3 Companies that earn from different businesses

Once we see a company dominate the market we really don’t question where most of its income comes from. Not that there is anything wrong with having a unique business model which ensures that you have a steady flow of income from a totally different part of your business, it is perfectly legal. But to the common public it comes as such a shock!!

Originally this blog was just focused on one company, that is Starbucks. If you haven’t heard already, Starbucks actually holds more money than a lot of banks, thus it functions like a bank, in a manner of speaking.

While researching this phenomenon I stumbled upon other such unique business models! Somehow Apple is the 4th largest gaming company in the world without ever having made a game!

So without further ado, here are 3 companies that earn from different businesses.

1. Starbucks: -

Starbucks is synonymous with coffee to a large group of consumers thanks to their brilliant marketing strategies and their attention to customer service. However what most people don’t know is that Starbucks is also a bank….. kind of. Starbucks holds more cash than a lot of actual banks. This works because of the Starbucks reward program.

Starbucks allows you to pay for coffee through their app. The way it works is that you can add your money into the starbucks app and each time you make a purchase and complete a transaction using the starbucks app or starbucks cards, you earn twice the amount of royalty points which you can later redeem and get complimentary drinks.

And this seems to have worked out really well!! Starbucks customers are loyal to the brand and therefore are not afraid of keeping a decent amount of money in their starbucks account as they fully intend to use that money at Starbucks again. Starbucks’s “aggressive expansion” strategy compliments this as customer don’t have to look too hard to find a starbucks outlet nearby to spend their money.

Nearly 40% customers in the US and Canada pay using Starbucks Cards. A large percentage of banks in the US don’t hold more than 1 billion $ in total assets. But with Starbucks’s loyalty program Starbucks basically has 1.4 billion $ on loan with 0% interest.

So lets say you have a few gift cards on your starbucks app but for whatever reason, you don’t use any of it for a while, and they become void after their expiration date….. where does your cash go? Each year Starbucks recognizes that a portion of its stored value liabilities will be permanently lost. This is known as breakage.

Image source: Starbucks Final Accounts 2020

To put it into perspective Starbucks earned 144.6 million USD breakage in FY 2020. Breakage is recorded under Interest Income and other, net.

2. Apple: -

When you think gaming companies your mind goes to Sony, Nintendo, Ubisoft, EA games, and the list goes on. But when you sort them by revenue, you’ll see one really odd name on the list. We were left scratching our heads trying to recall when was the last time we played a game made by Apple?

So we went looking deeper into the rabbit hole and found out the sneaky way Apple earns from the gaming industry without ever making a single videogame.

Even though it is mocked by everyone, it is hard to ignore the fact that Mobile gaming is an industry which has proven to be more profitable than the PC gaming industry, console gaming industry and even the box office sales industry!

The market for Mobile games is valued at roughly 25.2 billion $ just in the US. The estimates go as far as 46 Billion $ worldwide.

Apple doesn’t make mobile games though.

But it does take a 30% cut of all its apps on the IOS app store. Games such as Fortnite and PUBG make millions of dollars in a day, and analysis of the app store shows that more than 25% of the apps are mobile games!

This strategy works as Apple devices are not too varied compared to android devices. If a gaming company has to make a game for an android device, it has to factor in a large variety of devices which may access their game.

This is a nightmare for any game developer. But when you look at Apple, their devices are very uniform and thus it is easier for game developers to make quality products for IOS.

Another huge factor is that the percentage of IOS users who are willing to pay for apps is much higher compared to other users. This attracts game developers towards Apple and makes it easier for Apple to enter into partnerships with many companies to sell their games on the app store.

3. McDonald’s: -

The third and final name we have is McDonalds. It also happens to be a fairly well known case of a company earning a sizeable amount from a different business.

Sure, the Mc-Lovely burgers and fries do contribute to the success of the fast food giant, but what really brings in majority of its earning is real estate. That’s right, McDonalds is a real estate company. Let us see how.

McD’s uses a unique way of handling their franchisee related activities. They provide access to its menu items, brand, operational infrastructure etc to anyone who are interested in running an outlet. But instead of collecting royalty charges they instead buy the property of the outlet and rent it out to the franchisees who are also paying for the equipment and décor of the store.

This allows McDonald’s to be one of the largest real estate holders in the world if measured by the assets they hold!

Source: McDonald’s Annual Report 2020

This snippet of McDonald’s Annual Report 2020 indicates the value of all its property and equipment which is roughly 41 billion $.

Usually if a restaurant is giving Franchisee rights to anyone, they collect a certain fee and bear the cost of the equipment and sometimes employee training as well. But McDonalds has its own formula which it claims has helped it generate enough revenue to maintain its performance levels which are considered a benchmark for many.

Conclusion: -

Companies position their brand image in our mind in such a manner that we hardly ever feel compelled to dig deeper into how they earn as much as they do. It may further interest you to know that Harvard and many other universities earn from Hedge Funds.

So even though it feels like a betrayal, is it really wrong or illegal for a company to earn from some other part of their business process?

Well, no. It all comes down to making a clever business model and successful branding. There is no particular name for this phenomenon as it is not that widely observed. As far as we could find, these major businesses were the only ones who have pulled off these clever business moves!!

Starbucks may function like a bank which allows its customers to withdraw in coffee not money, but at the end of the day, it wouldn’t be a bank without its coffee business.

Apple would not be collecting those 30% cuts from gaming apps if it did not have its expertly strategized ecosystem. And McDonalds would not be such a big real estate company if no one liked their burgers.

At the end of the day, it’s not cheating or lying or even illegal. It’s just good business.

- Aayush Ambegaoker