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In the modern business world, companies don't just stop at providing products and services but also seek ways to control cash flow to achieve maximum profits. Successful businesses are often those capable of managing cash flow effectively and creatively.
In fact, implementing the core business activities of fast-moving consumer goods (FMCG) companies or entertainment, travel services… sometimes generates even less super profits than their “underground banking” activities.
Looking at how a commercial bank operates, they hold customers' money and pay interest. Meanwhile, these FMCG companies sometimes "disguise" themselves as banks and pay no interest whatsoever for holding customers' money. In other words, the company generates profits by holding the prepaid money that customers pay in advance in the system.
This week's Viet Hustler article will highlight specific examples of companies: Starbucks, Carnival, Naked Wines, Delta and Travel + Leisure, thereby unveiling the tricks companies use to embed financial strategies to hold onto customer cash flow.
(Note: Condensed translation from the original article by author Marc Rubinstein with additional data supplemented from Viet Hustler)
1- Starbucks: Bank “disguised as” a coffee shop, customers voluntarily deposit 1-2 billion USD at 0% interest
If McDonald’s is seen as a real estate business model, Harvard resembles a hedge fund disguised as a school, then Starbucks is also quietly operating like a bank without anyone noticing.
Starbucks Rewards – Starting from gift card reward points
One of Starbucks' biggest turning points in building the technology platform and membership card system: Starbucks Rewards.
The membership card allows users to load money for purchases at Starbucks stores.
Customers can spend money on the card and accumulate points for free drinks.
Consumers can access free wifi and get coffee refills.
About 44% of transactions at Starbucks currently through the membership card program.
During the Covid period, this figure reached 80%!
According to statistics, Starbucks Rewards members spend 3 times more generously than regular coffee drinkers.
From a consumer perspective, the Starbucks Rewards program resembles a prepaid + payment points accumulation + user information storage form.
However, from Starbucks' perspective, this program enables easy appropriation of capital at 0% interest!
Public form of capital appropriation
Many customers have not hesitated to “deposit money” directly into the Starbucks app, making it the most popular restaurant rewards app in the industry.
…revenue through the app accounts for up to 40-50% of Starbucks' total revenue.
41% of users in the US and Canada pay with Starbucks card.
In the Q3/2022 report, Starbucks publicly disclosed 1.7 billion USD in Starbucks Rewards accounts!
Meanwhile, more than 3,900 banks in the US (~85% of banks) have total assets under 1 billion USD (according to FDIC).
E.g.: Customers Bank (780 million USD), Green Dot Corporation (560 million USD)….
Starbucks is holding much more cash than quite a few banks!
Even about 10% of deposits are often forgotten/not used, creating a "windfall" revenue source for Starbucks.
The balance of gift cards not used by Starbucks customers is also called breakage.
In the 2017-2019 financial reports, the forgotten deposits were respectively 104.6 million USD, 155.9 million USD and 125 million USD.
In September 2023, the breakage balance recorded up to 215 million USD, equivalent to 13% of the unused gift card balance.
Banks withdraw money with …coffee
The key point here is: Starbucks does not allow refunds after customers have loaded money into the account.
Money loaded into the Starbucks app can only be withdrawn with …coffee.
…therefore, Starbucks does not need to store cash at all (like bank reserve) to guard against bank run risks like banks do.
… unlike PayPal: still required to hold cash reserves to prevent customer withdrawal risks.
With 0% interest loans, Starbucks can fully use them to invest, expand business operations, and earn additional profits without sharing with customers…
→ Starbucks can openly and legally appropriate consumer capital!
Although Starbucks needs to launch additional promotions/discounts/rewards for customers, the company still saves on discount costs if customers pay via Visa or Mastercard.
Estimated at ~300 million USD/year.
2- Carnival Cruise Lines: Rising from customer deposit funds
Starting from a successful sea transportation business partnership
In 1966, Ted Arison invited Knut Kloster to establish Norwegian Caribbean Lines, a cruise business company.
The business succeeded quickly thereafter:
That Christmas, the Bahamas cruise on the Sunward ship had up to 540 passengers.
The business was a big success in Miami, with Sunward cruises selling out quickly.
On Ted's side, he was responsible for operating hotels, entertainment, marketing, and travel agents.
But soon, Ted discovered a financial loophole that could be exploited.
Loophole in business cash flow
At that time, when information still relied on paper and landline phones, customers often booked cruises at least 1 year, and Ted collected the deposits.
When the trip ended, Ted would send the money to Oslo, Norway….
… but before that, the money would be held in his account for up to 1 year.
Due to business growth, this amount quickly reached millions of USD!
Ted quickly invested this money into cargo ships, real estate,… to generate returns.
Conflict and end of partnership
When the off-book investment activities were discovered, Kloster was not pleased at all.
In 1971, the audit discovered a shortage of 7 million USD of company revenue, equivalent to more than 2/3 of annual revenue.
It also took several years thereafter for the court to rule that Ted return 60% of the money he had "embezzled".
Meanwhile, Ted closed his bank accounts in Miami and went to Europe to establish his own company Carnival Cruise Lines.
In fact, today's cruise lines still benefit from the cash flow "float" from customer advance deposits, but instead of investing in low-liquidity assets, the company usually invests directly in business operations.
As of the end of February, customer deposits on Carnival's balance sheet reached 7 billion USD, enough to invest in 1/6 of property and equipment (mainly ships).
3- Naked Wines: Points program for "angels" customers
Naked Wines is a wine business operating in the UK, US, and Australia with nearly 800,000 customers.
However, in reality, Naked Wines also operates like a bank when using wine as a form of savings.
How Naked Wines works:
Not only as "gods", customers are also called "angels" if they participate in the program wine savings of Naked Wines.
Specifically, each month, the "angels" prepay money into their Naked Wines account and receive discounts on subsequent wine purchases.
→ This model allows Naked Wines to have advance capital to purchase high-quality wine for customers.
As of the end of March 2023, "angels" customers had deposited £67 million on the balance sheet (equivalent to ~£78/person).
Trouble from declining customer numbers
After Covid, many "angels" who signed up in 2020 and 2021 canceled their memberships.
Customer repurchase rate dropped from 88% to 73% over 6 months, as of March 2022.
The number of "angels" began to decline after peaking at 964,000 in March 2022.
→ Customer decline, while the company accumulated too much inventory for this program, and the company's liquidity position was also quite poor
Fortunately, Naked Wines overcame the most difficult period, thanks to a stable base of loyal customers.
When the company was growing rapidly, the account withdrawal rate fluctuated from 20-25% over 6 months.
However, this rate dropped to only about 10% during the period when the company faced financial difficulties.
4- Some other case studies
SkyMiles: Growth driver for Delta's revenue Air Lines
Delta's SkyMiles program is one of the largest membership programs in the world….,
…. with 25 million members generating 6.6 billion USD 2023 revenue, making an important contribution to the company's profits.
The program allows ticket-buying members to accumulate reward points based on flight segments for the next service use.
At the end of last year, Delta had 8.4 billion USD unused reward points.
→ Airlines benefit from selling reward points to partners/customers by receiving cash immediately upon issuing the points.
Travel + Leisure Co: Lending in the form of timeshare business model
Travel + Leisure Co is a company specializing in business under the “timeshare” model for American tourists.
Example of the timeshare model:
Travel + Leisure Co sells the “product” of the right to use an apartment for 7 days in June each year to travel operators and tourists (timeshare units).
And this time period is fixed for 20 – 30 years of use.
Customers can use this time for their vacations or rent it out.
However, this is an expensive form of travel investment,
Estimated average cost per contract is about 24,000 USD + annual maintenance costs 1,170 USD.
Travel + Leisure Co also operates like a mortgage lending bank:
Customers only need to pay a down-payment of 10%, while Travel + Leisure Co allows them to pay in installments with some interest.
→ Therefore, in 2023, 74% of timeshare transactions were financed by Travel + Leisure, with 56% in the form of long-term loans.
In 2023, interest from providing this credit contributed 427 million USD to the company's total revenue, accounting for 11% of total revenue.
Typically, such companies do not directly provide credit to customers (but through other financial lending institutions) — due to concerns about controlling overdue debts and debt collection.
But Travel + Leisure Co. is an exception. They themselves control the creditworthiness (credit worthiness) of customers.
Notably, Travel + Leisure customers' FICE scores are usually quite high
Similar to an insurance company, Travel + Leisure also investigates users' credit history before lending, based on FICO score (credit risk assessment score).
→ The company's customers' FICO score reaches 739 points (2023), compared to the national average ~717 points.
Conclusion
It can be seen that, although the forms of capital utilization differ, companies like Starbucks, Carnival Cruise Lines, Naked Wines, Delta, or Travel + Leisure share the common characteristic of either using customer cash flow for their own financial strategies or earning additional profits from providing credit to customers. Thus, they become 'hidden banks' in their respective fields.
Typically, the world's largest coffee chain Starbucks - with over 34,000 stores worldwide, but few realize that Starbucks is operating as a 'secret' bank. Thanks to the rewards points program, Starbucks always has 1-2 billion USD in 'deposits' at 0% interest, and customers can only withdraw by… coffee. The wine company Naked Wines and the airline Delta Air Lines also use this points accumulation model.
Or with other companies like Carnival Cruise Lines - the sea transportation company used advance deposits a full year ahead for vacation trips to invest, real estate business,… And Travel + Leisure is also operating a timeshare model for vacation apartments accompanied by disguised mortgage lending.
This not only enhances liquidity or novel investment profitability capabilities of the business, but also creates stability and flexibility in dealing with market fluctuations. In modern business, whoever masters cash flow will have opportunities for sustainable success.
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