Starbucks doesn’t require an introduction. It is the largest coffeehouse chain operating in more than 70 countries of the world. Founded in 1971 by three friends who met at the University of San Francisco, Starbucks was originally launched to sell high-quality coffee beans. However, today the company brews and sells premium quality hot and cold drinks, whole-bean coffee, beverages, snacks in over 30,000 locations over the world.
Ever wondered how much and how does this world’s largest coffeehouse chain make money? Yes? Then let’s delve deep into how it makes money, how much it makes and what is the business model behind its success. So, shall we? But before that, let’s have a quick look at its history to understand more about its business model.
Short History of Starbucks
It’s no wonder that Starbucks has become a synonym for premium-quality coffee. Along with coffee, it offers a wide assortment of products such as hot and cold drinks, full-leaf tea, loose-leaf tea, fresh juices, pastries, latte, Frappuccino beverages, salads, yogurt etc. It charges premium prices for its products for the quality it offers and this is why it has a regular higher-end customer base. However, Starbucks isn’t launched to offer these services when the founders started it. The founders opened Starbucks to sell high-quality coffee beans.
It was on March 30, 1971, in Seattle, Washington, the history of Starbucks began. Jerry Baldwin, Zev Siegl and Gordon Bowker opened the first Starbucks that sells coffee beans in Seattle. Although the name Starbucks remembers the chief mate in the book Moby Dick, it has nothing to do with it and it was just a coincidence.
In 1980, the founders sold Starbucks to Howard Schultz who made the coffee-bean retailer into a coffee shop serving espresso-based drinks. Schultz aggressively expanded the company with franchises in different locations despite downfall. However, in the California market, the company brand gained immense prosperity. Starbucks buys green coffee beans directly from growers.
The company went public in June 1992. During that time, it had over 140 outlets and posted a revenue of $73.5 million and its market value was $271 million.
Although the company innovates new products and services, it has never compromised on the quality of its products and services since its inception. For instance, it keeps innovating new tastes and products which people love. It launched the Starbucks app, offered customers to sit and work even without ordering. Again, although the service doesn’t bring money directly, it paid off well as more customers got used to the brand. In the same way, its app made over 10% in-store purchases in July 2013.
Okay, enough said about its history! Let’s quickly get into the business model of Starbucks without any ado.
Starbucks Business Model
As you can see Starbucks offers a variety of hot and cold drinks, espresso coffee, snacks yet it is uniquely different from other coffee shops. It directly purchases coffee beans from growers, coffee beans are roasted by trained experts, brews coffee using automated espresso machines, and treats its customers and employees equally well ensuring safety and experience.
It partners with growers, coffee machine makers, and suppliers to channelize its business. Despite all its business model is quite simple. It rakes profits by delivering the utmost quality in its products and services. Its employees are well trained to provide outstanding customer service, it offers unique style spaces to awe its customers. However, apart from selling coffee and snack products in-stores and online around the world, it also uses grocery stores, convenience stores, warehouse clubs to sell products in some locations.
With a giant network of stores across multiple locations, Starbucks is misunderstood as a franchise model. But it isn’t. It adopted a mix of franchise and own stores unlike McDonald’s. Over 51% of restaurants are owned by Starbucks and 49% are its franchises, which means it holds control over operations and strategies of the majority of stores.
Okay now getting into its actual business model, Starbucks business model depends on 5 segments. Let’s discuss them.
Starbucks sells coffee and its other products to anyone who wants to have them. However, its key targets are office clients and high-end customers as it charges premium prices.
Starbucks is uniquely different in offering its products and services. It offers personal assistance to its customers, unlike most other brands. The employees are trained to make and serve orders to customers and offer any help they need. Thus they maintain a smooth and strong relationship with them and build loyal and repeat customers.
Innovation & Brand Image
It’s no secret that Starbucks is a powerful brand that drives several customers to its business. However, the brand image alone can’t bring billions of profits to a company and Starbucks knows it well. Starbucks provides ultimate convenience for its customers to order products and avoid lines at stores. Besides, it offers access to a wide range of products that spoil customers with its innovation.
Starbucks’ has become successful due to its successful operations right from research & development, production to marketing and supply.
It buys coffee beans grown under professional guidance, innovates new products with them, and serves them to customers.
Starbucks aims to deliver premium quality coffee, snacks and other products to its customers. In the same way, it charges premium costs that include store operation, administration costs and variable expenses.
How does Starbucks Make Money?
Now that you have seen the business model of Starbucks, let us see how it makes money.
Starbucks makes money primarily by selling its products over different channels.
Present in over 30,000 locations, Starbucks has both its own and franchise stores. However, as said the majority are Starbucks owned stores and they bring over 79% revenue to the company.
It makes money from selling premium coffee, whole bean coffee, food items and premium teas. Moreover, as discussed, Starbucks coffee is not only sold online or in-stores, people can buy them from grocery stores and convenience stores. Thus Starbucks is able to serve its customers from anywhere in the world. However, again, the largest portion of its revenue comes from in-stores which is why it inspires people to visit Starbucks restaurants.
Starbucks in Numbers
The American multinational coffeehouse chain reported net revenue of $26.1 billion in 2019. It sees a year-over-year growth in revenue for the past decade.
The premium quality products and outstanding services of the company brings a good deal of profits. In 2019, Starbucks’ highest portion of revenue ($16.65 billion) came from the Americas whereas the international stores brought $6.19 billion.
Coming to funding, Starbucks has raised $900 million in 2 funding rounds funded by Pershing Square Capital Management and Upfront Ventures.
So, this is how Starbucks makes money. The business model of Starbucks pays well as the company constantly grows its customer base who agree (and love) to pay whatever Starbucks asks for. Again, the prices are non-arguable as it offers superior quality products that no other brand offers. Thus, promising the premium-quality, building robust customer relationships, and innovating new products, Starbucks generates huge revenue for the company.