposed to convert Starbucks into a coffee brewing restaurant chain.
But the idea was opposed by the owners and Howard Schultz left Starbucks in 1985, to implement his idea through his startup which turned out to be a huge success.
In 1987, Baldwin and Bowker decided to sell Starbucks and Schultz did not hesitate to acquire the company through his startup and merged them to create Starbucks as we know it today.
Now that we know how the company was born, let’s discuss how Starbucks is a bank.
Starbucks Card Nexus
The entire banking scenario came into existence due to the launch of the Starbucks card in November 2001. The Starbucks card was launched for its regular customers to collect stars on every purchase.
These stars could be used to avail free drinks or snacks. The card was a huge success and was adopted by millions of users within the first year. The total amount deposited into the Starbucks card in its first year crossed $2.4 billion.
The popularity of the Starbucks card has been growing ever since. In 2013, 2.4 million Starbucks cards were activated in a single day. And when Starbucks launched its mobile app in 2011, to make it easier for its customers to order and pay using the app itself that came with a digital Starbucks Card, the transactions using the Starbucks card skyrocketed.
The entire premise, that Starbucks is more of a bank than a coffee shop is tailored around the fact that the money deposited into the Starbucks Card can only be used to make purchases from Starbucks and cannot be withdrawn.
This essentially means that Starbucks has access to all the funds sitting in the Starbucks Cards of the customers and they don’t have to worry about repaying the amount because the money cannot be withdrawn and can only be used for purchase. Starbucks can use the funds in whatever way they see fit without worrying about any financial regulations, unlike banks.
Starbucks has access to an interest-free credit-line loan from its customers. It doesn’t even need to repay the capital on the loan because at some point the money in the cards will be used to buy something from their shops. How cool is that!
Look at it this way, the money can be used by Starbucks to invest in interest-generating assets or can be directly used to fund the expansion of the company.
And we are not talking about puny amounts here, the unused deposits in Starbucks Cards in 2018 stood at $1.2 billion. This directly adds up to the cash flow of the company and provides it with a billion-dollar credit line with zero interest and no capital repayment.
Just imagine using the customer’s money to offer them a better experience and not worrying about the outcome because even if it does not work, it was not their money in the first place!
And that’s not the only perk Starbucks Cards offers, every year Starbucks makes upwards of $100 million in the form of abandoned, unused, and forgotten funds that are calculated using historical data.
This process is called Breakage in the industry.
McDonald’s
One of the biggest fast-food chains in the world, McDonald’s owns more real estate than most real estate companies. And the secret to this lies in its origin when Ray Croc designed a financial model for the company that changed the way McDonald’s looked at itself.
Origin and History
The concept of fast food was introduced to the world in the early 1920s. The idea was to offer delicious food to the customers without hanging them on waiting for long. But the idea lost its value as fast food gained popularity.
The fast-food menu got more complex to offer variety to the customers sacrificing one of the key features of fast food, time.
This was first observed by brothers Maurice and Richard Mcdonald when they saw long queues at drive-throughs. And realized how this was affecting the customer experience and how fast food had become the problem it was created to solve.
Maurice and Richard McDonald launched the first-ever McDonald’s stand in San Bernandino, California in 1948. A restaurant that offered Hamburgers and Milkshakes at half the price of its competitors.
Mcdonald’s ditched the idea of having waiters at the restaurant and instead went for a self-service counter. It also prepared hamburgers in advance, keeping them under High-powered heat lamps to keep them warm.
These strategies helped Mcdonald’s get ahead of its competitors and reduce its costs to offer Burgers at half the price.
The turning point for McDonald’s came when Ray Croc visited McDonald’s in 1954. Ray Croc was a salesman from the company that supplied milkshake machines to McDonald’s. Croc was surprised by how such a small restaurant could sell as many milkshakes as it did.
When Croc visited McDonald’s, he was fascinated by the Business model of McDonald’s and soon recognized the potential of the company. Croc bought the rights to franchise McDonald’s across the country.
And thanks to the genius Business Model of McDonald’s, the number of franchises started growing by the day and although this sounded like good news, it was not.
Croc was in a lot of debt because McDonald’s was not making a lot in terms of profits by selling burgers for 20 cents and franchising required a lot of capital for the real estate.
That’s when a lawyer told Croc that he did not understand the real business he was in. The real business of McDonald’s was not selling burgers, it was real estate.
McDonald’s-the Real Estate Mogul
After Ray Croc realized the true nature of the business, Croc and Harry Sonneborn designed a new business model where McDonald’s would own the land where its franchises built their restaurants.
Croc launched a new company called McDonald’s Corporation in 1955 with Harry as its CEO. The company started buying out land and leasing it to franchising partners.
The company was a huge success. It was minting a lot of money through the lease agreements and went on to acquire the restaurant business from Maurice and Richard McDonald six years later.
The real estate business grew exponentially with the expansion of McDonald’s across 100 countries with more than 30,000 outlets around the world by the end of the year 1999.
The reason why McDonald’s earns a lot of money today is not that it sells a lot of burgers across the world, but because McDonald’s owns most of the land or buildings where its restaurants are built and the franchises pay rent to Mcdonald’s.
McDonald’s Corp. charged a markup of 20% in the initial years and later increased it to 40% with a provision in the lease agreement to charge an extra 5% markup in case the outlet was doing well( Which it did, to be honest).
And it’s not your fault if you believed that all McDonald’s did was sell burgers across continents, because that was what you were meant to believe. McDonald’s advertises its burgers because burgers are the reason why they can collect such high rents from their franchises.
As of 2020, the real estate business of McDonald’s is worth $53 billion. This means that even if McDonald’s stops selling burgers tomorrow, it is not going out of business.
It can always find new tenants and collect the rent as it used to, now that it has expanded to around 40,000 locations around 119 countries. And this makes McDonald’s more of a real estate company and less of a burger vendor.
To be honest both of these secondary aspects of Starbucks and McDonald’s business were hiding in plain sight. These companies were never hiding them, it was just that these aspects of the business were embedded deep into their business model.
Not everyone would dig into the business model of the company that they bought coffee or burger from.
But that’s not an issue anymore because now you know everything and the next time you walk into Starbucks or McDonald’s, you will look at them through a new lens. A lens of curiosity.
Conclusion:
We hope that this article on How Starbucks is a Bank and McDonald’s-a Real Estate Business helped you learn something new and exciting.
This article was intended to quench the inquisitiveness of people who are always on the lookout for something new to learn.
And if you have reached this part of the article then Congratulations! You are one of those people and we cherish you as our reader.
Did you know that there is something similar to the Business Model of Dominos?
If you wish to read about that as well then do let us know in the comments below!
