Starbucks Faces Lease Battles

In its drive to cutback store growth and close locations, it seems that Starbucks has ticked off a few landlords. The coffee giant is facing a number of lawsuits from property owners as it cuts back its empire, according to this Wall Street Journal report.

“Some landlords contend Starbucks is paying rent late or darkening stores before specifying the closure dates to make the landlords wary of a fight and to pressure them into letting the company out of leases for a price they deem too low.”

The chain denies the charges. “We’re not doing anything out of the norm of any other company that would seek to restructure its real-estate portfolio,” says a spokesman.

We bet there are a lot of people out there who are bitter. Is a shopping center owner in today’s economy going to find a replacement for those stores that can pay as much rent and draw as much traffic?

Speaking of traffic, a report done by Morgan Stanley found out why Starbucks has seen a dip in its customers. It turns out it was price, Nation’s Restaurant News reports.

The research finds: “Of the Starbucks customers who are decreasing their visits, 84 percent blamed economic pressures. When asked what would increase their visits to Starbucks, 65 percent cited lower prices.”


13 Responses to “Starbucks Faces Lease Battles”

  1. 1 john braithwaite October 14, 2008 at 8:43 am

    Until there is a signed document between the parties, there is NO legal obligation on either side. Once a lease is signed, however, both parties are committed to the deal. Starbucks can’t just walk away from this. Make them pay.

  2. 2 MallMaven October 14, 2008 at 10:11 am

    If Starbucks has a continuous operations clause in their lease, and they go dark, then they are in legal trouble with the Landlord as they would be in default of the lease. If there is no continuous operations clause and Starbucks goes dark, then that is another situation.

    If Starbucks is paying their rent late, then they’ll have to pay the typical late fees to the Landlord.

    Using the above tactics to intimidate the Landlord, is nothing new in retail real estate, but not something one would expect from a national tenant with a good reputation. Seems like it’s getting ugly out there with blood in the streets.

  3. 3 Pedro October 14, 2008 at 10:11 am

    Starbucks CAN just walk away from a deal so long as their lease provides that they can do so. The real issue is whether or not they follow protocol when doing so. Losing them as a tenant is unfortunate and certainly a sign of the times.

  4. 4 TeenyTiny October 14, 2008 at 10:15 am

    Replacement tenants, you ask? I think not. I cannot think of any coffee competitor in a strong enough position, themselves, to step into the Starbuck’s locations. Also, if they were such great coffee locations, one must ask why Starbucks left them in the first place. In terms of visibility, Starbucks usually picks the premier locations, given that, perhaps the only other users who might be interested would be cell phone locations.

  5. 5 Crazy Days October 14, 2008 at 11:14 am

    I wonder if Sbux has any clue as to how badly they have damaged their reputation with retail developers? In most cases they had the right to close their stores, or back out of unsigned lease agreements. However, it was the manner in which they did the deeds that was most disturbing. I know several developers (big and small) who were burnt in the January mayhem. Two of the three claims sbux didn’t even have thr common decency to call them to let them know that their pending new deals were dead! It was well known that sbux arrogance rained supreme and that their reps were glorified order takers, but once an LOI were signed they usually followed through to lease execution. I know 1/2 dozen sbux brokers throughout the midwest who lived through the meltdown, most of whom lost tremendous credibility themseleves with their developer clients in this mess. Sbux is sbux and they’ll always be another developer willing to jump on the band wagon when they come back, but the more sophisticated players understand there’s a new limit to their belief in the once powerful OZ.

  6. 6 TeenyTiny October 14, 2008 at 11:24 am

    If Starbucks signed the lease and did not open the store, then they need to consult with their attorneys in order to get out of the lease. It can be complicated and will cost them $$$$.

  7. 7 James October 15, 2008 at 8:24 am

    When I dealt with them I was surprised to learn that they did not have a sales projection tool to analyse locations. They were selling seven billion dollars worth of product, had no debt, and yet they had no objective tool to project sales at new sites, something that at the most would have cost them a few hundred thousand dollars. Their lease in addition to requiring a handsome TI package, had termination provisions that let them out of the deal if they didn’t hit their gross sales figures by year three. Obviously that was meant to cover them if they made a mistake on site location.
    Lease language speaks volumes about the tenant, in this case the lease in my opinion was as high handed and arrogant as they come, quite a contrast with the public image. Many Seattle people, for some reason unfathomable to me, think their %$#@#$ doesn’t stink.
    Taken all together I felt they should take responsibility for their success or failure, I decided to pass unless they would agree to drop the termination provisions. They wouldn’t, I did.

  8. 8 AJ October 15, 2008 at 8:38 am

    Fortunately we have several PREMIUM sbux sites that they desperately want to keep. When their renewals come up next year we’ll be sure a extract an extra pound of flesh in honor of the developers who’ve been burned.

  9. 9 Larry J Ortega October 15, 2008 at 9:11 am

    Euphoria of the past has met with the reality of today. It was interesting to observe those in my brokerage office in Phoenix, (which when I announced my name and company name, the recepient of the call always thought it was Starbucks calling…hint, hint, hint)the daily Starbuck ritual of spending $5 bucks on a cup of coffee. Don’t get me wrong, loved the Sbux! But I had free coffee (well sorta free after my 50% split to the house) and could not come to terms in my mind paying so much for a cup of joe.

    We are lucky…not many closures here in Phoenix, but I have told Landlords, they (Sbux) has a right to close unprofitable stores. And the lease rate we got from Star “Bucks”….not going to get it from someone else, not in today’s economy, but sure you can hold out for the same economics you had with Sbux, but when you are vacant for months on end because you did not want to take the first replacement deal, well do the math.

  10. 10 CaffeineQueen October 15, 2008 at 10:52 am

    I don’t believe that many Landlord’s fell for Starbuck’s “Quick, sign here…and let me out of my lease” letter they sent out en masse earlier this year when they annouced their closings. This will be MUCH more expensive in LEGAL COSTS, than Starbuck’s anticipated. First, the majority of real estate owners that provided their locations, are diffused, one-off operators, in the thousands. This is not the mall business, where, primarily only four major players remain (maybe now three, after General Growth gets sold or goes BK), and tenants can sit down with four meetings and resolve the portfolio. No, this is thousands of phone calls between thousands of leasing reps, and, ultimately, attorneys. It will cost Starbcks some major DO, RE, MI ($$$$$).

  11. 11 BitterPill October 15, 2008 at 11:26 am

    The other issue is that these one-off Landlords are small investors, typically, with more riding on the line than a large Landlord would. These small guys are the kind that will go to small claims court for a $3,000 loss, much less a loss that Starbucks caused, which could very well be a large portion of their net worth, as the Starbucks location was such a KEY ELEMENT TO THEIR PRICING OF THE REAL ESTATE.

  12. 12 ShareholderUnion October 16, 2008 at 3:07 am

    Starbucks benefitted from Landlord’s large Tenant Allowances, now, they must bear the uncomfortable brunt of the weight of responsibility. Ah, what an unfavorable concept in capitalism of late, actually rewarding AND PUNISHING people and corporations for their actions.

  13. 13 cnbcfan October 22, 2008 at 7:43 pm

    Very interesting talk on Wall St Crisis: Is your money safe? It was mentioned that the international countries that had the most Starbuck’s also had the worst economies (i.e. there is a correlation between # of Starbucks locations in the country and the country’s economic performance.

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