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Starbucks Coffee – What Industrial Real Estate Investors Should Know

Corporation Summary

Starbucks Coffee, from time to time referred to as Fourbucks Coffee is the biggest coffeehouse chain in the entire world. It opened its 1st retailer in 1971 in Seattle’s waterfront Pike Spot Marketplace by a few companions: Jerry Baldwin, Zev Siegel, and Gordon Bowker to offer large-high-quality coffee beans and devices. In 1982, Howard Schultz, the present-day Chairman and CEO joined the enterprise as the Director of Marketing and advertising. He was amazed by the attractiveness of the espresso bars in Italy immediately after he traveled to Milan in 1983. Back to the US, he persuaded the founders of Starbucks to offer equally coffee beans and espresso beverages. Nevertheless, the idea was rejected so he remaining the enterprise and founded Il Giornale coffee bar chain in 1985. In 1987 Howard Schultz and Il Giornale bought Starbucks with $3.8M and renamed Il Giornale coffee bars to Starbucks and turned it into the Starbucks you know nowadays. The enterprise went general public with the image SBUX in June 26, 1992 at $17/share with a hundred and forty shops. Considering the fact that then the stock has split five periods. As of May possibly 2008, SBUX is traded at about $16, down from the large of $39.43 in November 2006.

Starbucks opened the 1st abroad retailer in Tokyo, Japan in 1996. The enterprise presently has about 16,000 shops, employs 172,000 companions, AKA employees as of September 2007 in 44 international locations. It has yearly product sales of more than $10B with most modern quarterly income being $2.526B. About eighty five% of Starbucks income arrives from enterprise-operated shops.

Starbucks does not franchise its functions and has no plans to franchises in foreseeable future. In North The united states, most shops are enterprise-operated. You may perhaps see some Starbucks shops within Goal, main supermarkets, University campuses, Hospitals, and Airports. These shops are operated below licensing agreements to present access to real estate which would if not unavailable. Starbucks gets licensee expenses and royalties from these licensed locations. At these licensed retail locations, the workers are deemed employees of that specific retailer, not Starbucks. As of 2008 it has 7087 enterprise-operated shops and 4081 licensed shops in the US. Internationally it has 1796 enterprise operated shops and 2792 joint-enterprise or licensed shops in 43 foreign international locations. The speed of expansion is slowing down as the enterprise plans to open 1020 US shops in 2008, fewer than 400 shops in 2009 down from 1800 shops in2007. In addition, it also plans to near a hundred shops in 2008.

Risks to Real Estate Investors

Starbucks coffee properties keep on being a well known expense for many investors. When you take into account investing in a assets occupied by Starbucks, you will need to comprehend the pursuing dangers of your expense:

  1. Recession-sensitivity: a hungry guy can endure with a Massive Mac & fries but can live with no a four-buck Frappuccino. This usually means Starbucks is quite delicate to economy downturn as found in 2007 and 2008 as opposed to Burger Kings and McDonald’s. This may perhaps be the key reason product sales at shops in the US open at the very least a 12 months are anticipated a mid single-digit proportion decline, the 1st fall ever. It triggers Howard Schultz to return to the CEO write-up. The enterprise plans to double its marketing and advertising paying to $100M in 2008 to drum up product sales. It started an aggressive coupons marketing campaign presenting cost-free drinks every Wednesday by May possibly 28, 2008. This may perhaps be a signal of desperation. On April 22, 2008 Starbucks slash its outlook for the 12 months citing weak economy.
  2. Calorie & Sugar: Starbucks drinks have a lot more sugar and calorie in which people are a lot more and a lot more concerned due to explosion of weight problems and diabetes epidemic in the US. For instance, its Strawberries & Crème Frappuccino® Blended Crème – whip has one hundred twenty grams (more than one/four lb) of sugar, and 750 calorie on its Venti 24 oz dimensions. If it will become a craze that people decide to slash down on the sugar drinks, or adhere to reduced-carb diet programs then it will have affect on Starbucks income.

  3. Competitiveness: McDonald’s, Wendy’s and Dunkin Donuts now also present espresso at reduced charges to compete with Starbucks. They will seize some income from Starbucks, in particular from value-acutely aware buyers. The present-day Starbucks charges are previously fairly large it is really quite tricky for Starbucks to maximize the charges in the around future with no affecting the targeted traffic to its shops.

  4. Large-expenditures small business product: whilst Starbucks profit margin is large as it pays an typical $one.42 for each pound for the unroasted coffee, its small business is quite labor intense just like any other foodstuff organizations. It will take involving 10-20 employees to run just one retailer. All qualified section-time and complete-time companions in the US and Canada receive reward bundle consisting of stock alternative approach, 401k with enterprise matching, healthcare, dental & eyesight coverage. Starbucks is voted as the 7-th finest enterprise to perform for in the US in 2008 by the Fortune magazine employee’s study. What is excellent for employees may perhaps not be excellent for the employers. These benefits are typically only accessible to crucial employees or professionals in the cafe industry. Traditionally, the expenses of these wellbeing benefits increase faster than the level of inflation. In the very long run, they may perhaps have detrimental affect on Starbucks bottom line. Should Starbucks not accomplish properly, it may perhaps be below pressure as a general public enterprise to near a lot more shops.

  5. Special-function building: Starbucks freestanding building is a distinctive-function building made specifically for Starbucks. Should Starbucks decide not to near or not to renew the lease, it is really tricky to re-lease the assets. There are few tenants out there inclined to fork out the large hire like Starbucks. It’s tricky to use it as a speedy foods cafe due to a relative little square footage. Aside from, it does not have a business kitchen. The moment vacated by Starbucks, the assets price will most likely go down.

Starbucks Real Estate Operation

Starbucks divides the US & Canada into 17 real estate territories, each and every has its possess retailer improvement business office to acquire the industry in its territory. The developers produced freestanding properties about 1800 SF with travel by in a place with large visibility, major targeted traffic. The moment the place is accepted by the territory business office, Starbucks generally symptoms a 10 12 months NNN lease with 2 5 12 months selections in which landlords are liable for roof and framework. All the leases typically have company warranty which usually means Starbucks will go on having to pay hire in the function it has to near the retailer. The lease frequently has 10% hire maximize every five several years. The hire is involving $one.sixty five/SF in a retailer in Utah to $five.84/SF in New York. This hire study is based mostly on the rents at just 30 Starbucks houses, 18 of them are cost-free standing, on the industry for sale by out the US as of April 2008.

Starbucks Area with Small Keep Closure Opportunities

All through tough periods, e.g. in 2008 when product sales are declining Starbucks will attempt to slash expenses and near underperforming shops. As a real estate investor considers investing in a Starbucks building, you don’t want to commit in a assets that will be shut in the future.

Area—— 1mile——3miles——-AHI/yr—–Dimensions (SF)—-Foundation hire /yr—Rent/SF/mo –Price—–Cap(%)
Ohio……………296……..2609………$88375….1613………$fifty eight,590……….. $3.03……….$868K…….6.75
Florida………..9186……55270……$68595…..1816………$75,000………..$3.44……….$one.2M………6.10
Georgia………5717……57201…..$143936….1750………$74,000………..$3.fifty two……….$one.091……..6.75
Mississippi….188……..4923……..$77372…..1816………$112,184………$five.15……….$one.558M…..7.2
Texas………….5944…..40970…….$75043…..1752………$ninety two,914………..$four.42……….$one,327M….7.00

Table one: Rent Comparables for Totally free-standing Starbucks Properties

Area——SBUX hire/yr—SBUX Dimensions—SBUX hire/SF/mo—Other tenant Dimensions—Rent/SF/mo—Variance
California…….$30096……..1248 SF…..$2.01……………………1245 SF……………..$2.50………….-19%
Kansas……….$43200……..1600 SF….$2.25…………………….1600 SF………………$one.33………….68%
Utah……………$38568……..1950 SF…..$one.sixty five…………………….1200 SF……………..$one.86…………-eleven%
New Mexico..$92004………2000 SF….$3.eighty three…………………….2500 SF……………..$one.ninety two…………a hundred%
New York…….$125004……1785 SF….$five.84…………………….2819 SF………………$2.75…………112%

Table 2: Rent Variance in Multi-tenant Starbucks Retail Facilities

Considering the fact that Starbucks does not release product sales income for a individual place, you just will need to make an educated guess. Based on yearly income and numbers of stored operated by Starbucks, the typical yearly income for each retailer is about $1M. In addition, if the yearly hire to income ratio is fewer than 10% there is a excellent probability the place is profitable. For instance if the foundation hire for the Starbucks in Ohio is $fifty eight,590 then the yearly income need to be a lot more than $585,590. Aside from finding a retailer at a excellent place (refer to the post titled “What ‘Location’ Means in Industrial Real Estate” by this creator), and the cap level you need to take into account the pursuing:

  1. Densely-populated location: a lot more individuals mean a lot more buyers dimensions and thus a lot more income. The Starbucks in FL, GA and TX on Table one are a lot more promising. Take note: the creator tries to be delicate by not disclosing the precise locations.
  2. Minimal-hire: the Starbucks in MS pays $112,184 for foundation hire. To be fairly profitable it needs to have yearly income of $one.12M. Nevertheless, because there are only 188 individuals in just one mile and 4923 citizens in just 3 miles radius from the retailer, it is really fewer likely the retailer ever achieves that income. Aside from Starbucks pays $five.15/SF which is quite large as opposed to just $3.fifty two/SF in a speedy increasing, large income, densely-populated in GA in which there are 57,201 citizens in just 3 miles radius and Regular Household Income (AHI) of more than $143K/12 months. It’s tricky to comprehend how the Starbucks in MS could be an irreplaceable place in an location with just 188 individuals in just one mile radius from the assets! While presenting the greatest 7.2% cap, this assets seems to be a excellent expense but it in fact has the greatest hazard of underperforming and could be shut down in the future. Alternatively, Starbucks could attempt to renegotiate the lease with reduced hire for the duration of tough periods. While Starbucks has not requested for hire reductions nonetheless, it is not surprised if Starbucks will do so to improve its bottom line in the future. In possibly situation, the assets price will go down.

  3. Rent premium: whilst most Starbucks houses are freestanding in which it occupies a hundred%, you may perhaps see a Starbucks in a little multi-unit strip heart with a few other tenants. It typically occupies the stop unit with travel by and thus is anticipated to fork out a premium as opposed to the adjacent unit. Nevertheless, most of the time Starbucks pays substantially larger hire. For instance, in Table 2 it pays $five.84/SF as opposed to just $2.75/SF by a tenant in the unit upcoming door in a heart in New York or 112% larger. In this strip heart need to the hire for the unit occupied by Starbucks be decreased (due to closure or lease renegotiation) the price of the heart will be decreased substantially. You surely don’t want to commit in this assets.