Starbucks Coffee – What Business Real Estate Investors Should Know

Company Overview

Starbucks Coffee, sometimes known as Fourbucks Coffee is the biggest coffeehouse chain in the world. This opened its first shop in 1971 in Seattle’s oceanfront Pike Place Market through three partners: Jerry Baldwin, Zev Siegel, and Gordon Bowker to sell high-quality espresso beans and equipment. In 1982, Howard Schultz, the current Chairman as well as CEO joined the company as the Director of Marketing. He was thankful for the popularity of the espresso pubs in Italy after this individual traveled to Milan in 1983. Back in the US, he persuaded the founders of Starbucks to sell both coffee beans as well as espresso beverages. However, the concept was rejected so this individual left the company and set up the Il Giornale coffee pub chain in 1985. In 1987 Howard Schultz, as well as Il Giornale, bought Starbucks for $3. 8M as well as renamed Il Giornale espresso bars to Starbucks as well as turned it into the Starbucks you know today. The company went public with the symbol SBUX on June 26, 1992, at $17/share with 150 stores. Since then the share has split 5 times. Since May 2008, SBUX is actually traded at about $16, down from the high of $39. 43 in November 2006.

Starbucks opened its first abroad store in Tokyo, The Japanese in 1996. The company presently has about 16, 000 stores, and employs 172, 000 partners, AKA employees since September 2007 in forty-four countries. It has annual product sales of over $10B along with its most recent quarterly revenue becoming $2. 526B. About 85% of Starbucks revenue originates from company-operated stores.

Starbucks is not going to franchise its operations and contains no plans to dispense in foreseeable future. In America, most stores are company-operated. You may see some Starbucks stores inside Target, key supermarkets, University campuses, Hospital wards, and Airports. These merchants are operated under licensing and training agreements to provide access to real estate property that would otherwise be unavailable. Starbucks receives licensee fees along with royalties from these accredited locations. At these accredited retail locations, the workers are viewed as employees of that specific dealer, not Starbucks. As of ’08, it has 7087 company-operated merchants and 4081 licensed merchants in the US. Internationally it has 1796 company-operated stores along with 2792 joint-venture or accredited stores in 43 unusual countries. The pace associated with the expansion is slowing down since the company plans to open 1020 US stores in 08, less than 400 stores last year down from 1800 shops in 2007. In addition, it also programs to close 100 stores within 2008.

Risks to Smaller property investors

Starbucks coffee buildings stay a popular investment for many traders. When you consider investing in a property busy by Starbucks, you need to understand the next risks of your investment:

Recession sensitivity: a hungry man may survive with a Big Mac pc & fries but may live without a four-buck Frappuccino. This means Starbucks is very delicate to the economic downturn as seen in 2007 and 08 compared to Burger King as well as McDonald’s. This may be the main reason product sales at stores in the US open up at least a year and are expected the mid-single-digit percentage drop, the first drop ever. This triggered Howard Schultz to come back to the CEO post. The corporation plans to double its marketing spending to $100M in 2008 to carol up sales. It started out with an aggressive coupons marketing campaign offering free drinks each Wednesday through May 36, 2008. This may be a sign involving desperation. On April 25, 2008, Starbucks cut its outlook for the year citing a weak economy.
Calorie as well as Sugar: Starbucks drinks have an overabundance of sugar and calorie that has consumers more and more concerned caused to an explosion of obesity along with the diabetes epidemic in the US. For instance, its Strawberries & Crème Frappuccino® Blended Crème rapid whip has 120 h (over 1/4 lb) involving sugar, and 750 food on its Venti all day and oz size. If it turns into a trend that consumers plan to cut down on sugar beverages or stick to low-carb diet programs then it will have an impact on Starbuck’s revenue.
Competition: McDonald’s, Wendy’s, and Dunkin Donuts right now also offer espresso at affordable prices to compete with Starbucks. They are going to capture some revenue through Starbucks, especially from cost-conscious customers. The current Starbucks costs are already pretty high; it is quite hard for Starbucks to improve the prices in the near future without influencing the traffic to its shops.
High-expenses business model: Starbucks’ profit margin is higher as it pays an average of $1. 42 per pound for your unroasted coffee, its company is very labor intensive just like every other foods business. It takes 10-20 employees to run 1 store. All eligible part-time and full-time partners in America and Canada receive an advantage package consisting of a stock choice plan, 401k with organization matching, medical, dental, and vision coverage. Starbucks is actually voted as the 7-the ideal company to work for in the united states in 2008 by the Good fortune magazine employee survey. What on earth is good for employees may not be beneficial to the employers. These positive aspects are normally only available to essential employees or managers in the restaurant industry. Historically, the cost of these health benefits rises more rapidly than the rate of monetary inflation. In the long run, they may have a damaging impact on Starbucks’ bottom line. Need to Starbucks does not perform well, it can be under pressure as a public firm to close more stores.
Special-purpose building: Starbucks freestanding construction is a special-purpose building made specifically for Starbucks. Should Starbucks decide not to close not really to renew the lease, really hard to re-lease the property? There are actually few tenants out there ready to pay the high rent like Starbucks. It’s hard to use it as a fast food restaurant due to essential contraindications of small square footage. Besides, that has a commercial kitchen. After being vacated by Starbucks, the property or home value will most likely go down.
Starbucks Real Estate Operation
Starbucks splits the US & Canada straight into 17 real estate territories, everyone has their own store development place of work to develop the market in its location. The developers constructed freestanding buildings about 1800 SF with drive-through in the location with high visibility, and major traffic. Once the location qualifies by the territory office, Starbucks typically signs a 10-season NNN lease with only two five-year options that have landlords responsible for the roof along with the structure. All the leases as a rule have a corporate guarantee which means Starbucks will continue paying book in the event it has to close the shop. The lease often possesses a 10% rent increase every 5 years. The book is between $1. 65/SF in a store in Ut to $5. 84/SF throughout New York. This rent study is based on the rents of just 30 Starbucks properties, eighteen of them are free-standing, available on the market for sale throughout the US since April 2008.

Starbucks Area with Minimal Store Drawing a line under Possibilities

During tough times, electronic. g. in 2008 whenever sales are declining Starbucks will attempt to cut costs as well as close underperforming stores. Like a real estate investor considering investing in a Starbucks building, you don’t want to buy a property that will be closed in the near future.

Location—— 1mile——3miles——-AHI/yr—–Size (SF)—-Base lease /yr—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
Ga……… 5717…… 57201….. $143936…. 1750……… $74, 000……….. $3. fifty-two………. $1. 091…….. 6. seventy-five
Mississippi…. 188…….. 4923…….. $77372….. 1816……… $112, 184……… $5. 15………. $1. 558M….. seven. 2
Texas…………. 5944….. 40970……. $75043….. 1752……… $92, 914……….. $4. 42………. $1, 327M…. 7. 00

Table one: Rent Comparables for Free-standing Starbucks Buildings

Location——SBUX rent/yr—SBUX Size—SBUX rent/SF/mo—Other tenant 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. 67……………………. 1200 SF…………….. $1. eighty-six………… -11%
New Mexico.. $92004……… 2000 SF…. $3. 83……………………. 2500 SF…………….. $1. ninety-two………… 100%
New York……. $125004…… 1785 SF…. $5. 84……………………. 2819 SF……………… $2. 75………… 112%

Table 2: Rent Distinction in Multi-tenant Starbucks Store Centers

Since Starbucks will not release sales revenue for a location, you just need to make an informed guess. Based on annual income and numbers of stores controlled by Starbucks, the average yearly revenue per store is all about $1M. In addition, if the yearly rent to revenue proportion is less than 10% there is a great chance the location is money-making. For example, if the base purchase for the Starbucks in Oh is $58, 590 then annual revenue should be in excess of $585, 590. Besides choosing a store at a good position (refer to the article known as “What ‘Location’ Means with Commercial Real Estate” at this author), and the cap charge you should consider the following:

Densely-populated place: more people mean considerably more customer size and thus considerably more revenue. The Starbucks with FL, GA, and ARIZONA in Table 1 is definitely more promising. Note: the author attempts to be sensitive by definitely not disclosing the exact locations.
Low-rent: Starbucks in MICROSOFT COMPANY pays $112, 184 to get base rent. To be sensibly profitable it needs to have 12-monthly revenue of $1. 12M. However, since there are only eighty-eight people within 1 kilometer and 4923 residents within just 3 miles radius from your store, it’s less likely the shop ever achieves that earnings. Besides Starbucks pays $5. 15/SF which is very high in comparison to just $3. 52/SF inside a fast-growing, high revenue, densely-populated in GA were there 57, 201 residents within just 3 miles radius and also Average Household Income (AHI) of over $143K/year. Is actually hard to understand how the Starbucks in MS could be a great irreplaceable location in a location with just 188 folks within a 1-mile radius from the property! While offering the best 7. 2% cap, this specific property appears to be a good investment nonetheless it actually has the highest probability of underperforming and could be shut down in the future. Alternatively, Starbucks could attempt to renegotiate often the lease with lower purchases during tough times. While Starbucks has not asked for rent discount rates yet, it is not surprised in the event Starbucks will do so to strengthen its bottom line in the future. Either way, the property value will go lower.
Rent premium: while most Starbucks properties are freestanding through which it occupies 100%, you could see a Starbucks in a small multi-unit strip center with a few additional tenants. It normally uses up the end unit with push-through and thus is anticipated to pay a premium compared to the adjoining unit. However, most of the time Starbucks pays substantially higher hires. For example, in Table, a couple of them pays $5. 84/SF in comparison to just $2. 75/SF by just a tenant in the unit to your neighbors in a center in The big apple or 112% higher. On this strip center should the purchase for the unit occupied by means of Starbucks be reduced (due to closure or reserve renegotiation) the value of the center will likely be reduced substantially. You certainly have a tendency to want to invest in this residence.