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Starbucks Gift Cards Are Kind of a Scam—Here's Why

You're better off paying out of pocket (you sort of already are...)

You may not believe in ghosts but Starbucks' financials sure do. The massive Seattle-based coffee firm made over $200 million worth of revenue this year thanks to an incredibly large contingent of phantom customers due to unused gift cards.

Whether as a corporate giveaway, stocking stuffer, or casual everyday gift, everyone has been given a Starbucks gift card at some point—but a shockingly large percentage of people apparently forget to ever redeem their coffee cash.

Starbucks attributed an astounding $212.7 million in revenue for the 2022 fiscal year to "breakage," or funds from unused gift cards. That's a whole lot of money hiding deep within countless wallets and between sofa cushions.

Notably, breakage has increased mightily in recent years at Starbucks; in 2021 the coffee brand reported over $180 million in unclaimed gift card funds. Since 2019, a year in which Starbucks reported $140.80 million in breakage revenue, the coffee behemoth's total breakage revenue has increased by 51%.

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Starbucks gift cards have always been a popular gift, especially during the holidays. Customers collectively spend billions on Starbucks gift cards each holiday season. What is new, however, is the recent uptick in breakage. The trend has become so prominent that just last month a labor coalition called Strategic Organizing Center (SOC) reached out to the SEC with a formal complaint regarding the impact of breakage revenue on Starbucks' overall profitability.

The SOC is made up of various unions working to promote unionization among Starbucks employees. Starbucks has been unwelcoming toward internal unionization efforts among employees, to put it mildly. When it comes to breakage, the SOC argues Starbucks isn't being as transparent as it could be about revenue driven from unused cards, or the impact of COVID-19 for that matter. For instance, the pandemic almost certainly made it more difficult for many people to visit their local Starbucks branch and spend a gift card.

The SOC also argues Starbucks should report on breakage revenue on a quarterly basis— something the coffee brand has not done since 2018. On a related note, that's the same year Starbucks began classifying breakage as "revenue" as opposed to "income." These changes in reporting are unfair to investors, the SOC posits. The labor coalition claims Starbucks would have fallen short of investors' expectations in both 2019 and 2021 if it wasn't for breakage earnings.

bunch of starbucks cards

"Starbucks discloses so little about breakage that this significant, and likely material, aspect of Starbucks' financial health is a virtual black box for investors," said Michael Zucker, the SOC's executive director, adding that the use of unredeemed credit "could be masking a failure to meet earnings expectations, or even allowing the company to double-count revenue."

In all fairness to Starbucks, the SOC isn't exactly an unbiased party. That being said, Michael Halen, a Bloomberg Intelligence restaurant analyst, did call it "somewhat surprising" that Starbucks provides notably fewer details than some of its peers regarding how it calculates and processes unspent credit. Breakage represents "a very large percent of their transactions and total US sales," he added.

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All in all, the gift card business has certainly been kind to Starbucks. Just last year consumers placed $13.5 billion on Starbucks gift cards, and $1.5 billion remained stored on those cards by the end of the fiscal year on October 2nd.

Starbucks gift cards never expire. Still, the coffee brand claims that according to historical redemption rates, a portion of those unclaimed funds will never be redeemed, and are thus "recognized as breakage over time in proportion to stored-value card redemptions." Per Starbucks' latest annual filing, unspent redemption patterns vary by market.

Does all of this mean you should leave Starbucks gift cards off your holiday shopping list this year? Not necessarily, but you may want to remind your loved ones to use their gift by Valentine's Day.

John Anderer
John Anderer is a writer who specializes in science, health, and lifestyle topics. Read more about John