Starbucks Coffee - What commercial Real Estate Investors Should Know

Homes For Rent - Starbucks Coffee - What commercial Real Estate Investors Should Know

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Company Summary

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Starbucks Coffee, sometimes referred to as Fourbucks Coffee is the largest coffeehouse chain in the world. It opened its first store in 1971 in Seattle's waterfront Pike Place market by three partners: Jerry Baldwin, Zev Siegel, and Gordon Bowker to sell high-quality coffee beans and equipment. In 1982, Howard Schultz, the current Chairman and Ceo joined the firm as the Director of Marketing. He was impressed by the popularity of the espresso bars in Italy after he traveled to Milan in 1983. Back to the Us, he convinced the founders of Starbucks to sell both coffee beans and espresso beverages. However, the idea was rejected so he left the firm and founded Il Giornale coffee bar chain in 1985. In 1987 Howard Schultz and Il Giornale bought Starbucks with .8M and renamed Il Giornale coffee bars to Starbucks and turned it into the Starbucks you know today. The firm went social with the sticker Sbux in June 26, 1992 at /share with 140 stores. Since then the stock has split 5 times. As of May 2008, Sbux is traded at about , down from the high of .43 in November 2006.

Starbucks opened the first overseas store in Tokyo, Japan in 1996. The firm currently has about 16,000 stores, employs 172,000 partners, Aka employees as of September 2007 in 44 countries. It has yearly sales of over B with most modern quarterly earnings being .526B. About 85% of Starbucks earnings comes from company-operated stores.

Starbucks does not franchise its operations and has no plans to franchises in foreseeable future. In North America, most stores are company-operated. You may see some Starbucks stores inside Target, major supermarkets, University campuses, Hospitals, and Airports. These stores are operated under licensing agreements to contribute passage to real estate which would otherwise unavailable. Starbucks receives licensee fees and royalties from these licensed locations. At these licensed sell locations, the workers are considered employees of that definite retailer, not Starbucks. As of 2008 it has 7087 company-operated stores and 4081 licensed stores in the Us. Internationally it has 1796 firm operated stores and 2792 joint-venture or licensed stores in 43 foreign countries. The pace of expansion is slowing down as the firm plans to open 1020 Us stores in 2008, less than 400 stores in 2009 down from 1800 stores in2007. In addition, it also plans to close 100 stores in 2008.

Risks to Real Estate Investors

Starbucks coffee buildings remain a beloved investment for many investors. When you consider investing in a asset occupied by Starbucks, you need to understand the following risks of your investment:

Recession-sensitivity: a hungry man can survive with a Big Mac & fries but can live without a four-buck Frappuccino. This means Starbucks is very sensitive to economy downturn as seen in 2007 and 2008 compared to Burger Kings and McDonald's. This may be the main presume sales at stores in the Us open at least a year are expected a mid single-digit division decline, the first drop ever. It triggers Howard Schultz to return to the Ceo post. The firm plans to duplicate its marketing spending to 0M in 2008 to drum up sales. It began an aggressive coupons campaign gift free drinks every Wednesday straight through May 28, 2008. This may be a sign of desperation. On April 22, 2008 Starbucks cut its outlook for the year citing weak economy. Calorie & Sugar: Starbucks drinks have more sugar and calorie in which consumers are more and more concerned due to explosion of obesity and diabetes epidemic in the Us. For example, its Strawberries & Crème Frappuccino® Blended Crème - whip has 120 grams (over 1/4 lb) of sugar, and 750 calorie on its Venti 24 oz size. If it becomes a trend that consumers determine to cut down on the sugar drinks, or stick to low-carb diets then it will have impact on Starbucks revenue. Competition: McDonald's, Wendy's and Dunkin Donuts now also offer espresso at lower prices to compete with Starbucks. They will capture some earnings from Starbucks, especially from cost-conscious customers. The current Starbucks prices are already pretty high; it's very hard for Starbucks to growth the prices in the near future without affecting the traffic to its stores. High-expenses firm model: while Starbucks profit margin is high as it pays an mean .42 per pound for the unroasted coffee, its firm is very labor oppressive just like any other foods businesses. It takes in the middle of 10-20 employees to run one store. All eligible part-time and full-time partners in the Us and Canada receive advantage package consisting of stock option plan, 401k with firm matching, medical, dental & foresight coverage. Starbucks is voted as the 7-th best firm to work for in the Us in 2008 by the Fortune magazine employee's survey. What is good for employees may not be good for the employers. These benefits are normally only available to key employees or managers in the restaurant industry. Historically, the costs of these condition benefits rise faster than the rate of inflation. In the long run, they may have negative impact on Starbucks lowest line. Should Starbucks not achieve well, it may be under pressure as a social firm to close more stores. Special-purpose building: Starbucks freestanding building is a special-purpose building designed specifically for Starbucks. Should Starbucks determine not to close or not to renew the lease, it's hard to re-lease the property. There are few tenants out there willing to pay the high rent like Starbucks. It's hard to use it as a fast food restaurant due to a relative small quadrate footage. Besides, it does not have a commercial kitchen. Once vacated by Starbucks, the asset value will most likely go down.
Starbucks Real Estate Operation

Starbucks divides the Us & Canada into 17 real estate territories, each has its own store development office to found the market in its territory. The developers constructed freestanding buildings about 1800 Sf with drive straight through in a location with high visibility, heavy traffic. Once the location is stylish by the territory office, Starbucks typically signs a 10 year Nnn lease with 2 five year options in which landlords are responsible for roof and structure. All the leases normally have corporate guarantee which means Starbucks will continue paying rent in the event it has to close the store. The lease often has 10% rent growth every 5 years. The rent is in the middle of .65/Sf in a store in Utah to .84/Sf in New York. This rent examine is based on the rents at just 30 Starbucks properties, 18 of them are free standing, on the market for sale straight through out the Us as of April 2008.

Starbucks Location with Minimal Store Closure Possibilities

During tough times, e.g. In 2008 when sales are declining Starbucks will endeavor to cut costs and close underperforming stores. As a real estate investor considers investing in a Starbucks building, you don't want to spend in a asset that will be closed in the future.

Location------ 1mile------3miles-------Ahi/yr-----Size (Sf)----Base rent /yr---Rent/Sf/mo --Price-----Cap(%)
Ohio...............296........2609.........375....1613.........,590........... .03..........8K.......6.75
Florida...........9186......55270......595.....1816.........,000............44...........2M.........6.10
Georgia.........5717......57201.....3936....1750.........,000............52...........091........6.75
Mississippi....188........4923........372.....1816.........2,184..........15...........558M.....7.2
Texas.............5944.....40970.......043.....1752.........,914............42..........,327M....7.00

Table 1: 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.......096........1248 Sf......01........................1245 Sf..................50.............-19%
Kansas..........200........1600 Sf.....25.........................1600 Sf...................33.............68%
Utah...............568........1950 Sf......65.........................1200 Sf..................86............-11%
New Mexico..004.........2000 Sf.....83.........................2500 Sf..................92............100%
New York.......5004......1785 Sf.....84.........................2819 Sf...................75............112%

Table 2: Rent discrepancy in Multi-tenant Starbucks sell Centers

Since Starbucks does not issue sales earnings for a particular location, you just need to make an educated guess. Based on yearly earnings and numbers of stored operated by Starbucks, the mean yearly earnings per store is about M. In addition, if the yearly rent to earnings ratio is less than 10% there is a good opening the location is profitable. For example if the base rent for the Starbucks in Ohio is ,590 then the yearly earnings should be more than 5,590. Also picking a store at a good location (refer to the narrative titled "What 'Location' Means in commercial Real Estate" by this author), and the cap rate you should consider the following:

Densely-populated area: more people mean more customers size and thus more revenue. The Starbucks in Fl, Ga and Tx on Table 1 are more promising. Note: the author tries to be sensitive by not disclosing the exact locations. Low-rent: the Starbucks in Ms pays 2,184 for base rent. To be reasonably profitable it needs to have yearly earnings of .12M. However, since there are only 188 people within 1 mile and 4923 residents within 3 miles radius from the store, it's less likely the store ever achieves that revenue. Also Starbucks pays .15/Sf which is very high compared to just .52/Sf in a fast growing, high income, densely-populated in Ga where there are 57,201 residents within 3 miles radius and mean Household earnings (Ahi) of over 3K/year. It's hard to understand how the Starbucks in Ms could be an irreplaceable location in an area with just 188 people within 1 mile radius from the property! While gift the highest 7.2% cap, this asset appears to be a good investment but it positively has the highest risk of underperforming and could be closed down in the future. Alternatively, Starbucks could endeavor to renegotiate the lease with lower rent while tough times. While Starbucks has not asked for rent reductions yet, it is not surprised if Starbucks will do so to improve its lowest line in the future. In whether case, the asset value will go down. Rent premium: while most Starbucks properties are freestanding in which it occupies 100%, you may see a Starbucks in a small multi-unit strip center with a few other tenants. It normally occupies the end unit with drive straight through and thus is expected to pay a superior compared to the adjacent unit. However, most of the time Starbucks pays substantially higher rent. For example, in Table 2 it pays .84/Sf compared to just .75/Sf by a tenant in the unit next door in a center in New York or 112% higher. In this strip center should the rent for the unit occupied by Starbucks be reduced (due to closure or lease renegotiation) the value of the center will be reduced substantially. You positively don't want to spend in this property.

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