The Gift Card Economics Edition

On stored value, shadow loans, and consumer brands

One from the archives today. We’re back tomorrow. -Colin (CJN)

Colin here. Walk down an aisle in any CVS and you’ll see a huge wall of gift cards. Often bought when you don’t have the time or energy to think of a better present, they are a mainstay of modern life, with Americans purchasing around $171 Billion worth in 2019. 

They are also incredibly good business for the brands that issue them. According to a deep-dive on the subject in the Hustle, “often, they go unused — whether we lose them, forget we have them, let them expire, or fail to spend the full amount that was gifted. And when that happens, there’s only one winner: The companies that sell the cards.”

Indeed, around 10 to 19% of gift card balances go unredeemed, and 6 percent are never used. If I buy a $50 Amazon gift card and the recipient loses it, Amazon is the beneficiary. We won’t go into the rabbit hole about the types of accounting practices around these products, but suffice to say, non-redemptions benefit the businesses immensely. It is free money. 

Why is this interesting? 

You likely have the Starbucks app on your phone. It’s consistently in the top ten apps in food & beverage and in the top 100 of all apps in both the iOS and Android app stores according to SensorTower. They do a remarkable job in terms of gamification, to allow people to order ahead, and even drop little bonuses like free music. As far as consumer apps go, it is pretty well thought out. Until recently, you had to “top up” your balance in the app, rather than just directly linking your card. Turns out there was a big strategic reason for this.

In a remarkable deep dive from last year, JP Koning explains

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.

On the balance sheet, and again, not falling too far into the accounting wonk world, Starbucks can recognize something called “breakage” which is stored value liabilities that are permanently lost. According to the piece, “In 2018 the company recognized $155 million in breakage, around 10% of all stored value balances. Wow! Starbucks already pays just 0% on its debts to customers, but add in breakage and that equates to a roughly -10% interest rate!”

So, simply put, Starbucks has $1.6 billion dollars in free “loans” from consumers that like to make sure their balances are topped up for that Pumpkin Spice Latte drive-through visit. The company recently updated the app to allow people to directly link a payment card, but you’ll notice you get 2 stars for every dollar if you use their other “preferred” method that gives them a healthy float every year. Now you know why. (CJN)

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Thanks for reading,

Noah (NRB) & Colin (CJN)

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