How Big Are Starbucks’ Problems?

In New York we like to joke about how, at some street corners in Manhattan, the storefronts of three different Starbucks are visible.

Granted, whenever we walk by a Starbucks here they are usually packed, with long lines and rarely any seating for those who might want to have a meeting or get some other work done. But this is Manhattan, where lots of things are like that.

Apparently, not all Starbucks are that busy, judging from the company’s announcement that it is closing 600 units by some time next year. Sure, that’s not a huge chunk of the chain’s 11,000-plus US stores, but a big jump from the previous target of 100 closures.

The fact that Starbucks overextended its real estate is old news now. But the company seems to have other problems, including the fast death of its highly touted new blend.

So what’s next for the coffee giant? More store closures? Or have they likely cut all of the excess fat?


17 Responses to “How Big Are Starbucks’ Problems?”

  1. 1 TheJudge July 2, 2008 at 8:21 am

    I suspect that a lot of these stores are in-line, non end-cap (no drive thru) locations. They’re in that stage of their maturity where they’re really “bean” counting…:) The writing is on the wall in terms of them, ultimately, having to be more price competitive with McDonalds. That means they can only afford “A” sites with high volume (drive thru) opportunities.

    My. $.02 … have a great day all !

  2. 2 Ex Bucks July 2, 2008 at 10:04 am

    They have issues in leadership. Few rememeber when Howard ran the company, and the internal culture of the siren needs to change. It is a business based on profit and loss, the stock traded on the numbers of stores, their market reach, etc., and many silent issues for years have been covered up by the fat profit margins of the beverage and other offerings Now with a credible challengers, like McDonalds, and a pull back in the economy, they have learned their product isn’t the “affordable luxury” it once was, they are having to regroup which is both healthy and good for the company, as they have lacked strong national compeition, regional purveyors of coffee, yes, but not a credible national player until now.

    Line extension of frappachino, more flavors of lattes, etc. are not going to bring in the customers as they have relied upon in previous years. They have to create the compelling reason for the customer to pay 20% more than three years ago. Howard once asked the question how does Starbucks stay relevent, and we now see he is strecthing for answers. The problem wasn’t real estate, the problem was trying to impress Wall Street and ego.

  3. 3 Dunkin'man July 2, 2008 at 10:10 am

    I believe that most of these, like “The Judge” sez, are in Targets and co branded/tenanted with banks and other “experimental” locations.

    However, I fear what this will do to the investment community who paid crazy cap rates, well below 7%, for these leases.

    As an investor/ developer, the new game is Dunkin’, but with cap rates that won’t put the kids thru college or buy the big boat that Starbucks would have.

    Back to reality!

  4. 4 Don July 3, 2008 at 8:08 am

    It’s time for Starbucks to wake up and smell the McDonalds coffee. A really good idea during the “good times” when people could pay for an overpriced cup of coffee or foo foo coffee has come to a screeching hault. Over expansion, bad locations, and poor insight on what the competition is doing has hit them where it hurts.

    Unless the economy substantially improves Starbucks will be one of the first line of non-essential product retailers to go down the hard way. Another dollar or two per gallon will seal their fate.

  5. 5 Brad July 3, 2008 at 8:18 am

    There is no way to feed all of their leases when the average customer is cutting back on most non-essentials. Even in the best of times their “super premium” product has limited likeability.

    They need to retrench, close a lot more stores and rethink their menu.
    Clearly, the recent re-training of their personnel was not the solution. In NYC and ‘burbs they just have way too many stores.

    A more budget minded menu might help traffic flow.

  6. 6 MikeF July 3, 2008 at 8:41 am

    Starbucks just simply overbuilt and is now feeling the pressure of the weakened economy. They got away from what got them to the dance as well, especially with the launch of the very un-Starbuck’s like Pike Place Brew. The need to re-focus on their core product and actually do some marketing! The rise of Dunkin Donuts has been more successful due to the elevation of its image. If Starbucks continues to tell no-one about their premium products then they are setting the same course as GAP, whose marketing fell flat because by the time they actually launched a good national campaign, their product wasn’t cool anymore. Starbucks, like GAP, seems to think that they are too cool to do any sort of marketing and that word of mouth will continue to get them by. Well, you can’t control word of mouth advertising and if the stories you hear are true, Starbucks has a major customer service and product problem. That could be exacerbated by closing stores and shifting customer load to different stores who are unprepared to handle the new customers, who after a few bad customer service experiences, slow service, etc. will then go elsewhere.

  7. 7 WayneV July 3, 2008 at 9:38 am

    Ditto to the majority of MikeF’s comments…one step further…the ambiance originally created and the “want to be included/seen” aura at Starbuck will once again drive customer loyalty by focusing on a return to the very basics of a retail operating business like attention to operational detail, i.e., personality-driven customer service/interviewing process/HR (eliminate the caught-up-in-themselves or under-educated or under-mannered toads as they are not cut out for the service business), in-store cleanliness throughout (chairs & table-tops, torn chairs mended or taken out of service, bathrooms impeccably clean, etc.). I’m beginning to believe it’s a more of an operational matter that needs immediate fixing as Starbucks has let its guard down. Further to the point, ricing needs to be re-thought….perhaps with Loyalty Cards with every seven drinks paid for gets you a free drink utilizing their “in-store credit card” to automate the procedure and measure the results and increased volumes. There are many ways to show flexibilty and respect for the changing economic times without demonstrating panic and moving down the ladder from upscale or only ordinary.

  8. 8 Joshua July 3, 2008 at 1:52 pm

    While there are obviously some issues with their business model that have only come to light as expansion has slowed and the economy has turned downwards, I feel the largest problem was over-expansion. This is easily evident in Southern California, where you can see a Starbucks at every single intersection in areas like San Vicente in Brentwood and Santa Monica in Century City. Even in secondary Inland Empire markets I watched as they opened a location in an existing enter (toward work), then opened a store across the street in a new construction center (toward home). They are paying $2.50/SF (existing center) and $3.50/SF (new center) for a city were lease rates are $1.50. Then they converted an old fast food into a standalone drive thru location about 2 miles west (toward work) between the existing center and the freeway. They take locations to monopolize a market and reduce competition, and end up only cannabalizing their sales because they have a lack of competition.

  9. 9 MallMaven July 7, 2008 at 8:35 am

    Starbucks over-paid on the majority of their rents. Period. Most of the deals only made brokers rich. Period.

  10. 10 TeenyTiny July 7, 2008 at 8:36 am

    Agree with MallMaven, Starbucks overpaid. They also forced up all the rents for other retailers that Landlords were able to achieve.

  11. 11 romycom July 7, 2008 at 2:10 pm

    What was Starbucks’s logic in opening multiple stores in such concentrated areas to begin with? I’m a bit confused about that one.

    Also, is it possible that Starbucks’s problems are just a result of our economy’s downturn and not of failed location plans?

  12. 12 bocadeveloper July 7, 2008 at 2:53 pm

    In response to MallMaven and others, brokers were not “getting rich” by doing Starbucks deals. First of all, the commissions were usually capped at X amount of dollars and, for every 10 deals that were proposed, worked on, looked at, etc you might get one deal approved and obviously, you get nothing for the work and effort put in to the other 9 deals. In addition, you usually had to tour the market mulitple times with the real estate director,the operations people, etc, take people out for dinners and lunches and expend time and money on preparing site packages and presentations all the while not knowing if you were going to get any deals approved or earn any commissions at all. While the commissions, when earned were good,unless you were doing 20-25 deals a year,I don’t think you can say brokers were getting rich.

    With respect to the comments by Dunkin’man unless things have changed, the leases being signed for Dunkin Donut locations are backed and guaranteed by franchisee’s, not by a multi billion dollar corporation. That is why there is a big cap rate differential and, on top of that, when you are competing for the “A” corner sites with the drugstores and banks and, you want a drive-thru that reduces the amount of developable building you can put on the site,(in the case of a multi-tenant development), and you want to restrict other uses in the project to protect your parking, and you have a high buildout cost, and, you want substantila TI dollars from the Landlord you are going to pay premium rents.

    I also belive that Starbucks does generally pick much better sites than Dunkin Donuts but they have strayed off their path, especially in the past 3-5 years. I witnessed a lot of changes in personnel in the real estate department during my 7 years as broker for Starbucks and, in most cases, the good long term employees are gone and they have a lot of newer faces that probably don’t have as much invested in the company. I think a combination of strategic store closures, a rebounding economy (hopefully in 2009), plus Howard’s reemergence as a leader of the company will get them back on the right path.

  13. 13 PiggyPiggy July 7, 2008 at 5:23 pm

    If Starbuck’s hadn’t overpaid on rents, then they wouldn’t be closing 600 stores. No one closes a cash cow.

  14. 14 TeenyTiny July 7, 2008 at 5:31 pm

    7.07.08 It’s all over the news: “U.S. store closings and cutbacks turned the second quarter into the worst for strip mall owners in 30 years, as budget-conscious consumers flocked to low-cost warehouse-style grocery centers, according to a report by real estate research firm Reis.

    Strip malls, which are usually anchored by grocery or drug stores, saw average vacancies spike 0.5 percentage points to 8.2 percent, a level unseen since 1995, according to the report released Monday.

    Vacancies at regional malls rose 0.4 percentage points to 6.3 percent, the highest level since the first quarter of 2002, according to the preliminary results. (Reuters).

    Starbucks is merely reaping what they’ve sowed for so long: overpaying for good real estate. Eventually, every retailer that makes this mistake must pay the price.

    It doesn’t take much talent to overpay for good real estate. Good real estate is easy to recognize.

    for the first time since 1980, more retail has become vacant than has been leased out. Definitely time for some rent reductions.

  15. 15 MisterMister July 7, 2008 at 6:30 pm

    Starbuck’s problems are much deeper than merely making a few real estate mistakes. They have 600 stores closing, of which, from what I understand, 70% are stores opened from 2006 to 2008. This is disastrous. How have the real estate execs survived this while they shamelessly layoff their real estate manager worker bees? And laying off 12,000 workers is being projected? Unbelievable. This was one runaway train operating on super-fuel,…. or was it caffeine?

  16. 16 TeenyTiny July 8, 2008 at 12:32 pm

    Starbuck’s real estate execs keep their jobs for 4 or 5 years and the real estate managers have to explain why they only have one or two year stints on their resumes. Meanwhile, the CEO runs off with multiple millions for feeding the never satisfied stock market’s thirst for growth, growth for growth’s sake. Shouldn’t these execs be evaluated on more long term goals? Like building a great company? Ridiculous.

  17. 17 TeenyTiny July 8, 2008 at 12:37 pm

    To The Judge, the majority of stores built between 2006 and 2008 were drive-thrus, which are the ones being closed. Your theory works for fast food, and drug stores, but is not ironclad for Starbucks.

    I suspect that the real issue is over-expansion into less desirable locations, combined with paying too much rent for prime locations. Starbucks growth in the US market is done, for now, international is where it’s at (and where they’re spending their capital on growth).

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