Money and Models Epilogue: In Defense of Capital One Cafes

The whole point of a business is to make money. This series will give a basic crash course in the language of business (accounting), and how various business models work.


Capital One Cafes


Corporations are evil and baby boomers have poisoned the economy, blah blah blah. Today, we’re going to talk about coffee and credit cards.


A recent business move that has drawn a lot of flak lately is the Capital One Cafe ( This has not been a popular concept on the internet. The concept of a big, evil bank (all banks are evil, duh) that’s trying to copy millennial trends has rubbed the wrong way for a lot of people. It’s seen as a stupid business idea thought up by a bunch of old executives that’s doomed for failure.



I don’t think that’s the case. While large corporations do make mistakes, I don’t think this move is one of them. That’s why I want to dissect the model here.


To recap, Capital One has made a partnership with Peet’s coffee, a coffee-shop chain that’s very popular in the Bay Area. A Capital One Cafe is essentially a Peet’s coffee with the sponsorship of Capital One, and a teller or two in the corner. These Cafes have now spread sparsely across the country in multiple states.


Stepping into a Capital One Cafe, the first thing I noticed was that it looked like an above average coffee-shop, and had very little resemblance to a bank. There were conference rooms available for everyone to use, everything was well kept, and the tables were very spacious. In the corner was a teller and a large tv-screen saying how I could start a checking account in 5 minutes, and in another corner was a no-fee ATM for Capital One customers. I ordered a mexican cappuccino from the counter during “happy hour”, which means that I got my drink for half-off the $5 price, paying only $2.50. I was told that if I paid with a Capital One credit card at any time besides happy-hour, I also could have gotten my drink half-off too. If I paid with a Capital One credit card during happy hour, I would have received my drink for free. Good vibes. I sat down to do some work on my laptop(read: browse reddit). A half hour later, it was lunchtime, and an employee told me that they were giving a free burger lunch to every person in the building. I left the building feeling like a spoiled, but content pig. If I knew that a coffee shop would consistently provide me this experience, this would definitely be my go-to place.


Free Food provided by Capital One


Coffee shops are very profitable enterprises. A grande cappuccino at Starbucks (my go-to drink) costs 31 cents to make, and sells for $3.65. This is an insane profit margin of more than 90%. It’s also probably a fair estimate to say that Peet’s pricing model is similar, and also has a very good profit margin. Coffee shops are also social hubs. People go to coffee shops to do work on their laptop, talk to friends, or go on dates. They tend to be bustling places that make a lot of money.


Brick-and-mortar bank branches are a cost center. The traditional bank branch involves a building with a bunch of tellers lined up in an aisle, and it costs money to employ these tellers. If you wanted to deposit a check or cash, you’d go to the row of tellers. If you wanted someone to talk to in a corner office to make a loan or what-not, you’d go to an office in the corner.


Bank branches originally existed because people don’t want to travel far to make their deposits. A distributed network of branches guaranteed people who needed to drop off their paycheck that they would find one close-by, instead of having to travel 3 hours to the nearest branch. This made sense back then, but I don’t think it does right now.


As more and more banking services go online, bank branches make less sense. Why do I need to visit a bank branch for my check if I already have direct deposit? Why apply for a credit card in person when I can do it online? The less useful a banking branch is, the less profitable it is to maintain a branch. In the future, most banks will probably deal with this situation by down-sizing their branches, and hiring less tellers.


In Capital One’s partnership with Peet’s, Peet’s likely franchises it’s stores to Capital One (check out part 2 of this series to get the run-down on franchises). I’m guessing that Capital One pays an upfront startup cost for each of Peet’s shops, and some training/onboarding fees. Peet’s would be in charge of training and hiring employees for the coffee-shop business side, and Capital One would hire all the financial employees (probably less than a traditional bank). When coffee shop items are sold, Peet’s would take a percentage per sale, and Capital One would pocket the rest. 


Capital One has money to throw around. This means that Capital One can afford to build very good cafes like the conference-room-filled cafe I went to earlier. Tacked on with the occasional free-lunches and half-off or free drinks, and this cafe has a huge competitive advantage compared to other banks in the area. Most Starbucks shops won’t give free lunches or coffees to its customers, since it’s usually not profitable for cafes in the short-term.


A Capital One Cafe though, isn’t really a cafe or a bank branch. In marketing, there exists a concept called a purchase funnel. This funnel describes the journey that a potential customer makes from being a person without any awareness of a product, to actually buying the product. To get a person to buy a product, they usually have to be aware of the product, then want the product, and then buy the product, and a business has to usher the person through these steps of the “funnel”. Google Ads can promote awareness of a product to people searching for a term, pushing them through the first step of the funnel.


Capital One Cafes are purchase funnels. Coffee shops are, once again, social hubs, and people who go Capital One’s higher-quality cafes are now aware of the branding of Capital One. These people will tend to be younger, and more used to using online services such as direct deposit. When baristas tell people that they can get coffee for half-off if they have a Capital One card, or free if they have a Capital One card during happy hour, people now realize the value of having a Capital One credit card. Eventually, a subset of these people will be enticed by the idea of having free coffee for life, and will sign up for a Capital One credit card.

Giving away a coffee for free doesn’t sound like the best ideas, but it’s important to see the numbers behind this. If a $5 cappuccino at a Capital One Cafe costs them 31 cents to make, then even pricing them half-off would cause a profit. In fact, factoring in rent, franchising fees, wages and cost-of-goods-sold, halving the price of coffee would probably be slightly above the break-even point for the coffee shop. If every person who went into the coffee shop had a Capital One credit card and got half-off their coffees, the Cafe would likely still keep afloat, and make Capital One money.


What about the people with Capital One credit cards who only buy during happy hour? Would this sink the cafes? My instincts say no. Remember, between merchant processing fees, interest, and annual fees (part 4 of this series), credit cards are very profitable products for companies. Capital One makes around 200 dollars per customer on average. If a cappuccino, for example, costs 31 cents to make, even if the average customer got a free cup of coffee every day, Capital One would still make a profit. (.31*365 = 113.15 < 200).


This is actually an amazing business model. This is the equivalent of a high-quality Google Ad that actually pays you money, instead of you paying to put the ad on Google, with the added perk of saving costs on your customer service center. As silly as this model seems to be on surface level, I think the numbers and strategy are both very smart and creative.


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