Summary
Like so many other retailers and food service companies, Starbucks growth in recent years was fueled by the pressures on a public company to add stores and with it sales volume. But much of that new store and sales volume growth came at the expense of good business practices and even common sense.
Analysis
Many of the stores that Starbucks has closed in the last year, along with those that that will be closing as part of this latest announcement, are store that have been open for less than three years. While it is true that many of those stores were located in newer, then-growing markets that are now languishing, it is also true that Starbucks entered into some very expensive leases that saddled these stores with excessively high fixed overhead that would hamper profitability even in a good market.
Take, for example, the free-standing stores with drive-thru windows that Starbucks opened with regularity over the last few years. These single purpose, costly facilities typically located on postage stamp sized lots carry a a high price tag for the struggling company. A recent listing of such a facility in a submarket of Tampa, Florida provides some insight. The offering price is $2,100,000 which comes to a whopping $1,212 per square foot. At that price, the new, ten year Starbucks lease represented a 7.3% capitalization rate, meaning that the lease rate was an incredible $88/sq. ft. NNN. What business model can justify such rent? And from an investor's viewpoint, even if you are comfortable with the credit worthiness of a Starbucks tenancy, what possible subsequent use could there be for such a facility once Starbucks is out of the picture?
Even the in-line Starbucks locations typically represented the highest per square foot lease rates in any given retail center. This was partly the result of the demand by Starbucks for a significant tenant improvement allowance, but it was also the result of bad decisions driven by sloppy real estate reps fueled by the opening of more than 50 new stores a week. Those in-line stores in relatively small, tertiary markets were paying north of $30/sq. ft. NNN.
This may not be the last round of store closing for Starbucks. But if this isn't the start of a new approach to store planning and site selection, it certainly should be.
