Starbucks®, the nation’s largest specialty coffee chain, said late Monday that it would transform into a bank holding company to strengthen its position amid current market turmoil.

Federal Reserve banking regulators said they approved its application because of the “unusual and exigent circumstances” roiling financial markets and the company’s interest in tapping up to $3.8 billion in government money. As a full-fledged bank, Starbucks would gain greater access to the Treasury’s bank bailout plan, a move that should allow Starbucks to continue to continue with its well-known “Starbucks Card” loyalty program.

The Starbucks card has become a fixture in the wallets of millions of loyal customers in the seven years following its launch. It has also emerged as one of the company’s hottest-selling holiday gift items. While most major retailers have offered gift and loyalty cards for years, few retailers have seen so many customers hang on to them as long and use them as often as they do at Starbucks.

“It’s unique in the sense that most retailers aren’t the kind where you have that everyday purchase,” said a spokesman for the National Retail Union, a Washington-based trade group.

During the prior holiday shopping season, the Starbucks Cards accounted for 12 percent of the company’s North American revenue stream. “The card has exceeded our expectations, absolutely! We had no idea that we would reach 12 percent,” said Starbucks’ marketing director.  Since November 2001, customers have reloaded their cards about 40 million times, bringing in more than $2 billion in revenue.

The Treasury official overseeing the government’s financial relief said that allowing the coffee retailer to convert to a bank was a “one-shot deal” that was in the best interest of taxpayers and government employees.

Federal Reserve regulators sped up Starbucks’ request because of the market turbulence, the importance of the holiday shopping season, and the company’s desire to apply for the government investment program, which has a mid-November deadline. Typically, the process can take at least 45 days; Starbucks got its license in about half that time.

Starbucks gift card operations made it “more or less a bank, anyway” said a Treasury official that did not want to be named because he is a regular Starbucks customer.  “This is just a formality, really, that will permit Starbucks to continue to build their deposit base, and serve their private-sector and public-sector customers,” during the critical holiday shopping and regulatory intervention season.

Neel Kashkari, assistant secretary of the Treasury, said the move was “necessary to maintain the stability of the financial system. All of us here, as well as in New York, are working late nights and weekends – we get hardly any sleep.  The only thing that keeps us going is the coffee.  For me, a Grande Caffè Latte made with 2% milk – 16 ounces, 190 calories – is just the thing to keep me sharp through the night.  I believe that the Fed[eral Reserve] had to open 5 new [Starbucks] kiosks inside their building since last April, just to keep their staff all buzzed and alert.”

The company’s announcement came as Starbucks reported flat revenue and a 98 percent decline in profit over the fourth quarter of 2007, which were dragged down in part by charges related to its turnaround plan that includes the termination of 1,000 employees. Starbucks reported a modest profit of $5.4 million, or a penny a share, compared with $158.5 million or 21 cents a share, in the period a year ago.  Revenue rose 3 percent, to $2.5 billion, up slightly from $2.4 billion a year ago.

According to company representatives, Starbucks customers are unlikely to notice any changes, once they get used to the “tastefully designed green-and-black metal detectors featuring the company logo that will be placed just inside the doorways of every Starbucks retail outlet.”  The company had not yet announced how it will deal with security at Starbucks locations that currently operate inside independent retailers, such as Barnes and Noble. 

“We may have to nationalize the booksellers, too,” Mr. Kashkari conceded. “But I wouldn’t lose any sleep over it.  After all that we’ve done so far – to preserve the integrity of the US Financial system – government control of booksellers  and newspaper vendors will be the least of our worries.” 

Representatives of Dunkin’ Donuts, the other major US coffee chain, did not respond to several e-mails asking if they also planned to seek a national bank charter.

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I used to work with numbers for a living, but now I’m amazed at the jolt I get just by reading each morning’s newspaper as I look for my next job or ‘idea’.   Till next time.

 
AP/MSNBC -  Starbucks cashes in on loyalty card, 6 Dec 2006.

B. Stone, The New York Times – Starbucks Profit Down Sharply on Restructuring Costs, 11 Nov 2008.
E. Dash, The New York Times – American Express to Be Bank Holding Company, 11 Nov 2008.

 STARBUCKS®  
Starbucks, Our Coffee: Starbucks® Anniversary Blend – Extra Bold.

Manhattan Transfer, The Very Best of The Manhattan Transfer -  Java Jive, Rhapsody/Rhino Atlantic, 1994.