How Does Starbucks Make Money?

I remember being in a Starbucks when my friend asked the barista, “so how does a cup of coffee cost so much?”

The Barista didn’t bat an eyelid.

“You’re not paying for the coffee, you’re paying to sit on the sofa over there.”

how does starbucks make money

Image source: Rebecca Krebs

Clever. I like what you did there. Except, although perhaps once upon a time you were paying for the seat, that’s definitely not the case anymore.

Stating the obvious

Coffee is a drug. A stimulant to be precise. It tastes good. It is social.

It is the perfect excuse for meeting a friend. Particularly when it is raining outside.

There is a simple proof that you aren’t going to Starbucks for the seat. People are buying the coffee and not using the seat. This is a fine example of a clever insight that is clever, but not that insightful. Coffee sells because people enjoy it.

Pricing

Near where I am in London, a grande is £2.35 (or $3.40), pricey huh? Like many things, London likes to show how special it is by being a little bit more expensive.

This table shows three medium sized drinks at Starbucks and four UK competitors. Only the Starbucks Americano grande is shown in pounds Sterling, all the others are the price difference. Prices change, and so will these differentials, between stores and between countries.

starbucks coffee price comparison

Starbucks sells the most expensive chain coffee in London. An Americano is an espresso with hot water. A latte is an espresso with steamed milk. The Starbucks hot chocolate starts as cocoa, water and sugar in a syrup, which is then mixed with hot milk.

What does this tell us other than McDonald’s is cheap?

Starbucks has pricing power. A consultancy Allegra Strategies estimated that 8p of the cost of a coffee is coffee. If you’re a fan, you might say that their coffee is better, but it is unlikely that that Costa is spending less than 7p.

Starbucks pricing premium over the other coffee shops will be almost pure profit.

Allegra also estimated that the packaging, like the cup and the stirrer, costs Starbucks 16p. But all these providers will be the same on this. I’m not going to say Starbucks is making money on the cup. An empty cup is worthless.

Latte is coffee and milk. Milk is more expensive than water. Will it be 30p more? Given that the supermarkets buy milk at less than 30p for half a liter, the margins on latte milk will be over 50%.

An excuse to stick to the coffee

Is cocoa more expensive than coffee? No. Cocoa is cheaper than ground coffee. Even though McDonald’s will be using cheaper ingredients, their pricing is likely to be more reflective of the costs of the underlying drinks. McDonald’s hot chocolate is 5% cheaper than their Americano.

Starbucks overall margins are 19%. I’d estimate milk (going from an Americano to a latte) and on non-coffee drinks (not just hot chocolate, but Frappuccino’s and teas as well) are hugely profitable to Starbucks. Throw in the size options, and its easy to guess that although the coffee gets you in the door, Starbucks is making all its money on the upsell.

I’m not going to go as far as saying the basic filter coffee is great value. It may be better value than a caramel macchiato, but Starbucks is making good money on the basics too. If it were the same price as McDonald’s, maybe then I’d be saying they’re losing money on the filter coffee.

The revenue numbers

In the September quarter of 2015, Starbucks revenues were $5.4bn. They don’t just have coffee stores, they do bags of roast coffee, k-cups and china cups too.

Starbucks is driving growth by trying to expand out of their core area, or day-part in the jargon, the morning, into food for lunch, afternoon snacking, and hanging out in the evenings.

They also have one of the most cutting edge loyalty schemes I’ve come across, where you can use an app to order your coffee in advance. By trying to introduce their own currency, or stars, they boost loyalty and cut out a payment cost. 21% of US transactions are now via the mobile app.

You want to hack Starbucks?

Guess what, in most Starbucks you can order a couple of shots of espresso, and add milk for free from the self-serve counter!

Also, although there may be 3-4 options regarding sizes for any given drink, typically there are only 2-3 quantities of coffee / caffeine involved. The rest is just hot water.

I wish I could say something simple like the grande and the tall cappucino’s have the same caffeine, but unfortunately not only does it vary by drink, it varies by region. Here is the caffeine content in milligrams for a caffé latté.

starbucks caffe latte caffeine comparison

Finally when it comes to buying a drink, one thing you should always remember is ice – you don’t want it. Less ice always equals more drink!

Want to know why Uber is currently over paying its drivers? Curious as to why Uber should fear driver-less cars? Or if you’re more interested in payments – then check out the differences between PayPal versus Alipay.

Yuen Lo

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