Starbucks Coffee – What Commercial Real Estate Investors Should Know

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company Overview

Starbucks coffee, sometimes referred to as Fourbucks coffee, is the largest coffee house chain in the world. It opened its first store in 1971 in Seattle's Pike Place Market by the water of three partners: Jerry Baldwin, Zev Siegel and Gordon Bowker to sell high-quality coffee beans and equipment. In 1982, Howard Schultz, the current President and CEO, took over as Director of Marketing. He was impressed with the popularity of espresso bars in Italy after traveling to Milan in 1983. Back in the US, he convinced the founders of Starbucks to sell both coffee beans and espresso drinks. However, the idea was rejected, so he left the company and founded Il Giornale coffee shop chain in 1985. In 1987, Howard Schultz and Il Giornale bought Starbucks for $ 3.8 million and renamed Il Giornale coffee shops to Starbucks and turned it into Starbucks you know in day. The company went public with the symbol SBUX on June 26, 1992 at $ 17 / share with 140 stores. Since then, the stock has split 5 times. As of May 2008, SBUX is trading at around $ 16, down from the high of $ 39.43 in November 2006.

Starbucks opened its first overseas store in Tokyo, Japan in 1996. The company currently has approx. 16,000 stores, employ 172,000 partners, AKA employees as of September 2007 in 44 countries. It has annual sales of over $ 10B, with the most recent quarterly revenue being $ 2,526B. About 85% of Starbucks revenue comes from company-run stores.

Starbucks does not franchise its activities and has no plans to franchise for the foreseeable future. In North America, most stores are company-run. You can see some Starbucks stores inside Target, large supermarkets, college campuses, hospitals and airports. These stores are operated under license agreements to provide access to real estate that would otherwise not be available. Starbucks receives licensees and royalties from these licensed sites. At these licensed retail locations, workers are considered employees of the specific retailer, not Starbucks. As of 2008, it has 7087 company-run stores and 4081 licensed stores in the United States. Internationally, it has 1796 company-run stores and 2,792 joint venture or licensed stores in 43 foreign countries. The expansion rate is slowing as the company plans to open 1020 US stores in 2008, less than 400 stores in 2009 down from 1800 stores in 2007. In addition, it also plans to close 100 stores in 2008.

Risks to Real Estate Investors

Starbucks coffee buildings are still a popular investment for many investors. When considering investing in a Starbucks-owned property, you need to understand the following risks of your investment:

  1. Recession-sensitivity: a hungry man can survive with a Big Mac & fries, but can live without a four-bucks Frappuccino. This means that Starbucks is very sensitive to the economic downturn as seen in 2007 and 2008 compared to Burger Kings and McDonald's. This may be the main reason why sales in stores in the US that have been open for at least a year are expected to see a mid-term single digit percentage decline, the first drop ever. That triggers Howard Schultz to return to CEO. The company plans to double its marketing spend to $ 100 million in 2008 to drum up sales. It launched an aggressive coupon campaign offering free drinks every Wednesday through May 28, 2008. This may be a sign of desperation. On April 22, 2008, Starbucks cut its expectations for the year, citing weak financials.
  2. Calories and sugar: Starbucks drinks have more sugar and calorie levels, with consumers becoming more and more concerned by the explosion of obesity and diabetes epidemics in the United States. For example, Strawberries & Crème Frappuccino® Blended Crème – whip 120 grams (over 1/4 lb) of sugar and 750 calories at its 24 oz Venti size. If consumers tend to cut back on sugar drinks, or stick to carbohydrates, it will impact Starbucks revenue.

  3. Competition: McDonald's, Wendy's and Dunkin Donuts now also offer espresso at lower prices to compete with Starbucks. They will collect some revenue from Starbucks, especially from cost-conscious customers. The current Starbucks prices are already quite high; it is very difficult for Starbucks to raise prices in the near future without affecting traffic to its stores.

  4. High cost business model: While Starbucks profit margin is high as it pays an average of $ 1.42 per pounds for the non-roasted coffee, its business is very labor intensive like all other food businesses. It takes between 10-20 employees to run a store. All eligible part-time and full-time partners in the United States and Canada receive a benefit package consisting of stock option plan, 401k with company matching, medical, dental and vision. Starbucks has been voted the 7th best company to work for in the United States in 2008 by the Fortune employee survey. What is good for employees may not be good for employers. These benefits are usually only available to key employees or restaurant industry executives. Historically, the cost of these health benefits is rising faster than inflation. In the long run, they can have a negative impact on Starbucks bottom line. Should Starbucks not perform well, it could be under pressure as a public company to close more stores.

  5. special Building: Starbucks freestanding building is a special building designed specifically for Starbucks. Should Starbucks decide not to close or not to renew the lease, it is difficult to re-let the property. There are few renters out there willing to pay the high rent like Starbucks. It is difficult to use it as a fast food restaurant because of a relatively small square footage. Besides, it does not have a commercial kitchen. When the property is vacated by Starbucks, property value is likely to fall.

Starbucks real estate operation

Starbucks divides the United States and Canada into 17 real estate areas, each with its own store development office to develop the market in its area. The developers designed freestanding buildings around 1800 SF with driving through in a place of high visibility, heavy traffic. Once the location is approved by the Territory Office, Starbucks typically signs a 10-year NNN lease with 2 five-year options where landlords are responsible for the roof and structure. All leases usually have a corporate guarantee, which means Starbucks continues to pay rent should it close the store. The lease often has a 10% increase in rent every 5 years. The rent is between $ 1.65 / SF in a Utah store to $ 5.84 / SF in New York. This rent survey is based on the rent of only 30 Starbucks properties, 18 of which are freestanding, in the US 2008 sales market.

Starbucks location with minimal store closure options

In hard times, e.g. In 2008, when sales are declining, Starbucks will try to cut costs and shut down underperforming stores. As a real estate investor considering investing in a Starbucks building, you do not want to invest in a property that will be closed in the future.

Location —— 1 mile —— 3 mile ——- AHI / year —– Size (SF) —- Base rent / year — Rent / SF / mo –Price —– Cap (%)

Ohio …………… 296 …….. 2609 ……… $ 88375 …. 1613 …….. . $ 58,590 ……….. $ 3.03 ………. $ 868K … 6.75

Florida ……….. 9186 …… 55270 …… $ 68595 ….. 1816 ……… $ 75,000 ….. .. …. $ 3.44 ………. $ 1.2M ……… 6.10

Georgia ……… 5717 …… 57201 ….. $ 143936 …. 1750 ……… $ 74,000 ……… .. $ 3.52 ………. $ 1,091 …….. 6.75

Mississippi …. 188 …….. 4923 …….. $ 77372 ….. 1816 ……… $ 112,184 …….. . $ 5.15 ………. $ 1.558M ….. 7.2

Texas …………. 5944 ….. 40,970 ……. $ 75043 ….. 1752 ……… $ 92,914 … .. …… $ 4.42 ………. $ 1,327M …. 7.00

Table 1: Rental rates for freestanding Starbucks buildings

Location —— SBUX rent / year — SBUX Size — SBUX rent / SF / mo — Other bearings Size — Rent / SF / mo — Difference

California ……. $ 30096 …….. 1248 SF ….. $ 2.01 ………………… … 1245 SF …………….. $ 2.50 ………….- 19%

Kansas ………. $ 43200 …….. 1600 SF …. $ 2.25 ………………. …. ..1600 SF ……………… $ 1.33 …………. 68%

Utah …………… $ 38568 ……… 1950 SF ….. $ 1.65 ………… ….. …….. 1200 SF …………….. $ 1.86 …………- 11 %

New Mexico .. $ 92004 ……… 2000 SF …. $ 3.83 ……………………. 2500 SF .. …………… $ 1.92 ………… 100%

New York ……. $ 125004 …… 1785 SF …. $ 5.84 ………………….. .. 2819 SF ……………… $ 2.75 ………… 112%

Table 2: Rental difference in multi-tenant Starbucks retail centers

Since Starbucks does not release sales revenue for a particular location, just make a well-educated guess. Based on the annual revenue and number of stocks operated by Starbucks, the average annual revenue per Shop approx. In addition, there is a good chance that the location is profitable if the annual rent to income ratio is less than 10%. For example, if the base rent for Starbucks in Ohio is $ 58,590, annual revenue should be more than $ 585,590. In addition to choosing a store in a good location (see the article titled "What & # 39; Location & # 39; Means in Commercial Real Estate" by this author), and the ceiling rate, consider the following:

  1. Densely populated area: more people means more customer sizes and thus more revenue. Starbucks in FL, GA and TX on Table 1 are more promising. Note: the author tries to be sensitive by not revealing the exact locations.
  2. Low-rent: Starbucks in MS pays $ 112,184 for base rent. To be reasonably profitable, it must have an annual revenue of $ 1.12M. Since there are only 188 people within 1 mile and 4923 residents within 3 miles radius of the store, the store is less likely to ever achieve this revenue. In addition to Starbucks paying $ 5.15 / SF, which is very high compared to just $ 3.52 / SF in a fast-growing, high-income, densely populated GA, where there are 57,201 residents within 3 miles of radius and average household income ( AHI) of over $ 143K / year. It's hard to understand how Starbucks in MS can be an irreplaceable location in an area with only 188 people within 1 mile radius of the property! Although the property with the highest ceiling of 7.2% appears to be a good investment, it actually has the highest risk of underperformance and may be closed in the future. Alternatively, Starbucks could try to renegotiate the lower-rent lease in tough times. While Starbucks has not yet requested a rent reduction, it is not surprised if Starbucks will do so to improve the bottom line in the future. In either case, the property value will fall.

  3. bearing Prize: While most Starbucks properties are freestanding where they occupy 100%, you may see a Starbucks in a small multi-unit strip mall along with a few other tenants. It usually takes up the unit while driving through and is therefore expected to pay a premium compared to the adjacent unit. However, most of the time Starbucks pays significantly higher rent. For example, in Table 2, it pays $ 5.84 / SF compared to only $ 2.75 / SF of a tenant in the unit next door in a downtown New York or 112% higher. In this strip center, the rent for the unit occupied by Starbucks should be reduced (due to closing or negotiating a lease) substantially reducing the value of the center. You certainly do not want to invest in this property.

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