Skip to content

Starbucks Coffee – What Industrial Real Estate Traders Should really Know

Company Summary

Starbucks Coffee, at times referred to as Fourbucks Coffee is the largest coffeehouse chain in the earth. It opened its first retail outlet in 1971 in Seattle’s waterfront Pike Place Market by 3 companions: Jerry Baldwin, Zev Siegel, and Gordon Bowker to sell superior-high quality coffee beans and gear. In 1982, Howard Schultz, the present Chairman and CEO joined the business as the Director of Advertising. He was impressed by the recognition of the espresso bars in Italy immediately after he traveled to Milan in 1983. Back again to the US, he certain the founders of Starbucks to sell each coffee beans and espresso beverages. Nonetheless, the notion was rejected so he remaining the business and founded Il Giornale coffee bar chain in 1985. In 1987 Howard Schultz and Il Giornale bought Starbucks with $three.8M and renamed Il Giornale coffee bars to Starbucks and turned it into the Starbucks you know nowadays. The business went community with the symbol SBUX in June 26, 1992 at $17/share with a hundred and forty stores. Due to the fact then the stock has split 5 situations. As of May well 2008, SBUX is traded at about $sixteen, down from the superior of $39.43 in November 2006.

Starbucks opened the first overseas retail outlet in Tokyo, Japan in 1996. The business at the moment has about sixteen,000 stores, employs 172,000 companions, AKA workforce as of September 2007 in 44 international locations. It has once-a-year income of about $10B with most the latest quarterly income becoming $2.526B. About 85% of Starbucks income comes from business-operated stores.

Starbucks does not franchise its functions and has no strategies to franchises in foreseeable potential. In North The usa, most stores are business-operated. You may see some Starbucks stores inside Target, main supermarkets, College campuses, Hospitals, and Airports. These stores are operated underneath licensing agreements to deliver entry to real estate which would if not unavailable. Starbucks gets licensee service fees and royalties from these licensed areas. At these licensed retail areas, the personnel are regarded as workforce of that unique retailer, not Starbucks. As of 2008 it has 7087 business-operated stores and 4081 licensed stores in the US. Internationally it has 1796 business operated stores and 2792 joint-undertaking or licensed stores in 43 international international locations. The pace of growth is slowing down as the business strategies to open up 1020 US stores in 2008, much less than 400 stores in 2009 down from 1800 stores in2007. In addition, it also strategies to near one hundred stores in 2008.

Dangers to Real Estate Traders

Starbucks coffee structures continue being a popular financial investment for quite a few investors. When you consider investing in a property occupied by Starbucks, you need to fully grasp the pursuing threats of your financial investment:

  1. Economic downturn-sensitivity: a hungry gentleman can survive with a Big Mac & fries but can stay devoid of a 4-buck Frappuccino. This implies Starbucks is really sensitive to economy downturn as noticed in 2007 and 2008 when compared to Burger Kings and McDonald’s. This may be the principal purpose income at stores in the US open up at least a 12 months are expected a mid solitary-digit percentage decline, the first drop at any time. It triggers Howard Schultz to return to the CEO put up. The business strategies to double its advertising and marketing spending to $100M in 2008 to drum up income. It commenced an aggressive discount coupons marketing campaign featuring no cost drinks every single Wednesday by means of May well 28, 2008. This may be a indicator of desperation. On April 22, 2008 Starbucks lower its outlook for the 12 months citing weak economy.
  2. Calorie & Sugar: Starbucks drinks have additional sugar and calorie in which individuals are additional and additional anxious owing to explosion of weight problems and diabetic issues epidemic in the US. For example, its Strawberries & Crème Frappuccino® Blended Crème – whip has one hundred twenty grams (about 1/4 lb) of sugar, and 750 calorie on its Venti 24 oz size. If it becomes a trend that individuals come to a decision to lower down on the sugar drinks, or adhere to reduced-carb eating plans then it will have affect on Starbucks income.

  3. Level of competition: McDonald’s, Wendy’s and Dunkin Donuts now also supply espresso at decreased selling prices to contend with Starbucks. They will capture some income from Starbucks, in particular from charge-conscious buyers. The present Starbucks selling prices are previously very superior it is really really hard for Starbucks to raise the selling prices in the in the vicinity of potential devoid of affecting the site visitors to its stores.

  4. Higher-bills organization product: even though Starbucks revenue margin is superior as it pays an normal $1.forty two for each pound for the unroasted coffee, its organization is really labor intensive just like any other foodstuff corporations. It will take concerning 10-20 workforce to operate one particular retail outlet. All suitable aspect-time and total-time companions in the US and Canada receive advantage deal consisting of stock selection system, 401k with business matching, clinical, dental & eyesight coverage. Starbucks is voted as the 7-th ideal business to operate for in the US in 2008 by the Fortune magazine employee’s survey. What is very good for workforce may not be very good for the companies. These positive aspects are usually only offered to critical workforce or supervisors in the cafe field. Historically, the costs of these health and fitness positive aspects rise quicker than the level of inflation. In the long operate, they may have negative affect on Starbucks base line. Should really Starbucks not execute perfectly, it may be underneath tension as a community business to near additional stores.

  5. Unique-function building: Starbucks freestanding building is a distinctive-function building built exclusively for Starbucks. Should really Starbucks come to a decision not to near or not to renew the lease, it is really hard to re-lease the property. There are several tenants out there ready to pay the superior rent like Starbucks. It really is hard to use it as a rapidly meals cafe owing to a relative compact square footage. In addition to, it does not have a professional kitchen area. When vacated by Starbucks, the property value will most likely go down.

Starbucks Real Estate Operation

Starbucks divides the US & Canada into 17 real estate territories, just about every has its very own retail outlet progress workplace to establish the current market in its territory. The developers created freestanding structures about 1800 SF with push by means of in a locale with superior visibility, large site visitors. When the locale is permitted by the territory workplace, Starbucks typically symptoms a 10 12 months NNN lease with 2 five 12 months choices in which landlords are responsible for roof and structure. All the leases usually have company assurance which implies Starbucks will keep on having to pay rent in the celebration it has to near the retail outlet. The lease generally has 10% rent raise every single 5 a long time. The rent is concerning $1.65/SF in a retail outlet in Utah to $5.eighty four/SF in New York. This rent survey is dependent on the rents at just 30 Starbucks attributes, 18 of them are no cost standing, on the current market for sale by means of out the US as of April 2008.

Starbucks Locale with Minimum Shop Closure Options

In the course of challenging situations, e.g. in 2008 when income are declining Starbucks will try to lower costs and near underperforming stores. As a real estate investor considers investing in a Starbucks building, you never want to invest in a property that will be shut in the potential.

Locale—— 1mile——3miles——-AHI/yr—–Sizing (SF)—-Foundation rent /yr—Lease/SF/mo –Selling price—–Cap(%)
Ohio……………296……..2609………$88375….1613………$fifty eight,590……….. $three.03……….$868K…….six.seventy five
Florida………..9186……55270……$68595…..1816………$seventy five,000………..$three.44……….$1.2M………six.10
Georgia………5717……57201…..$143936….1750………$seventy four,000………..$three.52……….$1.091……..six.seventy five
Mississippi….188……..4923……..$77372…..1816………$112,184………$5.fifteen……….$1.558M…..7.2
Texas………….5944…..40970…….$75043…..1752………$92,914………..$4.forty two……….$1,327M….7.00

Table 1: Lease Comparables for No cost-standing Starbucks Structures

Locale——SBUX rent/yr—SBUX Sizing—SBUX rent/SF/mo—Other tenant Sizing—Lease/SF/mo—Big difference
California…….$30096……..1248 SF…..$2.01……………………1245 SF……………..$2.fifty………….-19%
Kansas……….$43200……..1600 SF….$2.25…………………….1600 SF………………$1.33………….68%
Utah……………$38568……..1950 SF…..$1.65…………………….1200 SF……………..$1.86…………-eleven%
New Mexico..$92004………2000 SF….$three.eighty three…………………….2500 SF……………..$1.92…………one hundred%
New York…….$125004……1785 SF….$5.eighty four…………………….2819 SF………………$2.seventy five…………112%

Table 2: Lease Big difference in Multi-tenant Starbucks Retail Facilities

Due to the fact Starbucks does not release income income for a individual locale, you just need to make an educated guess. Primarily based on once-a-year income and figures of stored operated by Starbucks, the normal once-a-year income for each retail outlet is about $1M. In addition, if the once-a-year rent to income ratio is much less than 10% there is a very good chance the locale is successful. For example if the foundation rent for the Starbucks in Ohio is $fifty eight,590 then the once-a-year income ought to be additional than $585,590. In addition to selecting a retail outlet at a very good locale (refer to the report titled “What ‘Location’ Signifies in Industrial Real Estate” by this creator), and the cap level you ought to consider the pursuing:

  1. Densely-populated place: additional men and women necessarily mean additional buyers size and consequently additional income. The Starbucks in FL, GA and TX on Table 1 are additional promising. Be aware: the creator attempts to be sensitive by not disclosing the correct areas.
  2. Minimal-rent: the Starbucks in MS pays $112,184 for foundation rent. To be reasonably successful it requires to have once-a-year income of $1.12M. Nonetheless, considering the fact that there are only 188 men and women in 1 mile and 4923 residents in three miles radius from the retail outlet, it is really much less likely the retail outlet at any time achieves that income. In addition to Starbucks pays $5.fifteen/SF which is really superior when compared to just $three.52/SF in a rapidly escalating, superior earnings, densely-populated in GA where by there are 57,201 residents in three miles radius and Typical Household Cash flow (AHI) of about $143K/12 months. It really is hard to fully grasp how the Starbucks in MS could be an irreplaceable locale in an place with just 188 men and women in 1 mile radius from the property! Though featuring the highest 7.2% cap, this property appears to be a very good financial investment but it really has the highest danger of underperforming and could be shut down in the potential. Alternatively, Starbucks could try to renegotiate the lease with decreased rent in the course of challenging situations. Though Starbucks has not questioned for rent reductions nonetheless, it is not stunned if Starbucks will do so to enhance its base line in the potential. In either circumstance, the property value will go down.

  3. Lease top quality: even though most Starbucks attributes are freestanding in which it occupies one hundred%, you may see a Starbucks in a compact multi-device strip heart with a several other tenants. It usually occupies the conclusion device with push by means of and consequently is expected to pay a top quality when compared to the adjacent device. Nonetheless, most of the time Starbucks pays considerably bigger rent. For example, in Table 2 it pays $5.eighty four/SF when compared to just $2.seventy five/SF by a tenant in the device future doorway in a heart in New York or 112% bigger. In this strip heart ought to the rent for the device occupied by Starbucks be minimized (owing to closure or lease renegotiation) the value of the heart will be minimized considerably. You undoubtedly never want to invest in this property.